G.R. No. L-37331             March 18, 1933FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders of the Balatoc Mining Company, etc., plaintiffs-appellants,vs.BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.Gibbs and McDonough and Roman Ozaeta for appellants.DeWitt, Perkins and Brady for appellees.Ross, Lawrence and Selph for appellee Balatoc Mining Company. D E C I S I O NSTREET, J.:This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in his own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute to the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently associated themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a certificate covering 600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money alleged to have been unlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the amount expended by the latter company under a contract between the two companies, bearing date of March 9, 1927. The complaint was afterwards amended so as to include a prayer for the annulment of this contract. Shortly prior to the institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal subject matter of the action. This was done apparently to facilitate the splitting up to the shares in the course of the sale or distribution. To prevent this the plaintiffs, upon filing their original complaint, procured a preliminary injunction restraining the defendants, their agents and servants, from selling, assigning or transferring

the 600,000 shares of the Balatoc Mining Co., or any part thereof, and from removing said shares from the Philippine Islands. This explains the connection of Renz with the case. The other individual defendants are made merely as officials of the Benguet Consolidated Mining Co. Upon hearing the case the trial court dismissed the complaint and dissolved the preliminary injunction, with costs against the plaintiffs. From this judgment the plaintiffs appealed.The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly told these facts are as follows: The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their respective properties are located only a few miles apart in the subprovince of Benguet. The capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each.When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the original stockholders were unable to supply the means needed for profitable operation. For this reason, the board of directors of the corporation ordered a suspension of all work, effective July 31, 1926. In November of the same year a general meeting of the company’s stockholders appointed a committee for the purpose of interesting outside capital in the mine. Under the authority of this resolution the committee approached A. W. Beam, then president and general manager of the Benguet Company, to secure the capital necessary to the development of the Balatoc property. As a result of the negotiations thus begun, a contract, formally authorized by the management of both companies, was executed on March 9, 1927, the principal features of which were that the Benguet Company was to proceed with the development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day, and with an extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to erect an appropriate power plant, with the aerial tramlines and such other surface buildings as might be needed to operate the mine. In return for

this it was agreed that the Benguet Company should receive from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon the development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value of the work in the amount of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the value of its shares had increased in the market from a nominal valuation to more than eleven pesos per share. While the Benguet Company was pouring its million and a half into the Balatoc property, the arrangements made between the two companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of many thousands of the shares of the Balatoc Company. But as soon as the success of the development had become apparent, he began this litigation in which he has been joined by two others of the eighty shareholders of the Balatoc Company.Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any interest in a mining corporation and that the contract by which the interest here in question was acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the corresponding enrichment of the shareholders of the Balatoc Company.When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine Commission was early drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion of the corporation in English and American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in Sections 74 and 75 of the Act. The provisions of Section 74 have been superseded by Section 28 of the Act of Congress of August 29, 1916, but in Section 75

there is a provision referring to mining corporations, which still remains the law, as amended. This provisions, in its original form, reads as follows: “… it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining.”Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American corporate law.For the purposes of general description only, it may be stated that the sociedad anonima is something very much like the English joint stock company, with features resembling those of both the partnership is shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is used in that language to designate other forms of partnership, and in its organization it is constructed along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes of loose translation the expression sociedad anonima has not infrequently the other hand, the affinity of this entity to the American corporation has not escaped notice, and the expression sociedad anonima is now generally translated by the word corporation. But when the word corporation is used in the sense of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish expression sociedad anonima either in a parenthesis or connected by the word “or”. This latter device was adopted in Sections 75 and 191 of the Corporation Law.In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that Act (No. 1459) the words which we have already quoted from Section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course obvious that whatever meaning originally attached to this provision in the Act of Congress, the same significance

should be attached to it in Section 13 of our Corporation Law.As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustments resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in Section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law “so far as such provisions may be applicable”, and giving to the sociedades anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in Section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that were in force prior to the passage of this Act “in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”As already observed, the provision above quoted from Section 75 of the Act Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged in mining and members of such from being interested in any other corporation engaged in mining, was amended by Section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress March 1, 1929. The change in the law effected by this amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision against members of a corporation engaged in agriculture or mining from being interested in other corporations engaged in agriculture or in mining was so modified as merely to prohibit any such member from holding more than fifteen per centum of the outstanding capital stock of another such corporation. Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of

an interest in any other corporation engaged in agriculture or in mining was so modified as to limit the restriction to corporations organized for the purpose of engaging in agriculture or in mining.As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of Section 13 of the Act. The Philippine Legislature undertook to remedy this situation in Section 3 of Act No. 2792 of the Philippine Legislature, approved on February 18, 1919, but this provision was declared invalid by this court in Government of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted substantially the same penal provision in Section 21 of Act No. 3518, under a title sufficiently broad to comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in question was made.This provision was inserted as a new section in the Corporation Law, forming Section 1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads as follows:SEC. 190 (A). Penalties. — The violation of any of the provisions of this Act and its amendments not otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos and by imprisonment for not more than five years, in the discretion of the court. If the violation is committed by a corporation, the same shall, upon such violation being proved, be dissolved by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by order of said Attorney-General: . . . .Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in this controversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedly committed by the Benguet Company in this case. The second is whether, assuming the first question to be answered in the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the United States, and later by the Philippine Legislature, prohibiting a mining corporation from

becoming interested in another mining corporation. It is obvious that, if the first question be answered in the negative, it will be unnecessary to consider the second question in this lawsuit.Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole view to the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is now Section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in representation of the Government.What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission of that wrong. The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in status quo ante by restoring the consideration with interest, while the Balatoc Company remains in possession of what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company in many millions of dollars in favor of individuals who have not the slightest equitable right to that money in a proposition to which no court can give a ready assent.The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply the second paragraph of Article 1305 of the Civil Code which declares that an innocent party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any promise he may have made. But, supposing that the first hurdle can be safely vaulted, the

general remedy supplied in Article 1305 of the Civil Code cannot be invoked where an adequate special remedy is supplied in a special law. It has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising upon a usurious loan. The reason given for the decision on this point was that the Usury Act, as amended, contains all the provisions necessary for the effectuation of its purposes, with the result that the remedy given in Article 1305 of the Civil Code is unnecessary. Much more is that idea applicable to the situation now before us, where the special provisions give ample remedies for the enforcement of the law by action in the name of the Government, and where no civil wrong has been done to the party here seeking redress.The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem to be unnecessary to ransack the American decisions for analogies pertinent to the case. We may observe, however, that the situation involved is not unlike that which has frequently arisen in the United States under provisions of the National Bank Act prohibiting banks organized under that law from holding real property. It has been uniformly held that a trust deed or mortgaged conveying property of this kind to a bank, by way of security, is valid until the transaction is assailed in a direct proceeding instituted by the Government against the bank, and the illegality of such tenure supplies no basis for an action by the former private owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)Most suggestive perhaps of all the cases in Compañia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had refused to register two deeds in favor of the Compañia Azucarera on the ground that the land thereby conveyed was in excess of the area permitted by law to the company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of the deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until the State acts every power and capacity that any other individual capable of acquiring lands, possesses. The corporation may exercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it may demand specific performance. It has an absolute title against all the world except the State after a proper proceeding is begun in a court of law. … The Attorney General is the exclusive officer in whom is confided the right to initiate proceedings for escheat or attack the right of a corporation to hold land.Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction of law supposed to have been committed, we forego any discussion of the further question whether a sociedad anonima created under Spanish law, such as the Benguet Company, is a corporation within the meaning of the prohibitory provision already so many times mentioned. That important question should, in our opinion, be left until it is raised in an action brought by the Government.The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs against the appellants.G.R. No. L-18216            October 30, 1962STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants, vs.REGISTER OF DEEDS OF MANILA, respondent-appellee.Ramon C. Fernando for petitioners-appellants.Office of the Solicitor General for respondent-appellee.BAUTISTA ANGELO, J.:On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the corporation reciting, among other things, that by virtue of a resolution of the stockholders adopted on September 17, 1960, dissolving the corporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in Manila.The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration on seven grounds, of which the following were disputed by the stockholders:

3. The number of parcels not certified to in the

acknowledgment;5. P430.50 Reg. fees need be paid;6. P940.45 documentary stamps need be attached to the document;7. The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.The stockholders interposed the present appeal.As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three grounds on which the denial of the registration of the certificate of liquidation was predicated hinges on whether or not that certificate merely involves a distribution of the corporation's assets or should be considered a transfer or conveyance.Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a distribution of the assets of the corporation which has ceased to exist for having been dissolved. This is apparent in the minutes for dissolution attached to the document. Not being a conveyance the certificate need not contain a statement of the number of parcel of land involved in the distribution in the acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to require appellants to pay the amount of P430.50 as registration fee.The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the view expressed by the register of deed to the effect that the certificate of liquidation in question, though it involves a distribution of the corporation's assets, in the last analysis represents a transfer of said assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance.We agree with the opinion of these two officials. A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property they do not

represent property of the corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant in common of the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, — and this is in effect the purpose which they seek to obtain from the Register of Deeds of Manila, — that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.WHEREFORE, we affirm the resolution appealed from, with costs against appellants.Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur.G.R. No. L-15121             August 31, 1962GREGORIO 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 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.ñëtIt 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.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.[G.R. No. 42420. November 20, 1936.]

WALTER A. SMITH CO., INC., Plaintiff-Appellee, v. J. W. FORD, Defendant-Appellant. 

J.W. Ferrier for Appellant. 

Anatolio G. Alcoba for Appellee. 

SYLLABUS1. ALLEGATIONS; JURISDICTION; WAIVER OF RIGHT TO OBJECT TO VENUE. — Even granting that the plaintiff company had no branch in the City of Manila at the time of the filing of the complaint, the existence thereof not having been proven, the Court of First Instance of Manila did not thereby lack jurisdiction

to take cognizance of said complaint because when said defendant’s demurrer had been overruled and he was ordered to answer the complaint, he filed an answer wherein, aside from denying generally and specifically the allegations contained in each and every paragraph of the complaint in question, he interposed two special defenses. This is equivalent to a waiver of his right to object to the jurisdiction of the court a quo over his person and a submission to the jurisdiction of said court (67 Corpus Juris, 131). 

2. ID.; SUFFICIENCY OF EVIDENCE IN SUPPORT OF THE COMPLAINT. — It having been proven that all the lumber the value of which is claimed by the plaintiff company was invoiced in the defendant’s name or delivered at his address, the mere answer that he neither knew nor remembered whether or not some of those who signed the receipts for delivery thereof were his employees cannot overcome the evidence for the plaintiff.

D E C I S I O N

VILLA-REAL, J.:

The defendant J.W. Ford appeals to this court from the judgment of the Court of First Instance of Manila the dispositive part of which

"Wherefore, the court orders the herein defendant to pay to the plaintiff Walter A. Smith Co., Inc., the sum of two thousand four hundred eighty-nine pesos and ninety-two centavos (P2,489.92), with interest thereon at 1 per cent a month from the dates of the invoices in question, with costs. So ordered." In support of his appeal, the appellant assigns the following alleged errors as committed by the court a quo in its decision in question, to wit: "1. In overruling defendant’s demurrer and motion to dismiss. 

"2. In declaring that defendant had not only failed to deny but

had admitted that he had received all the merchandise described in the inovices. 

"3. In condemning the defendant to pay plaintiff the sum of P2,489.92 with interest thereon at 1 per cent per annum from the respective dates of the invoices, and to pay the costs. 

"4. In not absolving the defendant from the complaint particularly for the reason that plaintiff no longer has any claim against said defendant. 

"5. In denying defendant’s motion for a new trial." From the record the following facts may be inferred: By resolution of December 31, 1931, of the board of directors of the corporation, Walter A. Smith Co., Inc., with official residence in Iloilo, Iloilo, the president thereof, Walter A. Smith, was authorized to open and he did open a branch of the corporation in the City of Manila. From December 6, 1927, to May 17, 1930, both dates inclusive, there were delivered on different dates at the defendant’s address in Iloilo, Iloilo, various kinds of lumber the total value of which amounted to P2,489.92 (Exhibits A, A-3, B, B-3, C, C-2, C-4, D, E, E- 2, E-4, F, F-3, G, H, I, J, J-3, K, K-3, K-6 and L-1), the corresponding receipts having been signed as follows: Exhibit A-1 by Nicolas Dignadice, Exhibit A-4 by Manuel Solatorio, Exhibit B-1 by Manuel Solatorio, Exhibit B-4 by Geo. G. Martin, Exhibit C-1 by J.W. Ford, Exhibit C-3 by a person the signature of which is illegible, Exhibit C-5 by Andres Velez, Exhibits D-1, E-1, and E-3 by J.W. Ford himself, Exhibit F-5 by Cornelio Flores, Exhibit H-1 by J.W. Ford himself, Exhibit I-1 by Thick Ford, Exhibit I-2 by Frank F. Ford, Exhibits J-1 and EJ-4 by Gabino Pullantis, Exhibit K by Frank Ford, Exhibit K-4 by Juan Salazar, Exhibit K-7 by Mariano Moquera, Exhibit L-1 by Mrs. Marcela Ford. Some of said receipts, those signed by the defendant J. W. Ford, bear under the signature thereof the words "on account" (Exhibit E-1), "Act. Loan & Asia Lumber Co." (Exhibit E-3), "On Act." (Exhibit F-1), "On Act. Note from Asia Lumber Co." (Exhibit H-1). The value of said lumber had not yet been paid either totally or partially on the date of the filing of the amended complaint. The defendant J.W. Ford denies having received all said lumber.

He admits having received only that appearing in Exhibits A-1 signed by Nicolas Dignadice; A-4 signed by Manuel Solatario; B-1 also signed by Manuel Solatario; B-4 signed by Geo G. Martin; C-1 signed by J.W. Ford; C-5 signed by Andres Velez; D-1, E-1 and E-3 signed by J.W. Ford; E-5 signed by Frank Ford; F-1 signed by J.W. Ford; F-2 signed by Frank Ford; F-4 signed by J.W. Ford; F-5 signed by Cornelio Flores; H- 1 signed by J.W. Ford; I-2 signed by Frank F. Ford; J-1 signed by Gabino Pullantis; K signed by Frank Ford; K-7 signed by Mariano Moquera; L-1 signed by Marcela de Ford. The lumber consigned in the receipts Exhibits C-3 with an illegible signature; G and G-1 which are unsigned; J-3 also unsigned; J-4 signed by Gabino Pullantis, and K-3 and K-4 signed by Juan Salazar, was not received by him inasmuch as he does not know the persons whose signatures appear in said receipts. Upon being questioned by his attorney regarding the signature of Nicolas Dignadice in Exhibit A-1, the defendant J.W. Ford stated that he did not remember said name but that it must be that of one of his employees. With respect to Manuel Solatario whose signature appears in the receipt Exhibit A-4, Geo. G. Martin whose signature appears in the receipt Exhibit B-4; and Andres Velez whose signature appears in Exhibit C-5, the defendant J.W. Ford, upon being asked if he had employees by those names, answered that he did not know or that he did not remember. 

In view of the foregoing facts, the first question to be decided is that procedural question raised by the appellant in his first assignment of alleged error, consisting in that the court a quo erred in overruling the demurrer filed by him and denying his motion to dismiss on the ground of improper venue. 

Even granting that the plaintiff company had no branch in the City of Manila at the time of the filing of the complaint, the existence thereof not having been conclusively proven, the Court of First Instance of Manila did not thereby lack jurisdiction to take cognizance of said complaint because when said defendant’s demurrer had been overruled and he was ordered to answer the complaint, he filed an answer wherein, aside from denying generally and specifically the allegations contained in each and every paragraph of the complaint in question, he interposed two special defenses one of which is that all the items enumerated in said complaint, with the exception of the

last two amounting to P278.40, have already prescribed; the other being that Walter A. Smith, the biggest stockholder of the plaintiff corporation was indebted and continued to be indebted to the defendant for a considerable amount of money the total of which is very much more than that claimed by the plaintiff entity, which amount must be applied to the payment of Walter A. Smith’s debt to said defendant, and he prays for the dismissal of the complaint. All of this is equivalent to a waiver of his right to object to the jurisdiction of the court a quo over his person and a submission to the jurisdiction of said court (67 Corpus Juris, 131). The facts of the case of Cohen and Cohen v. Benguet Commercial Co. (34 Phil., 526), cited by the appellant, are that the defendant company appeared specially and objected to the jurisdiction of the Court of First Instance of Manila over the company in question and the subject matter of the action on the ground that the venue had been improperly laid by the plaintiff as the trial, under the provisions of the Code of Civil Procedure, must take place in the province where either the plaintiff or the defendant resided or was found at the time the summons was served. The prayer of the motion was that the above entitled cause be dismissed. The motion was denied by the court on the ground that the motion, especially the prayer, constituted a voluntary general appearance in the action, and that such an appearance was a waiver of the objection to the venue. The motion filed by the defendant company, Benguet Commercial Co., Ltd., reads: "Now come the undersigned attorneys appearing specially in behalf of the defendant in the above entitled case for the sole purpose of objecting to the venue of the action." This court, through Justice Moreland, said:

"This limited the character of the appearance in that motion unless, by some subsequent act, the defendant waived the limitation or exceeded it by acts which constitute a general appearance. The mere fact that the prayer of the motion was for a dismissal of the action is not sufficient to constitute such waiver, or even a general appearance, having in mind the limitation stated in the body of the motion. A prayer in a motion, like a prayer in a complaint, is not conclusive as to the character of the motion. Indeed, under the Code of Civil Procedure dismissal of the action is one of the remedies for an improper venue. Improper venue is a ground of demurrer and it

may be made the basis of a plea in abatement; and, as the ordinary effect of sustaining a demurrer is to dismiss the complaint, if it is not amended, and, as the result of a plea in abatement is to terminate the action, it necessarily follows that the remedy prayed for was one of the remedies to which defendant was entitled if its motion was proper. 

"Section 377 provides that the defendant may enter a general appearance in the action without waiving his rights, even where the venue is improperly laid, provided he, at the same time, files an objection to the venue. The distinction between a general and special appearance does not seem to have been preserved, at least in words, by the Code of Civil Procedure, it appearing to have been the purpose of the legislature, in enacting section 377, to require the courts to look at the intent and purpose of the appearing party and to deal with him accordingly, leaving out of account all technicalities which would deprive him of that which he really desired to secure by his appearance. Furthermore, there does not seem to be any provision in the Code of Civil Procedure with respect to change of venue in cases like the present, the remedy appearing to be a dismissal of the action on the ground that the jurisdiction, if any, which the court obtained over the person of the defendant by the service of the summons within the jurisdiction of the court, is divested by objection in conformity with the provisions of section 377."

It will be seen that in said case the defendant company only appeared specially to object to the jurisdiction of the court as to the place where the complaint was filed and its person. It neither filed any answer, not set up any defense whether general or special with a prayer for relief. In the present case the defendant answered the complaint by denying generally and specifically all the allegations contained therein and interposed special defenses praying that the plaintiff company’s claim against him be compensated by what the manager of the company, Walter A. Smith, owed him. In the case of Marquez Lim Cay v. Del Rosario (55 Phil., 962), this court laid down the following doctrine:

"The filing of a demurrer on the ground that the complaint does not allege facts sufficient to constitute a cause of action; the

filing of a motion praying for the dissolution of an attachment without objecting to the jurisdiction of the court over the place where the property is situated, by means of a special appearance; the giving of a bond for the dissolution of said attachment; and the filing of a motion praying for the assessment of damages caused by the undue and unjust issuance of said attachment, imply a submission to the jurisdiction of the court and a waiver of the privilege to impugn such jurisdiction. (Manila Railroad Company v. Attorney-General, 20 Phil., 523.)" (See also Samson v. Carratala, 50 Phil., 647.) 

As to the second assignment of alleged error, while it is true that not all the receipts for delivery of lumber were signed by the defendant, upon being asked by his own attorney whether those who signed the other receipts of delivery were his employees, he answered that he did not know or that he did not remember. It having been proven that all the lumber the value of which is claimed by the plaintiff company was invoiced in the name of the defendant or delivered at his address, the mere answer that he neither knew nor remembered whether or not some of those who signed the receipts for delivery thereof were his employees cannot overcome the evidence for the plaintiff. 

With respect to the question whether or not the defendant is entitled to the compensation of the amount claimed by the plaintiff company by the alleged indebtedness to him of the president and manager thereof, Walter A. Smith, it not appearing that the amounts which the defendant claims Walter A. Smith owes him were invested or used in connection with the business of said corporation, the corporation cannot be held responsible for the payment thereof as the mere fact that Walter A. Smith is president and manager of Walter A. Smith Co., Inc., does not make the latter responsible for any personal obligation contracted by said manager. 

As to the question raised in the fourth assignment of alleged error that the court a quo erred in not absolving the defendant from the complaint inasmuch as said plaintiff no longer has any claim against said defendant, Exhibit LL provides that the Manila Lumber Inc. would take charge of collecting certain accounts due Walter A. Smith Co., Inc., with official residence in

the City of Iloilo, on condition that said Manila Lumber Inc. should defray all expenses incurred in the collection of the accounts delivered to it for collection and that 10 per cent of the amount collected, after deducting all the expenses for collection including costs, sheriff’s fees and attorney’s fees, would be delivered to said Walter A. Smith Co., Inc., said Manila Lumber Inc., retaining 90 per cent of the net amount collected. It will be seen that under said contract Walter A. Smith Co., Inc., has not transferred its rights over its uncollected accounts to the Manila Lumber Inc., but simply entrusted the collection thereof from its debtors. The fact that the Manila Lumber Inc. retained 90 per cent of the net amount of the collections, delivering only 10 per cent thereof to Walter A. Smith, Inc., has nothing to do with Walter A. Smith’s personal debt which, as already stated, cannot be imputed to Walter A. Smith Co., Inc., on the ground that Walter A. Smith’s personality is separate from and independent of the juridical personality of Walter A. Smith Co., Inc., notwithstanding the fact that Walter A. Smith is the biggest stockholder of the corporation. 

In view of the foregoing considerations, and not finding any error in the appealed judgment, it is affirmed in toto with costs to the appellant. So ordered. G.R. No. L-10510             March 17, 1961M. MC CONNEL, W. P. COCHRANE, RICARDO RODRIGUEZ, ET AL., petitioners, vs.THE COURT OF APPEALS and DOMINGA DE LOS REYES, assisted by her husband, SABINO PADILLA,respondents.Jesus B. Santos and Cornelio Antiquera for petitioners.Teodoro Padilla for respondents.REYES, J.B.L., J.:The issue before us in the correctness of the decision of the Court of Appeals that, under the circumstances of record, there was justification for disregarding the corporate entity of the Park Rite Co., Inc., and holding its controlling stockholders personally responsible for a judgment against the corporation.The Court of Appeals found that the Park Rite Co., Inc., a Philippine corporation, was originally organized on or about April 15, 1947, with a capital stock of 1,500 shares at P1.00 a share. The corporation leased from Rafael Perez Rosales y Samanillo a vacant lot on Juan Luna street (Manila) which it

used for parking motor vehicles for a consideration.It turned out that in operating its parking business, the corporation occupied and used not only the Samanillo lot it had leased but also an adjacent lot belonging to the respondents-appellees Padilla, without the owners' knowledge and consent. When the latter discovered the truth around October of 1947, they demanded payment for the use and occupation of the lot.The corporation (then controlled by petitioners Cirilo Parades and Ursula Tolentino, who had purchased and held 1,496 of its 1,500 shares) disclaimed liability, blaming the original incorporators, McConnel, Rodriguez and Cochrane. Whereupon, the lot owners filed against it a complaint for forcible entry in the Municipal Court of Manila on 7 October 1947 (Civil Case No. 4031).Judgment was rendered in due course on 13 November 1947, ordering the Park Rite Co., Inc. to pay P7,410.00 plus legal interest as damages from April 15, 1947 until return of the lot. Restitution not having been made until 31 January 1948, the entire judgment amounted to P11,732.50. Upon execution, the corporation was found without any assets other than P550.00 deposited in Court. After their application to the judgment credit, there remained a balance of P11,182.50 outstanding and unsatisfied.The judgment creditors then filed suit in the Court of First Instance of Manila against the corporation and its past and present stockholders, to recover from them, jointly and severally, the unsatisfied balance of the judgment, plus legal interest and costs. The Court of First Instance denied recovery; but on appeal, the Court of Appeals (CA-G.R. No. 8434-R) reversed, finding that the corporation was a mere alter ego or business conduit of the principal stockholders that controlled it for their own benefit, and adjudged them responsible for the amounts demanded by the lot owners, as follows:

WHEREFORE, premises considered, the decision appealed from is reversed. Defendants-appellees Cirilo Paredes and Ursula Tolentino are hereby declared liable to the plaintiffs-appellants for the rentals due on the lot in question from August 22, 1947 to January 31, 1948 at the rate of P1,235.00 a month, with legal interest thereon from the time of the filing of the complaint. Deducting the P550.00 which was paid at the time when the corporation was already acquired by the said defendants-

appellees Cirilo Paredes and Ursula Tolentino, they are hereby ordered to pay to plaintiffs-appellants Dominga de los Reyes and Sabino Padilla the sum of P6,036.66 with legal interest therein from the time of the filing of the complaint until fully paid.Defendant-appellee RICARDO RODRIGUEZ is hereby ordered to pay to the plaintiffs-appellants Dominga de los Reyes and Sabino Padilla the sum of P1,742.64 with legal interest thereon from the time of the filing of the complaint and until it is fully paid. In addition thereto the defendants-appellees Cirilo Paredes, Ursula Tolentino and Ricardo Rodriguez shall pay the costs proportionately in both instances.IT IS SO ORDERED.

Cirilo Paredes and Ursula Tolentino then resorted to this court. We granted certiorari.On the main issue whether the individual stockholders maybe held liable for obligations contracted by the corporation, this Court has already answered the question in the affirmative wherever circumstances have shown that the corporate entity is being used as an alter ego or business conduit for the sole benefit of the stockholders, or else to defeat public convenience, justify wrong, protect fraud, or defend crime (Koppel [Phil.] Inc. vs. Yatco, 77 Phil. 496; Arnold vs. Willits and Patterson, 44 Phil. 364).The Court of Appeals has made express findings to the following effect:

There is no question that a wrong has been committed by the so-called Park Rite Co., Inc., upon the plaintiffs when it occupied the lot of the latter without its prior knowledge and consent and without paying the reasonable rentals for the occupation of said lot. There is also no doubt in our mind that the corporationwas a mere alter ego or business conduit of the defendants Cirilo Paredes and Ursula Tolentino, and before them — the defendants M. McConnel, W. P. Cochrane, and Ricardo Rodriguez. The evidence clearly shows that these persons completely dominated and controlled the corporation and that the functions of the corporation were solely for their benefits.When it was originally organized on or about April 15, 1947, the original incorporators were M. McConnel, W. P.

Cochrane, Ricardo Rodriguez, Benedicto M. Dario and Aurea Ordrecio with a capital stock of P1,500.00 divided into 1,500 shares at P1.00 a share. McConnel and Cochrane each owned 500 shares, Ricardo Rodriguez 408 shares, and Dario and Ordrecio 1 share each. It is obvious that the shares of the last two named persons were merely qualifying shares. Then or about August 22, 1947 the defendants Cirilo Paredes and Ursula Tolentino purchased 1,496 shares of the said corporation and the remaining four shares were acquired by Bienvenido J. Claudio, Quintin C. Paredes, Segundo Tarictican, and Paulino Marquez at one share each. It is obvious that the last four shares bought by these four persons were merely qualifying shares and that to all intents and purposes the spouses Cirilo Paredes and Ursula Tolentino composed the so-called Park Rite Co., Inc. That the corporation was a mere extension of their personality is shown by the fact that the office of Cirilo Paredes and that of Park Rite Co., Inc. were located in the same building, in the same floor and in the same room — at 507 Wilson Building. This is further shown by the fact that the funds of the corporation were kept by Cirilo Paredes in his own name (p. 14, November 8, 1950, T.S.N.) The corporation itself had no visible assets, as correctly found by the trial court, except perhaps the toll house, the wire fence around the lot and the signs thereon. It was for this reason that the judgment against it could not be fully satisfied. (Emphasis supplied).

The facts thus found can not be varied by us, and conclusively show that the corporation is a mere instrumentality of the individual stockholder's, hence the latter must individually answer for the corporate obligations. While the mere ownership of all or nearly all of the capital stock of a corporation is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown, as in the case before us, that the operations of the corporation were so merged with those of the stockholders as to be practically indistinguishable from them. To hold the latter liable for the corporation's obligations is not to ignore the corporation's separate entity, but merely to apply the established principle that such entity can not be invoked or used for purposes that could not have been intended by the law that created that separate personality.

The petitioners-appellants insist that the Court could have no jurisdiction over an action to enforce a judgment within five (5) years from its rendition, since the Rules of Court provide for enforcement by mere motion during those five years. The error of this stand is apparent, because the second action, originally begun in the Court of First Instance, was not an action to enforce the judgment of the Municipal Court, but an action to have non-parties to the judgment held responsible for its payment.Finding no error in the judgment appealed from, the same is hereby affirmed, with costs against petitioners-appellants Cirilo Paredes and Ursula Tolentino.

G.R. No. L-20214             March 17, 1923G. C. ARNOLD, plaintiff-appellant, vs.WILLITS & PATTERSON, LTD., defendant-appellee.Fisher, DeWitt, Perkins and Brady for appellant.Ross and Lawrence for appellee.STATEMENTFor a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of the International Banking Corporation of Manila, and it is conceded that he is a competent and experienced business man. July 31, 1916, C. D. Willits and I. L. Patterson were partners doing business in San Francisco, California, under the name of Willits & Patterson. The plaintiff was then in San Francisco, and as a result of negotiations the plaintiff and the firm entered into a written contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of the firm in the Philippine Islands for certain purposes for the period of five years at a minimum salary of $200 per month and travelling expenses. The plaintiff returned to Manila and entered on the discharge of his duties under the contract. As a result of plaintiff's employment and the world war conditions, the business of the firm in the Philippines very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose between the plaintiff and the firm as to the construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile Patterson retired from the firm and Willits became the sole owner of its assets. For convenience of operation and to serve his own purpose, Willits organized a corporation under the laws of

California with its principal office at San Francisco, in and by which he subscribed for, and became the exclusive owner of all the capital stock except a few shares for organization purposes only, and the name of the firm was used as the name of the corporation. A short time after that Willits came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to which he again subscribed for all of the capital stock except the nominal shares necessary to qualify the directors. In legal effect, the San Francisco corporation took over and acquired all of the assets and liabilities of the Manila corporation. At the time that Willits was in Manila and while to all intents and purposes he was the sole owner of the stock of corporations, there was a conference between him and the plaintiff over the disputed construction of Exhibit A. As a result of which another instrument, known in the record as Exhibit B, was prepared in the form of a letter which the plaintiff addressed to Willits at Manila on November 10, 1919, the purpose of which was to more clearly define and specify the compensation which the plaintiff was to receive for his services. Willits received and confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits. At the time both corporations were legally organized, and there is nothing in the corporate minutes to show that Exhibit B was ever formally ratified or approved by either corporation. After its organization, the Manila corporation employed a regular accountant whose duty it was to audit the accounts of the company and render financial statements both for the use of the local banks and the local and parent corporations at San Francisco. From time to time and in the ordinary course of business such statements of account were prepared by the accountant and duly forwarded to the home office, and among other things was a statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum of P106,277.50. A short time previous to that date, the San Francisco corporation became involved in financial trouble, and all of its assets were turned over to a "creditors' committee." When this statement was received, the "creditors' committee" immediately protested its allowance. An attempt was made without success to adjust the matter on a friendly basis and without litigation. January 10, 1922, the plaintiff brought this action to recover from the defendant the sum of P106,277.50 with legal interest and costs,

and written instruments known in the record as Exhibits A and B were attached to, and made a part of, the complaint.For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and denies each and every other allegation, except as specifically admitted, and alleges that what is known as Exhibit B was signed by Willits without the authority of the defendant corporation or the firm of Willits & Patterson, and that it is not an agreement which was ever entered into with the plaintiff by the defendant or the firm, and, as a separate defense and counterclaim, it alleges that on the 30th of June, 1920, there was a balance due and owing the plaintiff from the defendant under the contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921, under Exhibit A was $400 per month, or a total of P10,400. That about July 6, 1921, the plaintiff wrongfully took P30,000 from the assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest and costs, from which it prays judgement.The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and authority of the defendant, and denies all other new matter in the answer.Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as prayed for in its counterclaim, from which the plaintiff appeals, contending that the trial court erred in not holding that the contract between the parties is that which is embodied in Exhibits A and B, and that the defendant assumed all partnership obligations, and in failing to render judgment for the plaintiff, as prayed for, and in dismissing his complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:In their respective briefs opposing counsel agree that the important questions involved are "what was the contract under which the plaintiff rendered services for five years ending July 31, 1921," and "what is due the plaintiff under that contract." Plaintiff contends that his services were performed under Exhibits A and B, and that the defendant assumed all of the obligations of the original partnership under Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B. The defendant admits that Exhibit A was the original contract

between Arnold and the firm of Willits & Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was to be employed for a period of five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil mill, and to do such other business as might be deemed advisable for which he was to receive, first, the travelling expenses of his wife and self from San Francisco to Manila, second, the minimum salary of $200 per month, third, a brokerage of 1 per cent upon all purchases and sales of merchandise, except for the account of the coconut oil mill, fourth, one-half of the profits on any transaction in the name of the firm or himself not provided for in the agreement. That the agreement also provided that if it be found that the business was operated at a loss, Arnold should receive a monthly salary of $400 during such period. That the business was operated at a loss from June 30, 1920, to July 31, 1921, and that for such reason, he was entitled to nothing more than a salary of $400 per month, or for that period P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold on June 30, 1920, makes a total of P19,141.05, leaving a balance due the defendant as set out in the counterclaim. In other words, that the plaintiff's compensation was measured by, and limited to, the above specified provisions in the contract Exhibit A, and that the defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.CHAS. D. WILLITS, Esq.,

Present.DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits & Patterson is as under:Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on all purchases made for them in the Philippines or sales made to them by Manila and one per cent on all sales made for them in the Philippines, or purchases made from them by Manila. If such purchases or sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the commission is computed on the c. i. f. price

These commissions are credited to me in San Francisco.I do not participate in any profits on business transacted between Willits & Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San Francisco, half the profits are to be credited to my account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.On all other business, such as the Cooperative Coconut Products Co. account, or any other business we may undertake as agents or managers, half the profits are to be credited to my account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their own funds invested in the capital stock or a corporation, I of course do not participate in the earnings of such stock, any more than Willits & Patterson would participate in the earnings of stock held by me on my account.If the foregoing conforms to your understanding of our agreement, please confirm below.Yours faithfully,

(Sgd.) G. C. ARNOLDConfirmed:

WILLITS & PATTERSONBy (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L. Patterson constituted the firm of Willits & Patterson doing business in the City of San Francisco; that later Patterson retired from the firm, and Willits acquired all of his interests and thereafter continued the business under the name and style of Willits & Patterson; that the original contract Exhibit A was made between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a period of five years from that date; that plaintiff entered upon the discharged of his duties and continued his services in the Philippine Islands to someone for the period of five years; that on November 10, 1919, and as a result of conferences between Willits and the

plaintiff, Exhibit B was addressed and signed in the manner and form above stated in the City of Manila. A short time prior to that date Willits organized a corporation in San Francisco, in the State of California, which took over and acquired all of the assets of the firm's business in California then being conducted under the name and style of Willits & Patterson; that he subscribed for all of the capital stock of the corporation, and that in truth and in fact he was the owner of all of its capital stock. After this was done he caused a new corporation to be organized under the laws of the Philippine Islands with principal office at Manila, which took over and acquired all the business and assets of the firm of Willits & Patterson in the Philippine Islands, in and to which, in legal effect, he subscribed for all of its capital stock, and was the owner of all of its stock. After both corporations were organized the above letter was drafted and signed. The plaintiff contends that the signing of Exhibit B in the manner and under the conditions in which it was signed, and through the subsequent acts and conduct of the parties, was ratified and, in legal effect, became and is now binding upon the defendant.It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he was to all intents and purposes the legal owner of all the stock in both corporations. It also appears from the evidence that the parent corporation at San Francisco took over and acquired all of the assets and liabilities of the local corporation at Manila. That after it was organized the Manila corporation kept separate records and account books of its own, and that from time to time financial statements were made and forwarded to the home office, from which it conclusively appears that plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit B was signed was there ever any dispute between plaintiff and Willits as to the compensation for plaintiff's services. That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed and at all times in force and effect, after it was signed November 10, 1919. It appears from an analysis of Exhibit B that it was for the mutual interest of both parties. From a small beginning, the business was then in a very flourishing conditions and growing fast, and the profits were very large and were running into big money.Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall be divided in equal shares

between the said parties hereto; (b) that Arnold should receive a brokerage of 1 per cent from all purchases and sales of merchandise, except for the account of the coconut mills; (c) that the net profits from all other business should be divided in equal half shares between the parties hereto."Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the profits and a brokerage of 1 per cent from all purchases and sales, except those for the account of the coconut oil mills, which under the volume of business then existing would run into a very large sum of money. It was for such reason and after personal conferences between them, and to settle all disputed questions, that Exhibit B was prepared and signed.The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff faithfully performed all the duties incumbent upon him under his contract of employment, it being understood, however, that this admission does not include an admission that the plaintiff placed a proper interpretation upon his right to remuneration under said contract of employment."It being admitted that the plaintiff worked "under his contract of employment" for the period of five years, the question naturally arises, for whom was he working? His contract was made with the original firm of Willits & Patterson, and that firm was dissolved and it ceased to exist, and all of its assets were merged in, and taken over by, the parent corporation at San Francisco. In the very nature of things, after the corporation was formed, the plaintiff could not and did not continue to work for the firm, and, yet, he continued his employment for the full period of five years. For whom did he work after the partnership was merged in the corporation and ceased to exist?It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual interests of both parties, and that if the contract Exhibit A was to be enforced according to its terms, that Arnold might well contend for a much larger sum of money for his services. In truth and in fact Willits and both corporations recognized his employment and accepted the benefits of his services. He continued his employment and rendered his services after the corporation were organized and Exhibit B was signed just the same as he did before, and both corporations recognized and accepted his services. Although the plaintiff was president of the local corporation, the

testimony is conclusive that both of them were what is known as a one man corporation, and Willits, as the owner of all of the stock, was the force and dominant power which controlled them. After Exhibit B was signed it was recognized by Willits that the plaintiff's services were to be performed and measured by its term and provisions, and there never was any dispute between plaintiff and Willits upon that question.The controversy first arose after the corporation was in financial trouble and the appointment of what is known in the record as a "creditors' committee." There is no claim or pretense that there was any fraud or collusion between plaintiff and Willits, and it is very apparent that Exhibit B was to the mutual interest of both parties. It is elementary law that if Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it is equally binding upon the creditors' committee. It would not have any higher or better legal right than the corporation itself, and could not make any defense which it could not make. It is very significant that the claim or defense which is now interposed by the creditors' committee was never made or asserted at any previous time by the defendant, and that it never was made by Willits, and it is very apparent that if he had remained in control of the corporation, it would never have made the defense which is now made by the creditors' committee. The record is conclusive that at the time he signed Exhibit B, Willits was, in legal effect, the owner and holder of all the stock in both corporations, and that he approved it in their interest, and to protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter of fact, it appears from the statement of Mr. Larkin, the accountant, in the record that if plaintiff's cause of action was now founded upon Exhibit A, he would have a claim for more than P160,000.Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from its membership has its limitations. It must be noted that this separate existence is for particular purposes. It must also be remembered that there can be no corporate existence without persons to compose it; there can be no association without associates. This separate existence is to a certain extent a legal fiction. Whenever necessary for the interests of the public or for the protection or enforcement of the rights of the membership, courts will disregard this legal

fiction and operate upon both the corporation and the persons composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L. R. A., 145, in which the Supreme Court of Ohio says:

"So long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is harmless, and, because convenient, should not be called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored, and the question determined whether the act in question, though done by shareholders, — that is to say, by the persons uniting in one body, — was done simply as individuals, and with respect to their individual interest as shareholders, or was done ostensibly as such, but, as a matter of fact, to control the corporation, and affect the transaction of its business, in the same manner as if the act had been clothed with all the formalities of a corporate act. This must be so, because, the stockholders having a dual capacity, and capable of acting in either, and a possible interest to conceal their character when acting in their corporate capacity, the absence of the formal evidence of the character of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that department of the law fraud would enjoy an immunity awarded to it in no other."Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed to be the same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in the first instance could not have made, it may by ratification render binding on it a contract, entered into on its behalf by its officers or agents without authority. As a general rule such ratification need not be manifested by any voted or formal resolution of the corporation or be authenticated by the corporate seal; no higher degree of evidence is requisite in establishing ratification on the

part of a corporation, than is requisite in showing an antecedent authorization.x x x           x x x           x x xSEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in the same manner that the absent of a natural person may be, and it is well settled that where a corporation with full knowledge of the unauthorized act of its officer or agents acquiesces in and consents to such acts, it thereby ratifies them, especially where the acquiescence results in prejudice to a third person.x x x           x x x           x x xSEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affair, his authority to represent the corporation may be inferred from the manner in which he has been permitted by the directors to transact its business.SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers or agents within the scope or apparent scope of their authority is attributed to the corporation.SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act received and enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:Ratification by a corporation of a transaction not previously authorized is more easily inferred where the corporation receives and retains property under it, and as a general rule where a corporation, through its proper officers or board, takes and retains the benefits of the unauthorized act or contract of an officer or agent, with full knowledge of all the material facts, it thereby ratifies and becomes bound by such act of contract, together with all the liabilities and burdens resulting therefrom, and in some jurisdiction this rule is, in effect, declared by statute. Thus the corporation is liable on the ground of ratification where, with knowledge of the facts, it accepts the benefit of services rendered under an unauthorized contract of employment . . . .

Applying the law to the facts.Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time and in the ordinary course of business made and prepared financial statements showing its assets and liabilities, true copies of which were sent to the home office in San Francisco. It appears upon their face that plaintiff's compensation was made and founded on Exhibit B, and that such statements were made and prepared by the accountant on the assumption that Exhibit B was in full force and effect as between the plaintiff and the defendant. In the course of business in the early part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at P740 per ton. Due to break in the market, plaintiff was able to purchase the oil at P380 per ton or a profit of P180,000.It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San Francisco, half the profit are to be credited to may account and half to the Profit & Loss account Willits & Patterson, Ltd., Manila.

The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed that all of the oil purchased should be held as security for the full payment of the purchase price. As a result, the defendant itself received the P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil as security for the balance of the purchase price. This transaction was shown in the semi-annual financial statement for the period ending December 31, 1920. That is to say, the business was transacted by and through the plaintiff, and the defendant received and accepted all of the profits on the deal, and the statement which was rendered gave him a credit for P90,737.88, or half the profit as provided in the contract Exhibit B, with interest.Although the previous financial statements show upon their face that the account of plaintiff was credit with several small items on the same basis, it was not until the 23d of March, 1921, that any objection was ever made by anyone, and objection was made for the first time by the creditors' committee in a cable of that date.As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the defendant

corporation, and the plaintiff is entitled to recover for his services on that writing as it modified the original contract Exhibit A.It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff is entitled to recover P106,277.50. It is very apparent that his statement was based upon the assumption that there was a net profit of P180,000 on the 500 tons of oil, of which the plaintiff was entitled to one-half.In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the amount which the defendant paid for them at the time of the purchase or P380 per ton, and the record shows that the defendant took and now has the possession of all of the oil secure the payment of the price at which it was sold. Hence, the profit on the deal to the defendant at the time of the sale would amount to the difference between what the defendant paid for the oil and the amount which it received for the oil at the time it sold the oil. It appears that at the time of the sale the defendant only received P105,000 in cash, and that it took and accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for P75,000 more which have been collected and may never be. Hence, it must follow that the amount evidence by the notes cannot now be deemed or treated as profits on the deal and cannot be until such times as the notes are paid.The judgment of the lower court is reversed, and a money judgment will be entered here in favor of the plaintiff and against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th day of January, 1922. In addition thereto, judgment will be rendered against the defendant in substance and to the effect that the plaintiff is the owner of an undivided one-half interest in the promissory notes for P75,000 which were executed by Cruz & Tan Chong Say, as a part of the purchase price of the oil, and that he is entitled to have and receive one-half of all the proceeds from the notes or either of them, and that also he have judgment against the defendant for costs. So ordered.Araullo, C. J., Street, Malcolm, Avanceña, Ostrand, and Romualdez, JJ., concur.G.R. No. L-13203             January 28, 1961YUTIVO 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 Due

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 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 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 ofCourt 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.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 YutivoThe 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.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 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.)

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 63,669.16 973,228.6610% 2,618,695.28 261,869.53 2,880,564.8115% 3,602,397.65 540,359.65 4,142,757.3020% 267,150.50 53,430.10 320,580.6030% 837,146.97 251,114.09 1,088,291.0650% 74,244.30 37,122.16 111,366.4675%           8,000.00           6,000.00         14,000.00

TOTALP20,220,413.77 P1,809,205.67

P22,038,619.44

Less Taxes Paid by Yutivo

988,655.76

Deficiency Tax still due

P820,549.91

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.G.R. No. L-17618             August 31, 1964COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.NORTON and HARRISON COMPANY, respondent.Office of the Solicitor General for petitioner.Pio Joven for respondent.

PAREDES, J.:This is an appeal interposed by the Commissioner of Internal Revenue against the following judgment of the Court of Tax Appeals:

IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment in question against petitioner. If at all, the assessment should have been directed against JACKBILT, the manufacturer. Accordingly, the decision appealed from is reversed, and the surety bond filed to guarantee payment of said assessment is ordered cancelled. No pronouncement as to costs.

Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesale and retail, all kinds of goods, wares, and merchandise; (2) to act as agents of manufacturers in the United States and foreign countries; and (3) to carry on and conduct a general wholesale and retail mercantile establishment in the Philippines. Jackbilt is, likewise, a corporation organized on February 16, 1948 primarily for the purpose of making, producing and manufacturing concrete blocks. Under date of July 27, 1948. Norton and Jackbilt entered into an agreement whereby Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever an order for concrete blocks was received by the Norton & Harrison Co. from a customer, the order was transmitted to Jackbilt which delivered the merchandise direct to the customer. Payment for the goods is, however, made to Norton, which in turn pays Jackbilt the amount charged the customer less a certain amount, as its compensation or profit. To exemplify the sales procedures adopted by the Norton and Jackbilt, the following may be cited. In the case of the sale of 420 pieces of concrete blocks to the American Builders on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the purchase price. Out of this amount Norton paid Jackbilt P168.00, the difference obviously being its compensation. As per records of Jackbilt, the transaction was considered a sale to Norton. It was under this procedure that the sale of concrete blocks manufactured by Jackbilt was conducted until May 1, 1953, when the agency agreement was terminated and a management agreement between the parties was entered into. The management agreement provided that Norton would sell concrete blocks for

Jackbilt, for a fixed monthly fee of P2,000.00, which was later increased to P5,000.00.During the existence of the distribution or agency agreement, or on June 10, 1949, Norton & Harrison acquired by purchase all the outstanding shares of stock of Jackbilt. Apparently, due to this transaction, the Commissioner of Internal Revenue, after conducting an investigation, assessed the respondent Norton & Harrison for deficiency sales tax and surcharges in the amount of P32,662.90, making as basis thereof the sales of Norton to the Public. In other words, the Commissioner considered the sale of Norton to the public as the original sale and not the transaction from Jackbilt. The period covered by the assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison did not conform with the assessment, the matter was brought to the Court of Tax Appeals.The Commissioner of Internal Revenue contends that since Jackbilt was owned and controlled by Norton & Harrison, the corporate personality of the former (Jackbilt) should be disregarded for sales tax purposes, and the sale of Jackbilt blocks by petitioner to the public must be considered as the original sales from which the sales tax should be computed. The Norton & Harrison Company contended otherwise — that is, the transaction subject to tax is the sale from Jackbilt to Norton.Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñëtThe majority of the Tax Court, in relieving Norton & Harrison of liability under the assessment, made the following observations:

The law applicable to the case is Section 186 of the National Internal Revenue Code which imposes a percentage tax of 7% on every original sale of goods, wares or merchandise, such tax to be based on the gross selling price of such goods, wares or merchandise. The term "original sale" has been defined as the first sale by every manufacturer, producer or importer. (Sec. 5, Com. Act No. 503.) Subsequent sales by persons other than the manufacturer, producer or importer are not subject to the sales tax.

If JACKBILT actually sold concrete blocks manufactured by it to petitioner under the distributorship or agency agreement of July 27, 1948, such sales constituted the original sales which are taxable under Section 186 of the Revenue Code, while the sales made to the public by petitioner are subsequent sales which are not taxable. But it appears to us that there was no such sale by JACKBILT to petitioner. Petitioner merely acted as agent for JACKBILT in the marketing of its products. This is shown by the fact that petitioner merely accepted orders from the public for the purchase of JACKBILT blocks. The purchase orders were transmitted to JACKBILT which delivered the blocks to the purchaser directly. There was no instance in which the blocks ordered by the purchasers were delivered to the petitioner. Petitioner never purchased concrete blocks from JACKBILT so that it never acquired ownership of such concrete blocks. This being so, petitioner could not have sold JACKBILT blocks for its own account. It did so merely as agent of JACKBILT. The distributorship agreement of July 27, 1948, is denominated by the parties themselves as an "agency for marketing" JACKBILT products. ... .x x x           x x x           x x xTherefore, the taxable selling price of JACKBILT blocks under the aforesaid agreement is the price charged to the public and not the amount billed by JACKBILT to petitioner. The deficiency sales tax should have been assessed against JACKBILT and not against petitioner which merely acted as the former's agent.x x x           x x x           x x x

Presiding Judge Nable of the same Court expressed a partial dissent, stating:

Upon the aforestated circumstances, which disclose Norton's control over and direction of Jackbilt's affairs, the corporate personality of Jackbilt should be disregarded, and the transactions between these two corporations relative to the concrete blocks should be ignored in determining the percentage tax for which Norton is liable. Consequently, the percentage tax should be computed on the basis of the sales of Jackbilt blocks to the public.

The majority opinion is now before Us on appeal by the Commissioner of Internal Revenue, on four (4) assigned errors, all of which pose the following propositions: (1) whether the acquisition of all the stocks of the Jackbilt by the Norton & Harrison Co., merged the two corporations into a single corporation; (2) whether the basis of the computation of the deficiency sales tax should be the sale of the blocks to the public and not to Norton.It has been settled that the ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the two companies and be considered as a sufficient ground for disregarding the distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June 30, 1961). However, in the case at bar, we find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded. Among these circumstances, which we find not successfully refuted by appellee Norton are: (a) Norton and Harrison owned all the outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on March 31, 1958, 14,993 shares belonged to Norton and Harrison and one each to seven others; (b) Norton constituted Jackbilt's board of directors in such a way as to enable it to actually direct and manage the other's affairs by making the same officers of the board for both companies. For instance, James E. Norton is the President, Treasurer, Director and Stockholder of Norton. He also occupies the same positions in Jackbilt corporation, the only change being, in the Jackbilt, he is merely a nominal stockholder. The same is true with Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia, while they are merely employees of the North they are Directors and nominal stockholders of the Jackbilt (c) Norton financed the operations of the Jackbilt, and this is shown by the fact that the loans obtained from the RFC and Bank of America were used in the expansion program of Jackbilt, to pay advances for the purchase of equipment, materials rations and salaries of employees of Jackbilt and other sundry expenses. There was no limit to the advances given to Jackbilt so much so that as of May 31, 1956, the unpaid advances amounted to P757,652.45, which were not paid in cash by Jackbilt, but was offset by shares of stock issued to Norton, the absolute and sole owner of Jackbilt; (d) Norton treats Jackbilt employees as its own. Evidence shows that Norton paid the salaries of Jackbilt

employees and gave the same privileges as Norton employees, an indication that Jackbilt employees were also Norton's employees. Furthermore service rendered in any one of the two companies were taken into account for purposes of promotion; (e) Compensation given to board members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The income tax return of Norton for 1954 shows that as President and Treasurer of Norton and Jackbilt, he received from Norton P56,929.95, but received from Jackbilt the measly amount of P150.00, a circumstance which points out that remuneration of purported officials of Jackbilt are deemed included in the salaries they received from Norton. The same is true in the case of Eduardo Garcia, an employee of Norton but a member of the Board of Jackbilt. His Income tax return for 1956 reveals that he received from Norton in salaries and bonuses P4,220.00, but received from Jackbilt, by way of entertainment, representation, travelling and transportation allowances P3,000.00. However, in the withholding statement (Exh. 28-A), it was shown that the total of P4,200.00 and P3,000.00 (P7,220.00) was received by Garcia from Norton, thus portraying the oneness of the two companies. The Income Tax Returns of Albert Golden and Dioscoro Ramos both employees of Norton but board members of Jackbilt, also disclose the game method of payment of compensation and allowances. The offices of Norton and Jackbilt are located in the same compound. Payments were effected by Norton of accounts for Jackbilt and vice versa. Payments were also made to Norton of accounts due or payable to Jackbilt and vice versa.Norton and Harrison, while not denying the presence of the set up stated above, tried to explain that the control over the affairs of Jackbilt was not made in order to evade payment of taxes; that the loans obtained by it which were given to Jackbilt, were necessary for the expansion of its business in the manufacture of concrete blocks, which would ultimately benefit both corporations; that the transactions and practices just mentioned, are not unusual and extraordinary, but pursued in the regular course of business and trade; that there could be no confusion in the present set up of the two corporations, because they have separate Boards, their cash assets are entirely and strictly separate; cashiers and official receipts and bank accounts are distinct and different; they have separate income tax returns, separate balance sheets and profit and loss

statements. These explanations notwithstanding an over-all appraisal of the circumstances presented by the facts of the case, yields to the conclusion that the Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of corporate entities, separate and distinct from each, should be disregarded. This is a case where the doctrine of piercing the veil of corporate fiction, should be made to apply. In the case of Liddell & Co. Inc. v. Coll. of Int. Rev., supra, it was held:

There are quite a series of conspicuous circumstances that militates against the separate and distinct personality of Liddell Motors Inc., from Liddell & Co. We notice that the bulk of the business of Liddell & Co. was channel Red through Liddell Motors, Inc. On the other hand, Liddell Motors Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co., Inc. and then sell them to the general public. These sales of vehicles by Liddell & Co, to Liddell Motors. Inc. for the most part were shown to have taken place on the same day that Liddell Motors, Inc. sold such vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality.x x x           x x x           x x xAccordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. There is however, in this instant case, a peculiar sequence of the organization and activities of Liddell Motors, Inc.As opined in the case of Gregory v. Helvering "the legal right of a tax payer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted". But as held in another case, "where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fictions".... a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in

proper cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take benefits of the transactions as the person accordingly taxable.... to allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws. (and cases cited therein.)

In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan. 28, 1961, this Court made a similar ruling where the circumstances of unity of corporate identities have been shown and which are identical to those obtaining in the case under consideration. Therein, this Court said:

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 (here concrete blocks) ... .

It may not be amiss to state in this connection, the advantages to Norton in maintaining a semblance of separate entities. If the income of Norton should be considered separate from the income of Jackbilt, then each would declare such earning separately for income tax purposes and thus pay lesser income tax. The combined taxable Norton-Jackbilt income would subject Norton to a higher tax. Based upon the 1954-1955 income tax return of Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of them are operating on the same fiscal basis and their returns are accurate, we would have the following result: Jackbilt declared a taxable net income of P161,202.31 in which the income tax due was computed at P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net income of P120,101.59, on which the income tax due was computed at P25,628.00. The total of these liabilities is P50,764.84. On the other hand, if the net taxable earnings of both corporations are combined, during the same taxable year, the tax due on their total which is P281,303.90 would be P70,764.00. So that, even on the question of income tax alone, it would be to the advantages of Norton that the corporations should be regarded as separate entities.

WHEREFORE, the decision appealed from should be as it is hereby reversed and another entered making the appellee Norton & Harrison liable for the deficiency sales taxes assessed against it by the appellant Commissioner of Internal Revenue, plus 25% surcharge thereon. Costs against appellee Norton & Harrison.G.R. No. L-20502             February 26, 1965EMILIO CANO ENTERPRISES, INC., petitioner, vs.COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.D. T. Reyes and Associates for petitioner.Mariano B. Tuason for respondent Court of Industrial Relations.C. E. Santiago for respondent Honorata Cruz.BAUTISTA ANGELO, J.:In a complaint for unfair labor practice filed before the Court of Industrial Relations on June 6, 1956 by a prosecutor of the latter court, Emilio, Ariston and Rodolfo, all surnamed Cano, were made respondents in their capacity as president and proprietor, field supervisor and manager, respectively, of Emilio Cano Enterprises, Inc.After trial, Presiding Judge Jose S. Bautista rendered decision finding Emilio Cano and Rodolfo Cano guilty of the unfair labor practice charge, but absolved Ariston for insufficiency of evidence. As a consequence, the two were ordered, jointly and severally, to reinstate Honorata Cruz, to her former position with payment of backwages from the time of her dismissal up to her reinstatement, together with all other rights and privileges thereunto appertaining.Meanwhile, Emilio Cano died on November 14, 1958, and the attempt to have the case dismissed against him having failed, the case was appealed to the court en banc, which in due course affirmed the decision of Judge Bautista. An order of execution was issued on August 23, 1961 the dispositive part of which reads: (1) to reinstate Honorata Cruz to her former position as ordered in the decision; and (2) to deposit with the court the amount of P7,222.58 within ten days from receipt of the order, failing which the court will order either a levy on respondents' properties or the filing of an action for contempt of court.The order of execution having been directed against the properties of Emilio Cano Enterprises, Inc. instead of those of the respondents named in the decision, said corporation filed

an ex parte motion to quash the writ on the ground that the judgment sought to be enforced was not rendered against it which is a juridical entity separate and distinct from its officials. This motion was denied. And having failed to have it reconsidered, the corporation interposed the present petition for certiorari.1äwphï1.ñëtThe issue posed before us is: Can the judgment rendered against Emilio and Rodolfo Cano in their capacity as officials of the corporation Emilio Cano Enterprises, Inc. be made effective against the property of the latter which was not a party to the case?The answer must be in the affirmative. While it is an undisputed rule that a corporation has a personality separate and distinct from its members or stockholders because of a fiction of the law, here we should not lose sight of the fact that the Emilio Cano Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. Thus, the following are its incorporators: Emilio Cano, his wife Juliana, his sons Rodolfo and Carlos, and his daughter-in-law Ana D. Cano. Here is an instance where the corporation and its members can be considered as one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice. 1 And so it has been held that while a corporation is a legal entity existing separate and apart from the persons composing it, that concept cannot be extended to a point beyond its reason and policy, and when invoked in support of an end subversive of this policy it should be disregarded by the courts (12 Am. Jur. 160-161).A factor that should not be overlooked is that Emilio and Rodolfo Cano are here indicted, not in their private capacity, but as president and manager, respectively, of Emilio Cano Enterprises, Inc. Having been sued officially their connection with the case must be deemed to be impressed with the representation of the corporation. In fact, the court's order is for them to reinstate Honorata Cruz to her former position in the corporation and incidentally pay her the wages she had been deprived of during her separation. Verily, the order against them is in effect against the corporation. No benefit can be attained if this case were to be remanded to the court a quo merely in response to a technical substitution of parties for

such would only cause an unwarranted delay that would work to Honorata's prejudice. This is contrary to the spirit of the law which enjoins a speedy adjudication of labor cases disregarding as much as possible the technicalities of procedure. We, therefore, find unmeritorious the relief herein prayed for.WHEREFORE, petition is dismissed, with costs.Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.

G.R. No. L-19550             June 19, 1967HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners, vs.HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his capacity as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents.Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for petitioners.Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro, Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for respondents.CONCEPCION, C.J.:Upon application of the officers of the government named on the margin1 — hereinafter referred to as Respondents-Prosecutors — several judges2 — hereinafter referred to as Respondents-Judges — issued, on different dates,3 a total of 42 search warrants against petitioners herein4 and/or the corporations of which they were officers,5 directed to the any peace officer, to search the persons above-named and/or the premises of their offices, warehouses and/or residences, and to seize and take possession of the following personal property to wit:

Books of accounts, financial records, vouchers,

correspondence, receipts, ledgers, journals, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursements receipts, balance sheets and profit and loss statements and Bobbins (cigarette wrappers).

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended to be used as the means of committing the offense," which is described in the applications adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal Code."Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the Rules of Court — because, inter alia: (1) they do not describe with particularity the documents, books and things to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants were issued to fish evidence against the aforementioned petitioners in deportation cases filed against them; (4) the searches and seizures were made in an illegal manner; and (5) the documents, papers and cash money seized were not delivered to the courts that issued the warrants, to be disposed of in accordance with law — on March 20, 1962, said petitioners filed with the Supreme Court this original action for certiorari, prohibition, mandamus and injunction, and prayed that, pending final disposition of the present case, a writ of preliminary injunction be issued restraining Respondents-Prosecutors, their agents and /or representatives from using the effects seized as aforementioned or any copies thereof, in the deportation cases already adverted to, and that, in due course, thereafter, decision be rendered quashing the contested search warrants and declaring the same null and void, and commanding the respondents, their agents or representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash moneys seized or confiscated under the search warrants in question.In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid and have been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners' consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners, regardless of the alleged illegality of the

aforementioned searches and seizures.On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the papers, documents and things seized from the offices of the corporations above mentioned are concerned; but, the injunction was maintained as regards the papers, documents and things found and seized in the residences of petitioners herein.7

Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may be split into two (2) major groups, namely: (a) those found and seized in the offices of the aforementioned corporations, and (b) those found and seized in the residences of petitioners herein.As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or of the interest of each of them in said corporations, and whatever the offices they hold therein may be.8 Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby,9 and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. 10 Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongsexclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity. 11 Indeed, it has been held:

. . . that the Government's action in gaining possession of papers belonging to the corporation did not relate to nor did it affect the personal defendants. If these papers were unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the rights of the corporation and not the rights of the other defendants. Next, it is clear that a question of the lawfulness of a seizure can be raised only by one whose

rights have been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had not been seized or the privacy of whose homes had not been disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its violation, if any, was with reference to the rights of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It follows, therefore, that the question of the admissibility of the evidence based on an alleged unlawful search and seizure does not extend to the personal defendants but embraces only the corporation whose property was taken. . . . (A Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.)

With respect to the documents, papers and things seized in the residences of petitioners herein, the aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by this Court,12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence against petitioners herein.In connection with said documents, papers and things, two (2) important questions need be settled, namely: (1) whether the search warrants in question, and the searches and seizures made under the authority thereof, are valid or not, and (2) if the answer to the preceding question is in the negative, whether said documents, papers and things may be used in evidence against petitioners herein.1äwphï1.ñëtPetitioners maintain that the aforementioned search warrants are in the nature of general warrants and that accordingly, the seizures effected upon the authority there of are null and void. In this connection, the Constitution13 provides:

The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized.

Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall issue but upon probable cause, to be determined by the judge in the

manner set forth in said provision; and (2) that the warrant shall particularly describe the things to be seized.None of these requirements has been complied with in the contested warrants. Indeed, the same were issued upon applications stating that the natural and juridical person therein named had committed a "violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other words, nospecific offense had been alleged in said applications. The averments thereof with respect to the offense committed were abstract. As a consequence, it was impossible for the judges who issued the warrants to have found the existence of probable cause, for the same presupposes the introduction of competent proof that the party against whom it is sought has performed particular acts, or committed specific omissions, violating a given provision of our criminal laws. As a matter of fact, the applications involved in this case do not allege any specific acts performed by herein petitioners. It would be the legal heresy, of the highest order, to convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code," — as alleged in the aforementioned applications — without reference to any determinate provision of said laws orTo uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of communication and correspondence at the mercy of the whims caprice or passion of peace officers. This is precisely the evil sought to be remedied by the constitutional provision above quoted — to outlaw the so-called general warrants. It is not difficult to imagine what would happen, in times of keen political strife, when the party in power feels that the minority is likely to wrest it, even though by legal means.Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court 14 by providing in its counterpart, under the Revised Rules of Court 15 that "a search warrant shall not issue but upon probable cause in connection with one specific offense." Not satisfied with this qualification, the Court added thereto a paragraph, directing that "no search warrant shall issue for more than one specific offense."

The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit:

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

Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights — that the things to be seized be particularly described — as well as tending to defeat its major objective: the elimination of general warrants.Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the searches and seizures under consideration were unconstitutional, the documents, papers and things thus seized are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are unanimously of the opinion that the position taken in the Moncado case must be abandoned. Said position was in line with the American common law rule, that the criminal should not be allowed to go free merely "because the constable has blundered," 16 upon the theory that the constitutional prohibition against unreasonable searches and seizures is protected by means other than the exclusion of evidence unlawfully obtained, 17 such as the common-law action for damages against the searching officer, against the party who procured the issuance of the search warrant and against those assisting in the execution of an illegal search, their criminal punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as may be provided by other laws.However, most common law jurisdictions have already given up this approach and eventually adopted the exclusionary rule, realizing that this is the only practical means of enforcing the constitutional injunction against unreasonable searches and

seizures. In the language of Judge Learned Hand:As we understand it, the reason for the exclusion of evidence competent as such, which has been unlawfully acquired, is that exclusion is the only practical way of enforcing the constitutional privilege. In earlier times the action of trespass against the offending official may have been protection enough; but that is true no longer. Only in case the prosecution which itself controls the seizing officials, knows that it cannot profit by their wrong will that wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

If letters and private documents can thus be seized and held and used in evidence against a citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be secure against such searches and seizures, is of no value, and, so far as those thus placed are concerned, might as well be stricken from the Constitution. The efforts of the courts and their officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the sacrifice of those great principles established by years of endeavor and suffering which have resulted in their embodiment in the fundamental law of the land.19

This view was, not only reiterated, but, also, broadened in subsequent decisions on the same Federal Court. 20After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):

. . . Today we once again examine the Wolf's constitutional documentation of the right of privacy free from unreasonable state intrusion, and after its dozen years on our books, are led by it to close the only courtroom door remaining open to evidence secured by official lawlessness in flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that very same unlawful conduct. We hold that all evidence obtained by searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a State.Since the Fourth Amendment's right of privacy has been declared enforceable against the States through the Due Process Clause of the Fourteenth, it is enforceable

against them by the same sanction of exclusion as it used against the Federal Government. Were it otherwise, then just as without the Weeks rule the assurance against unreasonable federal searches and seizures would be "a form of words," valueless and underserving of mention in a perpetual charter of inestimable human liberties, so too, without that rule the freedom from state invasions of privacy would be so ephemeral and so neatly severed from its conceptual nexus with the freedom from all brutish means of coercing evidence as not to permit this Court's high regard as a freedom "implicit in the concept of ordered liberty." At the time that the Court held in Wolf that the amendment was applicable to the States through the Due Process Clause, the cases of this Court as we have seen, had steadfastly held that as to federal officers the Fourth Amendment included the exclusion of the evidence seized in violation of its provisions. Even Wolf "stoutly adhered" to that proposition. The right to when conceded operatively enforceable against the States, was not susceptible of destruction by avulsion of the sanction upon which its protection and enjoyment had always been deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the substantive protections of due process to all constitutionally unreasonable searches — state or federal — it was logically and constitutionally necessarily that the exclusion doctrine — an essential part of the right to privacy — be also insisted upon as an essential ingredient of the right newly recognized by the Wolf Case. In short, the admission of the new constitutional Right by Wolf could not tolerate denial of its most important constitutional privilege, namely, the exclusion of the evidence which an accused had been forced to give by reason of the unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its privilege and enjoyment. Only last year the Court itself recognized that the purpose of the exclusionary rule to "is to deter — to compel respect for the constitutional guaranty in the only effectively available way — by removing the incentive to disregard it" . . . .The ignoble shortcut to conviction left open to the State

tends to destroy the entire system of constitutional restraints on which the liberties of the people rest. Having once recognized that the right to privacy embodied in the Fourth Amendment is enforceable against the States, and that the right to be secure against rude invasions of privacy by state officers is, therefore constitutional in origin, we can no longer permit that right to remain an empty promise. Because it is enforceable in the same manner and to like effect as other basic rights secured by its Due Process Clause, we can no longer permit it to be revocable at the whim of any police officer who, in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision, founded on reason and truth, gives to the individual no more than that which the Constitution guarantees him to the police officer no less than that to which honest law enforcement is entitled, and, to the courts, that judicial integrity so necessary in the true administration of justice. (emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the constitutional injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has competent evidence to establish probable cause of the commission of a given crime by the party against whom the warrant is intended, then there is no reason why the applicant should not comply with the requirements of the fundamental law. Upon the other hand, if he has no such competent evidence, then it is not possible for the Judge to find that there is probable cause, and, hence, no justification for the issuance of the warrant. The only possible explanation (not justification) for its issuance is the necessity of fishing evidence of the commission of a crime. But, then, this fishing expedition is indicative of the absence of evidence to establish a probable cause.Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration, overlooks the fact that violations thereof are, in general, committed By agents of the party in power, for, certainly, those belonging to the minority could not possibly abuse a power they do not have. Regardless of the handicap under which the minority usually — but,

understandably — finds itself in prosecuting agents of the majority, one must not lose sight of the fact that the psychological and moral effect of the possibility 21 of securing their conviction, is watered down by the pardoning power of the party for whose benefit the illegality had been committed.In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects seized in the offices of the corporations above referred to include personal belongings of said petitioners and other effects under their exclusive possession and control, for the exclusion of which they have a standing under the latest rulings of the federal courts of federal courts of the United States. 22

We note, however, that petitioners' theory, regarding their alleged possession of and control over the aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been Advanced, notin their petition or amended petition herein, but in the Motion for Reconsideration and Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be readjustment of that followed in said petitions, to suit the approach intimated in the Resolution sought to be reconsidered and amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said motion for reconsideration, or submitted in support thereof, contain either inconsistent allegations, or allegations inconsistent with the theory now advanced by petitioners herein.Upon the other hand, we are not satisfied that the allegations of said petitions said motion for reconsideration, and the contents of the aforementioned affidavits and other papers submitted in support of said motion, have sufficiently established the facts or conditions contemplated in the cases relied upon by the petitioners; to warrant application of the views therein expressed, should we agree thereto. At any rate, we do not deem it necessary to express our opinion thereon, it being best to leave the matter open for determination in appropriate cases in the future.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that the warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the documents, papers and other effects so seized in the aforementioned residences are concerned; that the aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other effects seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution, without special pronouncement as to costs.It is so ordered.Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.Adm. Matter No. R-181-P               July 31, 1987ADELIO C. CRUZ, complainant, vs.QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents.R E S O L U T I O N FERNAN, J.:In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged Quiterio L. Dalisay, Senior Deputy Sheriff of Manila, with "malfeasance in office, corrupt practices and serious irregularities" allegedly committed as follows:1. Respondent sheriff attached and/or levied the money belonging to complainant Cruz when he was not himself the judgment debtor in the final judgment of NLRC NCR Case No. 8-12389-91 sought to be enforced but rather the company known as "Qualitrans Limousine Service, Inc.," a duly registered corporation; and,2. Respondent likewise caused the service of the alias writ of execution upon complainant who is a resident of Pasay City, despite knowledge that his territorial jurisdiction covers Manila only and does not extend to Pasay City.

In his Comments, respondent Dalisay explained that when he garnished complainant's cash deposit at the Philtrust bank, he was merely performing a ministerial duty. While it is true that said writ was addressed to Qualitrans Limousine Service, Inc., yet it is also a fact that complainant had executed an affidavit before the Pasay City assistant fiscal stating that he is the owner/president of said corporation and, because of that declaration, the counsel for the plaintiff in the labor case advised him to serve notice of garnishment on the Philtrust bank.On November 12, 1984, this case was referred to the Executive Judge of the Regional Trial Court of Manila for investigation, report and recommendation.Prior to the termination of the proceedings, however, complainant executed an affidavit of desistance stating that he is no longer interested in prosecuting the case against respondent Dalisay and that it was just a "misunderstanding" between them. Upon respondent's motion, the Executive Judge issued an order dated May 29, 1986 recommending the dismissal of the case.It has been held that the desistance of complainant does not preclude the taking of disciplinary action against respondent. Neither does it dissuade the Court from imposing the appropriate corrective sanction. One who holds a public position, especially an office directly connected with the administration of justice and the execution of judgments, must at all times be free from the appearance of impropriety.1

We hold that respondent's actuation in enforcing a judgment against complainant who is not the judgment debtor in the case calls for disciplinary action. Considering the ministerial nature of his duty in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of a decision ordained or decreed in the dispositive part should be the subject of execution.2 No more, no less. That the title of the case specifically names complainant as one of the respondents is of no moment as execution must conform to that directed in the dispositive portion and not in the title of the case.The tenor of the NLRC judgment and the implementing writ is clear enough. It directed Qualitrans Limousine Service, Inc. to reinstate the discharged employees and pay them full backwages. Respondent, however, chose to "pierce the veil of corporate entity" usurping a power belonging to the court and

assumed improvidently that since the complainant is the owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a well-settled doctrine both in law and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities.3

Anent the charge that respondent exceeded his territorial jurisdiction, suffice it to say that the writ of execution sought to be implemented was dated July 9, 1984, or prior to the issuance of Administrative Circular No. 12 which restrains a sheriff from enforcing a court writ outside his territorial jurisdiction without first notifying in writing and seeking the assistance of the sheriff of the place where execution shall take place.ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay NEGLIGENT in the enforcement of the writ of execution in NLRC Case-No. 8-12389-91, and a fine equivalent to three [3] months salary is hereby imposed with a stern warning that the commission of the same or similar offense in the future will merit a heavier penalty. Let a copy of this Resolution be filed in the personal record of the respondent.SO ORDERED.G.R. No. L-67626 April 18, 1989JOSE REMO, JR., petitioner, vs.THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC., represented by APIFANIO B. MARCHA, respondents.Orbos, Cabusora, Dumlao & Sta. Ana for petitioner. GANCAYCO, J.:A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats a corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. 1However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to defeat public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will regard the corporation as an association of

persons, or in case of two corporations, will merge them into one." The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of a person." 2 There are many occasions when this Court pierced the corporate veil because of its use to protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing principles.In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation (hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Bañares, Feliciano Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the corporation may secure from any lending institution. 5Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of absolute sale. 6 In a side agreement of the same date, the parties agreed on a downpayment in the amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien covering said cargo trucks and the parties may allow an extension of 30 days and thereafter private respondent may ask for a revocation of the contract and the reconveyance of all said trucks. 7The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private respondent tried to collect from Coprada but the latter promised to pay only upon the release of the DBP loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said letter, Coprada reiterated that

he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made. 10Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting held on March 15, 1978. 11Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April 27, 1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental payments were made.On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the month to pay the balance of the purchase price; that he will update the rentals within the week; and in case he fails, then he will return the 13 units should private respondent elect to get back the same. 13 Private respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1, 1978. 14Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan application from a certain financing company, and that ten (10) trucks have been returned to Bagbag, Novaliches. 15 On December 9, 1978, Coprada informed private respondent anew that he had returned ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron from the State Investment House, Inc. 16In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13 trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan, Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez, Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered the complaint denying any participation in the transaction and alleging that Akron has a distinct corporate personality. He was, however, declared in default for his failure to attend the pre-trial.

In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended its articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of Akron to private respondent.After an ex parte reception of the evidence of the private respondent, a decision was rendered on October 28, 1980, the dispositive part of which reads as follows:Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering them jointly and severally to pay;

a — the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of interest) from the filing of the complaint until the full amount is paid;b — rentals of Bagbag property at P1,000.00 a month from August 1978 until the premises is cleared of the said trucks;c — attorneys fees of P10,000.00, andd — costs of suit.

The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1, 1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00 shall be from August 1, 1978 until the trucks are removed totally from the place." 17A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30, 1983. The appellate court entered another decision affirming the appealed decision of the trial court, with costs against petitioner.Hence, this petition for review wherein petitioner raises the following issues:

I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and in holding the petitioner personally liable for the obligation of the Corporation which decision is patently contrary to law and the applicable decision thereon.II. The Intermediate Appellate Court (IAC)

committed grave error of law in its decision by sanctioning the merger of the personality of the corporation with that of the petitioner when the latter was held liable for the corporate debts. 18

We reverse.The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in December, 1977 petitioner was still a member of the board of directors of Akron and that he participated in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that said resolution was intended to defraud anyone and more particularly private respondent. It was Coprada, President and Chairman of Akron, who negotiated with said respondent for the purchase of 13 cargo trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the payment of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought from the DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the said promissory note so he cannot be personally bound thereby.Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same and not petitioner.As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is not inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment to private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted on the 13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retro sale of the 2 units.As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron Transport International,

Inc., petitioner alleges that the change of corporate name was in order to include trucking and container yard operations in its customs brokerage of which private respondent was duly informed in a letter. 19Indeed, the new corporation confirmed and assumed the obligation of the old corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation to private respondent.There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case. Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder to dispose of his shares of stock anytime he so desires.Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has no part in this.If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that petitioner had any part or participation in the perpetration of the same. Fraud must be established by clear and convincing evidence. If at all, the principal character on whom fault should be attributed is Feliciano Coprada, the President of Akron, whom private respondent dealt with personally all through out. Fortunately, private respondent obtained a judgment against him from the trial court and the said judgment has long been final and executory.WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and affirmed, without costs.SO ORDERED.[G.R. No. 131673. September 10, 2004]RUBEN MARTINEZ,* substituted by his heirs, MENA

CONSTANTINO MARTINEZ, WILFRIDO C. MARTINEZ, EMMA M. NAVA, and EDNA M. SAKHRANI,petitioners, vs. COURT OF APPEALS and BPI INTERNATIONAL FINANCE, respondents.

D E C I S I O N

CALLEJO, SR., J.:Before us is a petition for review on certiorari of the

Decision[1] of the Court of Appeals, in CA-G.R. CV No. 43985, modifying the Decision[2] of the Regional Trial Court of Kalookan City, Branch 122, in Civil Case No. C-10811.

The antecedents are as follows:Respondent BPI International Finance[3] is a foreign

corporation not doing business in the Philippines, with office address at the Bank of America Tower, 12 Harcourt Road, Central Hongkong. It was a deposit-taking company organized and existing under and by virtue of the laws of Hongkong, and was also engaged in investment banking operations therein.

Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in Hongkong, with a paid-up capital of HK$10,000. The registered shareholders of the CLL in Hongkong were the Overseas Nominee, Ltd. and Shares Nominee, Ltd., which were mainly nominee shareholders. In Hongkong, the nominee shareholder of CLL was Baker & McKenzie Nominees, Ltd., a leading solicitor firm. However, beneficially, the company was equally owned by Messrs. Ramon Siy, Ricardo Lopa, Wilfrido C. Martinez, and Miguel J. Lacson.[4] The registered office address of CLL in Hongkong was 22/F, Princes Building, also the office address of Price Waterhouse & Co., a large accounting firm in Hongkong.

The bulk of the business of the CLL was the importation of molasses from the Philippines, principally from the Mar Tierra Corporation, and the resale thereof in the international market.[5] However, Mar Tierra Corporation also sold molasses to its customers.[6] Wilfrido C. Martinez was the president of Mar Tierra Corporation, while its executive vice-president was Blamar Gonzales. The business operations of both the CLL and Mar Tierra Corporation were run by Wilfrido Martinez and Gonzales.

About 42% of the capital stock of Mar Tierra Corporation was owned by RJL Martinez Fishing Corporation (RJL), the leading tuna fishing outfit in the Philippines. Petitioner Ruben Martinez was the president of RJL and a member of the board of directors thereof. The majority stockholders of RJL were Ruben Martinez and his brothers, Jose and Luis Martinez. Sixty-eight (68) percent of the total assets of Ruben Martinez were in the RJL.

In 1979, respondent BPI International Finance (then AIFL)

granted CLL a letter of credit in the amount of US$3,000,000. Wilfrido Martinez signed the letter agreement with the respondent for the CLL. The respondent and the CLL had made the following arrangements:Cintas Largas, Ltd. will purchase molasses from the Philippines, mainly from Mar Tierra Corporation, and then sell the molasses to foreign countries. Both the purchase of the molasses from the Philippines and the subsequent sale thereof to foreign customers were effected by means of Letters of Credit. A Letter of Credit would be opened by Cintas Largas, Ltd. in favour of Mar Tierra Corporation or any other seller in the Philippines. Upon the sale of the molasses to foreign buyers, a Letter of Credit would then be opened by such buyers, in favour of Cintas Largas, Ltd. The Letters of Credit were effected through the Letter of Credit Facility of Cintas Largas, Ltd. in plaintiff. The profits of Cintas Largas, Ltd. from these transactions were then deposited in either the deposit account of Cintas Largas, Ltd. with plaintiff or the Money Market Placement Account Nos. 063 and 084, depending upon the instructions of Wilfrido C. Martinez and Blamar C. Gonzales, principally.[7]

On January 24, 1979, the CLL opened a money market placement with the respondent bearing MMP No. 063, with an initial placement of US$390,000.[8] The CLL also opened and maintained a foreign currency account and a deposit account with the respondent. The authorized signatory in both accounts of CLL was Wilfrido C. Martinez. Some instructions also came from Gonzales, to be confirmed by Wilfrido Martinez.[9] On March 21, 1980, petitioner Ruben Martinez and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson affixed their signatures on the two signature cards furnished by the respondent which became MMP No. 063 and MMP No. 084. On the face of the cards, the signatories became joint account holders of the said money market placements.[10]

On March 25, 1980, the CLL opened a money market placement account with the respondent bearing MMP No. 084 with an initial placement of US$68,768.60, transferred from MMP No. 063.[11] At times, funds in MMP Nos. 063 and 084 were transferred to the CLLs deposit account, and vice versa.

On May 19, 1980, the CLL, through Wilfrido Martinez, and the respondent, through Senen L. Matoto and Michael Sung, Senior Manager of the Money Management Division of the respondent, executed a letter-agreement in which the existing

back-to-back credit facility granted to the CLL way back in 1979 was extended up to July 1980, and increased to US$5,000,000. The credit facility was to be secured as follows:

SECURITY: (i) Back-to-Back L/C to be secured by an L/C issued, by a bank acceptable to AFHK, in favor of Cintas Largas.

(ii) AFHK L/C issued prior to receipt of Backing L/C to be secured by a 10% margin by way of a hold out on cash deposit with AFHK with interest at LIBOR. The Backing L/C, however, shall be opened not later than 120 days after the issuance of AFHKs L/C.

(iii) JSS of Messrs. Ramon Siy, Wilfrido C. Martinez, Ricardo Lopa and Miguel J. Lacson for both of the above cases.

DOCUMENTATION: Standard AFHK L/C documentation.[12]

The facility was designed to finance the purchases of molasses made by the CLL from the Philippines for re-export.[13]

In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel J. Lacson, Ricardo Lopa, and Ramon Siy executed a continuing suretyship agreement in which they bound and obliged themselves, jointly and severally, with the CLL to pay the latters obligation under the said credit facility.[14]

As of September 26, 1980, the balance of the deposit account of the CLL with the respondent was US$1,025,052.06.[15] On the other hand, the balance of the money placement in MMP No. 063, as of September 25, 1980 was US$312,708.43,[16] while the balance of the money market placement in MMP No. 084 as of September 8, 1980 stood at US$768,258.24.[17]

On October 10, 1980, Blamar Gonzales, acting for Mar Tierra Corporation, sent to the respondent a telex confirming his telephone conversation with Michael Sung/Bing Matoto requesting the respondent to transfer US$340,000 to Account No. FCD SA 18402-7, registered in the name of Mar Tierra Corporation, Philippine Banking Corporation, Union Cement Building, Port Area, Manila, as payee, with the following specific instructions: (a) there should be no mention of Wilfrido Martinez or Mar Tierra Corporation; (b) the telex instruction should be signed only by Wilfrido Martinez and sent only through the telex

machine of Mar Tierra Corporation; and, (c) the final confirmation of the transfer should be made by telephone call.[18]Gonzales requested the respondent, in the same telex, to confirm its total available account so that instructions on the transfer of the funds to FCD SA 18402-7 could be formalized.[19]

On October 13, 1980, Sung sent a telex to Gonzales informing the latter of the balances of the MMP Nos. 063 and 084 and in the CLL account deposit, with the corresponding maturity dates thereof, thus:1. DETAIL OF PLACEMENT IN VARIOUS A/C.MMP 063VALUE DATE MATURITY DATE DATE AMOUNT MATURITY VALUE25/9/80 28/11/80 12-1/4 USD306,043.48 USD 312,708.43MMP 08425/09/80 28/11/80 12-1/4 USD751,883.88 USD 768,258.24-------------------------USD1080,966.67============CINTAS LARGASVALUE DATE MATURITY DATE DATE AMOUNT MATURITY VALUE15/9/80 1 DAY CALL 10-7/8 USD 46,131.2625/9/80 1 DAY CALL 11-1/4 USD500,000.00(RATE ADJ: TO 12-1/4 VALUE 7/10/80)26/9/80 31/10/80 12-1/4 USD420,831.45 USD 425,843.44

2. ACCORDING TO AIDC, O/S OF PESO LOAN IS 10,930,000.00, AND THE HOLDOUT REQUIRED IS 120 PCT

COMPUTATION: PESO 10,930,000.007.89 (EXCHANGE RATE)1.20 (120 PCT)

--------------------1,662,357.00

=============3. ACCORDINGLY, THE FUND AVAILABLE IS APPROX.

USD340,000.00. PLS REVERT.[20]

Sung informed Gonzales that the account available was approximately US$340,000, considering the CLL deposit account and the money market placements.[21] On October 14, 1980, the respondent received a telex from Wilfrido C. Martinez requesting that the transfer of US$340,000 from the deposit account of the CLL or any deposit available be effected by telegraphic transfer as soon as possible to their account, payee

FCD SA 18402-7, Philippine Banking Corporation, Port Area, Manila.[22] On October 21, 1980, Wilfrido Martinez wrote the respondent confirming his request for the transfer of US$340,000 to their account, FCD SA 18402-7, with the Philippine Banking Corporation, through Wells Fargo Bank of New York, Philippine Banking Corporation Account No. FCDU SA No. 003-019205.[23]

The respondent complied with the request of the CLL, through Wilfrido Martinez and Gonzales, and remitted US$340,000 as instructed.[24] However, instead of deducting the amount from the funds in the CLL foreign currency or deposit accounts and/or MMP Nos. 063 and 084, the respondent merely posted the US$340,000 as an account receivable of the CLL since, at that time, the money market placements had not yet matured.[25] When the money market placements matured, however, the respondent did not collect the US$340,000 therefrom. Instead, the respondent allowed the CLL and/or Wilfrido C. Martinez to withdraw, up to July 3, 1981, the bulk of the CLL deposit account and MMP Nos. 084 and 063;[26] hence, it failed to secure reimbursement for the US$340,000 from the said deposit account and/or money market placements.

In the meantime, problems ensued in the reconciliation of the transactions involving the funds of the CLL, including the MMP Nos. 063 and 084 with the respondent, as well as the receivables of Mar Tierra Corporation. There was also a need to audit the said funds. Sometime in July 1982, conferences were held between the executive committee of Mar Tierra Corporation and some of its officers, including Miguel J. Lacson, where the means to reduce the administrative expenses and accountants fees, and the possibility of placing the CLL on an inactive status were discussed.[27] The respondent pressured the CLL, Wilfrido Martinez, and Gonzales to pay the US$340,000 it remitted to Account No. FCD SA 18402-7.[28] Eventually, Wilfrido C. Martinez and Blamar Gonzales engaged the services of the auditing firm, the Jacinto, Belano, Castro & Co., to review the flow of the CLLs funds and the receivables of Mar Tierra Corporation.

On August 16, 1982, the CLL, through its certified public accountant, wrote the respondent requesting the latter to furnish its accountant with a copy of the financial report prepared by its auditors.[29] An audit was, thereafter, conducted by the Jacinto, Belano, Castro & Co., certified public

accountants of the CLL and Mar Tierra Corporation. Based on their report, the auditors found that the CLL owed the respondent US$340,000.[30]

In the meantime, the respondent demanded from the CLL, Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, the payment of the US$340,000 remitted by it to FCD SA 18402-7, per instructions of Gonzales and Wilfrido Martinez. No remittance was made to the respondent. Petitioner Ruben Martinez denied knowledge of any such remittance, as well as any liability for the amount thereof.

On June 17, 1983, the respondent filed a complaint against the CLL, Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, with the RTC of Kaloocan City for the collection of the principal amount of US$340,000, with a plea for a writ of preliminary attachment. Two alternative causes of action against the defendants were alleged therein, viz:FIRST ALTERNATIVE CAUSE OF ACTION2.1 The allegations contained in the foregoing paragraphs are repleaded herein by reference.2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained in the foregoing paragraphs was made upon the express instructions of defendants GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf of the defendant CINTAS, defendants GONZALES and WILFRIDO C. MARTINEZ being the duly authorized representatives of defendant CINTAS to transact any and all of its business with plaintiff.2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to advance the said amount and for defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff all such monies so advanced to said defendants or to their order.2.4 In making said remittance, plaintiff acted as the agent of the foregoing defendants in meeting the latters liability to the recipient/s of the amount so remitted.2.5 The remittance of US$340,000.00 which remains unsettled to date is a just, binding and lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS.2.6 Defendant CINTAS is a reinvoicing or paper company with nominee shareholders in Hongkong. The real and beneficial shareholders of the foregoing defendants are the defendants LACSON and WILFRIDO C. MARTINEZ.

2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or business conduit for their sole benefit and/or to defeat public convenience.2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing defendants, has no corporate personality distinct and separate from that of its beneficial shareholders and, likewise, has no substantial assets in its own name.2.9 The remittance of US$340,000.00 as referred to previously, although made upon the instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance made for the benefit of the beneficial shareholders of defendant CINTAS.2.10 Any and all obligations of defendant CINTAS are the obligations of its beneficial shareholders since the former is being used by the latter as an alter ego or business conduit for their sole benefit and/or to defeat public convenience.SECOND ALTERNATIVE CAUSE OF ACTION3.1 The allegations contained in the foregoing paragraphs are incorporated herein by reference.3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and LACSON are joint account holders of Money Market Placement Account Nos. 063 and 084 (hereinafter referred to as MMP 063 and 084 for brevity) opened and maintained by said defendants with the plaintiff.3.3 Said money market placement accounts, although nominally opened and maintained by said defendants, were in reality for the account and benefit of all the defendants.3.4 Defendant CINTAS likewise opened and maintained a deposit account with plaintiff.3.5 Defendants W.C. Martinez and Gonzales upon giving instructions to plaintiff to remit the amount of US$340,000.00 as previously discussed also instructed plaintiff to reimburse itself from available funds in MMP Account Nos. 063 and 084 and the defendant CINTAS deposit account.3.6 Due to excusable mistake, plaintiff was unable to obtain reimbursement for the remittance it made from MMP Account Nos. 063, 084 and from the deposit account of defendant CINTAS.3.7 As a consequence of said mistake, plaintiff delivered to the foregoing defendants and/or to third parties upon orders of the defendants substantially all the funds in MMP Account Nos. 063,

084 and the deposit account of defendant CINTAS.3.8 The amount of US$340,000.00 delivered by plaintiff to the foregoing defendants constituted an overpayment and/or erroneous payment as defendants had no right to demand the same; further, said amount having been unduly delivered by mistake, the foregoing defendants were obliged to return it.3.9 Since the foregoing defendants had no legal right to the overpayment or erroneous payment of US$340,000.00 they, therefore, hold said money in trust for the plaintiff.3.10 Despite numerous demands to the defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS for restitution of the funds erroneously paid or overpaid to said defendants, they have failed and continue to fail to make any restitution.[31]

The respondent prayed therein that, after due proceedings, judgment be rendered in its favor, viz:ON THEFIRST ALTERNATIVE CAUSE OF ACTION4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, jointly and severally, liable to pay plaintiff the amount of US$340,000.00 with interests thereon from February 20, 1982 until fully paid.4.2 Declaring that defendant CINTAS is a mere alter ego or business conduit of defendants LACSON and WILFRIDO C. MARTINEZ; hence, the foregoing defendants are, jointly and severally, liable to pay plaintiff the amount of US$340,000.00 with interests thereon.4.3 Ordering the foregoing defendants to be, jointly and severally, liable for the amount of P100,000.00 as and for attorneys fees; and4.4 Ordering the foregoing defendants to be, jointly and severally, liable to plaintiff for actual damages in an amount to be proved at the trial. Or -ON THESECOND ALTERNATIVE CAUSE OF ACTION5.1 Declaring that plaintiff made an erroneous payment in the amount of US$340,000.00 to defendants LACSON, WILFRIDO C. MARTINEZ, RUBEN MARTINEZ and CINTAS.5.2 Declaring the foregoing defendants to be, jointly and severally, liable to reimburse plaintiff the amount of US$340,000.00 with interest thereon from February 20, 1982 until fully paid.

5.3 Ordering defendants to be, jointly and severally, liable for the amount of P100,000.00 as and for attorneys fees; and5.4 Ordering defendants to be, jointly and severally, liable to plaintiff for actual damages in an amount to be proved at the trial.5.5 A writ of preliminary attachment be issued against the properties of the defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS as a security for the satisfaction of any judgment that may be recovered.Plaintiff further prays for such other relief as may be deemed just and equitable in the premises.[32]

In his answer to the complaint, petitioner Ruben Martinez interposed the following special and affirmative defenses:BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering defendant respectfully states:2. Defendant is not the holder, owner, depositor, trustee and has no interest whatsoever in the account in Philippine Banking Corporation (FCD SA 18402-7) where the plaintiff remitted the amount sought to be recovered. Hence, he did not benefit directly or indirectly from the said remittance;3. Defendant did not participate in any manner whatsoever in the remittance of funds from the plaintiff to the alleged FCD Account in the Philippine Banking Corporation;4. Defendant has not received nor benefited from the alleged remittance, payment, overpayment or erroneous payment allegedly made by plaintiff; hence, insofar as he is concerned, there is nothing to return to or to hold in trust for the plaintiff;5. Plaintiffs alleged remittance of the amount by mere telex or telephone instruction was highly irregular and questionable considering that the undertaking was that no remittance or transfer could be done without the prior signature of the authorized signatories;6. The alleged telex instructions to the plaintiff was for it to confirm the amounts that are free and available which it did;7. Plaintiff is guilty of estoppel or laches by making it appear that the funds so remitted are free and available and by not acting within reasonable time to correct the alleged mistake;8. The alleged remittance, overpayment and erroneous payment was manipulated by plaintiffs own employees, officers or representatives without connivance or collusion on the part of the answering defendant; hence, plaintiff has only itself to blame for the same; likewise, its recourse is not against

answering defendant;9. Plaintiffs Complaint is defective in that it has failed to state the facts constituting the mistake regarding its failure to obtain reimbursement from MMP 063 and 084;10. Plaintiff is guilty of gross negligence and it only has itself to blame for its alleged loss;11. Sometime on or about 1980, defendant was made to sign blank forms concerning opening of money market placements and perhaps, this is how he became a joint account holder of MMP 063 and 084; defendant at that time did not realize the import or significance of his act; afterwards, defendant did not do any act or omission by which he could be implicated in this case;12. Assuming that defendant is a joint account holder of said MMP 063 and 084, plaintiff has failed to plead defendants obligations, if any, by being said joint account holder; likewise, the Complaint fails to attach the corresponding documents showing defendants being a joint account holder.[33]

The CLL was declared in default for its failure to file an answer to the complaint.

After trial, the RTC rendered its decision, the dispositive portion of which reads as follows:PREMISES CONSIDERED, judgment is hereby rendered as follows:1. Ordering all the defendants, jointly and severally, to pay plaintiff the amount of US$340,000.00 or its equivalent in Philippine currency measured at the Central Bank prevailing rate of exchange in October 1980 and with legal interest thereon computed from the filing of plaintiffs complaint on June 17, 1983 until fully paid;2. Declaring that defendant Cintas Largas Ltd. is a mere business conduit and alter ego of the individual defendants, thereby holding the individual defendants, jointly and severally, liable to pay plaintiff the aforesaid amount of US$340,000.00 or its equivalent in Philippine Currency measured at the Central Bank prevailing rate of exchange in October 1980, with interest thereon as above-stated;3. Ordering all defendants to, jointly and severally, pay unto plaintiff the amount of P50,000.00 as and for attorneys fees, plus costs.All counterclaims and cross-claims are dismissed for lack of merit.

SO ORDERED.[34]

The trial court ruled that the CLL was a mere paper company with nominee shareholders in Hongkong. It ruled that the principle of piercing the veil of corporate entity was applicable in this case, and held the defendants liable, jointly and severally, for the claim of the respondent, on its finding that the defendants merely used the CLL as their business conduit. The trial court declared that the majority shareholder of Mar Tierra Corporation was the RJL, controlled by petitioner Ruben Martinez and his brothers, Jose and Luis Martinez, as majority shareholders thereof. Moreover, petitioner Ruben Martinez was a joint account holder of MMP Nos. 063 and 084. The trial court, likewise, found that the auditors of Mar Tierra Corporation and the CLL confirmed that the defendants owed US$340,000. The trial court concluded that the respondent had established its causes of action against Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez; hence, held all of them liable for the claim of the respondent.

The decision was appealed to the CA. On June 27, 1997, the CA rendered its decision, the dispositive portion of which reads:WHEREFORE, the decision of the Court a quo dated December [19], 1991 is hereby MODIFIED, by exonerating appellant Blamar Gonzales from any liability to appellee and the complaint against him isDISMISSED. The decision appealed from is AFFIRMED in all other respect.SO ORDERED.[35]

The appellate court exonerated Gonzales of any liability, reasoning that he was not a stockholder of the CLL nor of Mar Tierra Corporation, but was a mere employee of the latter corporation.[36] Petitioner Ruben Martinez sought a reconsideration of the decision of the CA, to no avail.[37]

Dissatisfied with the decision and resolution of the appellate court, the petitioner, filed the petition at bar, on the following grounds:IRESPONDENT COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONER RUBEN MARTINEZ IS LIABLE TO RESPONDENT BPI INTERNATIONAL FINANCE FOR REIMBURSEMENT OF THE US$340,000.00 REMITTED BY SAID RESPONDENT BPI INTERNATIONAL FINANCE TO FCD SA ACCOUNT NO. 18402-7 AT THE PHILIPPINE BANKING CORPORATION, PORT AREA BRANCH.

IIRESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING THE COUNTER-CLAIM OF PETITIONER RUBEN MARTINEZ CONSIDERING THE EVIDENCE ON RECORD THAT PROVES THE SAME.[38]

The paramount issue posed for resolution is whether or not the petitioner is obliged to reimburse to the respondent the principal amount of US$340,000.

The petitioner asserts that the trial and appellate courts erred when they held him liable for the reimbursement of US$340,000 to the respondent. He contends that he is not in actuality a stockholder of Mar Tierra Corporation, nor a stockholder of the CLL. He was not involved in any way in the operations of the said corporations. He added that while he may have signed the signature cards of MMP Nos. 063 and 084 in blank, he never had any involvement in the management and disposition of the said accounts, nor of any deposits in or withdrawals from either or both accounts. He was not aware of any transactions between the respondent, Wilfrido Martinez, and Gonzales, with reference to the remittance of the US$340,000 to FCD SA 18402-7; nor did he oblige himself to pay the said amount to the respondent. According to the petitioner, there is no evidence that he had benefited from any of the following: (a) the remittance by the respondent of the US$340,000 to Account No. FCD SA 18402-7 owned by Mar Tierra Corporation; (b) the money market placements in MMP Nos. 063 and 084, or, (c) from any deposits in or withdrawals from the said account and money market placements.

On the other hand, the appellate court found the petitioner and his co-defendants, jointly and severally, liable to the respondent for the payment of the US$340,000 based on the following findings of the trial court:The Court finds that defendant Cintas Largas (Ltd.) with capitalization of $10,000.00 divided into 1,000 shares at HK$10 per share, is a mere paper company with nominee shareholders in Hongkong, namely: Overseas Nominees Ltd. and Shares Nominees Ltd., with defendants Wilfrido and Miguel J. Lacson as the sole directors (Exh. A). Since the said shareholders are mere nominee companies, it would appear that the said defendants Wilfrido and Miguel J. Lacson who are the sole directors are the real and beneficial shareholders (t.s.n., 9-1-87, p. 5). Further, defendant Cintas Largas Ltd. has no real office in Hongkong as

it is merely being accommodated by Price Waterhouse, a large accounting office in Hongkong (t.s.n., 9-1-87, pp. 7-8).Defendant Cintas Largas Ltd., being a mere alter ego or business conduit for the individual defendants with no corporate personality distinct and separate from that of its beneficial shareholders and with no substantial assets in its own name, it is safe to conclude that the remittance of US$340,000.00 was, in fact, a remittance made for the benefit of the individual defendants. Plaintiff was supposed to deduct the US$340,000.00 remitted to the foreign currency deposit account from Cintas Largas (Ltd.) funds or from money market placement account Nos. 063 and 084 as well as Cintas Largas Ltd. deposit account (Exh. FF-24).Defendant Cintas Largas Ltd. was established only for financing (t.s.n., 12-19-88, pp. 25-26) and the active owners of Cintas are defendants Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-88, p. 22). Mar Tierra Corporation of which defendant Wilfrido Martinez is the President and one of its owners and defendant Blamar Gonzales as the Vice President, sells molasses to defendant Cintas Largas Ltd. Defendant Miguel J. Lacson is a business partner in purchasing molasses for Mar Tierra Corporation. Mar Tierra Corporation was selling molasses to Cintas Largas Ltd. which were purchased by Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-88, pp. 23-24). The majority owner of Mar Tierra Corporation is RJL Martinez Fishing Corporation which is owned by brothers Ruben Martinez, Jose Martinez and Luis Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-88, pp. 11-12). The FCD SA-18402-7 account at Philippine Banking Corporation, Port Area Branch, where the US$340,000.00 was remitted by the plaintiff is the account of Mar Tierra Corporation, and with the interlapping connection of the defendants to each other, these could be the reason why the funds of Cintas Largas Ltd. were being co-mingled and controlled by defendants more particularly defendants Blamar Gonzales and Wilfrido C. Martinez (Exhs. D, E, F, G, H, I, J, L, M, N, O, P, R, S, and T).On the basis of the evidence, the Court finds and so holds that the cause of action of the plaintiff against the defendants has been established.[39]

We do not agree with the trial court and appellate court.We note that the question of whether or not a corporation is

merely an alter ego is purely one of fact.[40] So is the question of

whether or not a corporation is a paper company or a sham or subterfuge or whether the respondent adduced the requisite quantum of evidence warranting the piercing of the veil of corporate entity of the CLL.[41] The Court is not a trier of facts. Hence, the factual findings of the trial court, as affirmed by the appellate court, are generally conclusive upon this Court.[42] However, the rule is subject to the following exceptions: (a) where the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (b) where the information made is manifestly mistaken; (c) where there is grave abuse of discretion; (d) where the judgment is based on a misapplication of facts, and the findings of facts of the trial court and the appellate court are contradicted by the evidence on record; and (e) when certain material facts and circumstances had been overlooked by the trial court which, if taken into account, would alter the result of the case.

We have reviewed the records and find that some substantial factual findings of the trial court and the appellate court and, consequently, their conclusions based on the said findings, are not supported by the evidence on record.

The general rule is that a corporation is clothed with a personality separate and distinct from the persons composing it. Such corporation may not be held liable for the obligation of the persons composing it; and neither can its stockholders be held liable for such obligation.[43] A corporation has a separate personality distinct from its stockholders and from other corporation to which it may be connected.[44] This separate and distinct personality of a corporation is a fiction created by law for convenience and to prevent injustice.[45]

Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit sparingly, the disregard of its independent being and the piercing of the corporate veil.[46] Thus, the veil of separate corporate personality may be lifted when such personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation 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;[47] or when the corporation is used as a cloak or cover for fraud or illegality, or

to work injustice, or where necessary to achieve equity or for the protection of the creditors.[48] In such cases where valid grounds exist for piercing the veil of corporate entity, the corporation will be considered as a mere association of persons.[49] The liability will directly attach to them.[50]

However, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. The substantial identity of the incorporators of two or more corporations does not warrantly imply that there was fraud so as to justify the piercing of the writ of corporate fiction.[51] To disregard the said separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly.[52]

The test in determining the application of the instrumentality or alter ego doctrine is as follows: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 plaintiffs legal rights; and3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.The absence of any one of these elements prevents piercing the corporate veil. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.[53]

In this case, the respondent failed to adduce the quantum of evidence necessary to prove any valid ground for the piercing of the veil of corporate entity of Mar Tierra Corporation, or of RJL for that matter, and render the petitioner liable for the respondents claim, jointly and severally, with Wilfrido Martinez and Lacson. The mere fact that the majority stockholder of Mar Tierra Corporation is the RJL, and that the petitioner, along with Jose and Luis Martinez, owned about 42% of the capital stock of RJL, do not constitute sufficient evidence that the latter corporation, and/or the petitioner and his brothers, had

complete domination of Mar Tierra Corporation. It does not automatically follow that the said corporation was used by the petitioner for the purpose of committing fraud or wrong, or to perpetrate an injustice on the respondent. There is no evidence on record that the petitioner had any involvement in the purchases of molasses by Wilfrido Martinez, Gonzales and Lacson, and the subsequent sale thereof to the CLL, through Mar Tierra Corporation. On the contrary, the evidence on record shows that the CLL purchased molasses from Mar Tierra Corporation and paid for the same through the credit facility granted by the respondent to the CLL. The CLL, thereafter, made remittances to Mar Tierra Corporation from its deposit account and MMP Nos. 063 and 084 with the respondent. The close business relationship of the two corporations does not warrant a finding that Mar Tierra Corporation was but a conduit of the CLL.

Likewise, the respondent failed to adduce preponderant evidence to prove that the Mar Tierra Corporation and the RJL were so organized and controlled, its affairs so conducted as to make the latter corporation merely an instrumentality, agency, conduit or adjunct of the former or of Wilfrido Martinez, Gonzales, and Lacson for that matter, or that such corporations were organized to defraud their creditors, including the respondent. The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.[54]

Also, the mere fact that part of the proceeds of the sale of molasses made by Mar Tierra Corporation to the CLL may have been used by the latter as deposits in its deposit account with the respondent or in the money market placements in MMP Nos. 063 and 084, or that the funds of Mar Tierra Corporation and the CLL with the respondent were mingled, and their disposition controlled by Wilfrido Martinez, does not constitute preponderant evidence that the petitioner, Wilfrido Martinez and Lacson used the Mar Tierra Corporation and the RJL to defraud the respondent. The respondent treated the CLL and Mar Tierra Corporation as separate entities and considered them as one and the same entity only when Wilfrido C. Martinez and/or Blamar Gonzales failed to pay the US$340,000 remitted by the respondent to FCD SA 18402-7. This being the case,

there is no factual and legal basis to hold the petitioner liable to the respondent for the said amount.

Contrary to the ruling of the trial court and the appellate court, the auditors of the CLL and the Mar Tierra Corporation, in their report, did not find the petitioner liable for the respondents claim in their report. The auditors, in fact, found the CLL alone liable for the said amount.[55] Even a cursory reading of the report will show that the name of the petitioner was not mentioned therein.

The respondent failed to adduce evidence that the petitioner had any involvement in the transactions between the CLL, through Wilfrido Martinez and Gonzales, and the respondent, with reference to the remittance of the US$340,000 to FCD SA 18402-7. In fact, the said transaction was so confidential that Gonzales even suggested to the respondent that the name of Wilfrido Martinez or Mar Tierra Corporation be not made of record, and to authorize only Wilfrido Martinez to sign the telex instruction:OCT. 10, 1980TO: AYALA FINANCEATTN: MICHAEL SUNG/BING MATOTOFR: B. GONZALESRE: TRANSFER OF FUNDSTHIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT WE WLD LIKE TO SUGGEST THE FF PROCEDURES FOR FUND TRANSFER.1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO OUR FCD ACCT BY TELEGRAPHIC TRANSFER.

2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF PHILBANKING CORPORATION, PORT AREA BRANCH, UNION CEMENT BLDG, BONIFACIO DRIVE, PORT AREA, METRO MANILA, PHILS.3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF W.C. MARTINEZ OR MAR TIERRA CORP. TLX INSTRUCTION SHLD BE SIGNED BY W.C. MARTINEZ AND WILL BE SENT ONLY THRU TLX MACHINE OF MAR TIERRA CORP.

4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE CALL.PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND AVAILABLE SO WE CAN FORMALIZE INSTRUCTION OF TRANSFER IF THE ABOVE PROCEDURE IS APPROVED BY YOU. PLS CONFRM ALSO

LIST OF CORRESPONDENT BANK IN HK.IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE FF PROCEDURE:1. WELLS FARGO HK WIL SEND A TLX TO MANILA INSTRUCTING PHIL BANKING CORP TO CREDIT FCD SA 18402-7.2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME WELLS FARGO HK WIL REQUEST WELLS FARGO NEW YORK TO CREDIT FCDU NO. 003-019205 FOR THE ACCT OF PHIL BANKING CORP.[56]

Even the respondent admitted, in its complaint, that the CLL, Gonzales, and Wilfrido Martinez, bound and obliged themselves to repay the US$340,000, viz:2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained in the foregoing paragraphs was made upon the express instructions of defendants GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf of the defendant CINTAS, defendants GONZALES and WILFRIDO C. MARTINEZ being the duly authorized representatives of defendant CINTAS to transact any and all of its business with plaintiff.2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to advance the said amount and for defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff all such monies so advanced to said defendants or to their order.2.4 In making said remittance, plaintiff acted as the agent of the foregoing defendants in meeting the latters liability to the recipient/s of the amount so remitted.2.5 The remittance of US$340,000.00 which remains unsettled to date is a just, binding and lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS.2.6 Defendant CINTAS is a reinvoicing or paper company with nominee shareholders in Hongkong. The real and beneficial shareholders of the foregoing defendants are the defendants LACSON, and WILFRIDO C. MARTINEZ.2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or business conduit for their sole benefit and/or to defeat public convenience.2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing defendants, has no corporate personality distinct and separate from that of its beneficial shareholders and likewise has no substantial assets in its own

name.2.9 The remittance of US$340,000.00 as referred to previously, although made upon the instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance made for the benefit of the beneficial shareholders of defendant CINTAS.[57]

The admissions made by the respondent in its complaint are judicial admissions which cannot be contradicted unless there is a showing that it was made through palpable mistake or that no such admission was made.[58]

The respondent impleaded the petitioner only in its second alternative cause of action, on its allegation that the latter was a joint account holder of MMP Nos. 063 and 084, simply because he signed the signature cards with Wilfrido Martinez and/or Lacson in blank. The trial court found the submission of the respondent duly established, based on Wilfrido Martinezs answer to the complaint, and held the petitioner liable for the said amount based on the signature cards in this language:Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel Lacson are joint account holders of the money market placement account Nos. 063 and 084 (par. 17 page 4 Answer of defendant Wilfrido C. Martinez; par. 2, page 5, Amended Answer of defendant Lacson; t.s.n., 4-18-88, p. 7).[59]

The appellate court affirmed the ruling of the trial court without making any specific reference to the aforequoted ruling of the trial court.[60]

We do not agree. The judicial admissions made by Wilfrido Martinez in his answer to the complaint are not binding on the petitioner.[61] The evidence on record shows that the petitioner affixed his signatures on the signature cards merely upon the request of his son, Wilfrido Martinez. The signature cards were printed forms of the respondent with the names of the signatories and the supposed account holders typewritten thereon and, except for the account number, were similarly worded, viz:SIGNATURE CARDAccount Name: Mr. Ruben Martinez and/or Account Number: MMP-063

Mr. Wilfrido C. Martinezand/or Mr. Miguel J. LacsonI.D. Card/Passport No.:________________________________________Residence Address:

_______________________________________________________________________________Tel.___________________Office Address:____________________________________________________________________________________Tel. ___________________Number of signature required to withdraw funds:_____________________

Confirmation/Correspondence to be mailed to: _____Office_____Residence_____Others:______

__________________________

__Other Instructions:________________________________________________________________________________________________________________________________________________________________________

Specimen of signature:1. Sgd. (Ruben Martinez) 3. Sgd. (Wilfrido Martinez)

SIGNATURE NAME SIGNATURE NAME2. Sgd. (Ruben Martinez) 4. Sgd. (Miguel J. Lacson)

SIGNATURE NAME SIGNATURE NAME[62]

The respondent failed to adduce any evidence, testimonial or documentary, including the relevant laws[63] of Hongkong where the placements were made to hold the petitioner liable for the respondents claims. Other than the signature cards, the respondent failed to adduce a shred of evidence to prove (a) the terms and conditions of the money market placements of the CLL in MMP Nos. 063 and 084; and, (b) the rights and obligations of the petitioner, Wilfrido Martinez and Lacson, over the money market placements. In light of the evidence on record, the CLL and/or Wilfrido Martinez never surrendered their ownership over the funds in favor of the petitioner when the latter co-signed the signature cards. The CLL and/or Wilfrido Martinez retained complete control and dominion over the funds.

By merely affixing his signatures on the signature cards, the

petitioner did not necessarily become a joint and solidary creditor of the respondent over the said placements. Neither did the petitioner bind himself to pay to the respondent the US$340,000 which was borrowed by the CLL and/or Wilfrido Martinez, and later remitted to FCD SA 18402-7.

The respondent has no one but itself to blame for its failure to deduct the US$340,000 from the foreign currency and deposit accounts and money market placements of the CLL. The evidence on record shows that the respondent was supposed to deduct the said amount from the money market placements of the CLL in MMP Nos. 063 and 084, but failed to do so. The respondent remitted the amount from its own funds and, by its negligence, merely posted the amount in the account of the CLL. Worse, the respondent allowed the CLL and Wilfrido Martinez to withdraw the entirety of the deposits in the said accounts, without first deducting the US$340,000. By the time the respondent realized its mistakes, the funds in the said accounts had already been withdrawn solely by the CLL and/or Wilfrido Martinez. This was the testimony of Michael Sung, the witness for the respondent.

Q: Do you know whether this US$340,000 was really transferred to Foreign Currency Deposit Account No. 18402-7 of the Philippine Banking Corporation in Manila?

A: Yes.Q: Pursuant to the procedure for fund transfer as

contained in Exhs. B, C, D and E, after having made such remittance of US$340,000.00, what was plaintiff supposed to do, if any, in order to get reimbursement for such transfer?

A: Plaintiff was supposed to deduct the US$340,000.00 remitted to the foreign currency deposit account from the Cintas Largas funds or from Money Market Placement Account Nos. 063 and 084 as well as the Cintas Largas, Ltd. deposit account.

Q: Do you know if plaintiff was able to obtain reimbursement of the US$340,000 remitted to the Philippine Banking Corporation in Manila?

A: No, because instead of deducting the remittance of US$340,000 from the funds in the money market placement accounts and/or the Cintas Largas Deposit Account, we posted the US$340,000

remittance as an account receivable of Cintas Largas, Ltd. since at that time the money market placement deposits have not yet matured. Subsequently, we failed to charge the deposit and MMP accounts when they matured and Cintas Largas, Ltd. and/or Wilfrido C. Martinez had already withdrawn the bulk of the funds contained in Money Market Placement Account No. 063 and the Cintas Largas, Ltd. Deposit Account thus, we were unable to obtain reimbursement therefrom.[64]

It cannot even be argued that if the petitioner would not be adjudged liable for the respondents claim, he would thereby be enriching himself at the expense of the respondent. There is no evidence on record that the petitioner withdrew a single centavo from or was personally benefited by the funds in MMP Nos. 063 and 084. The testimonial and documentary evidence of the respondent clearly shows that the CLL and/or Wilfrido Martinez used and disposed of the said funds without the knowledge, involvement, and consent of the petitioner. Furthermore, the documentary evidence of the respondent shows the following:

MMP 063Statement of Accounts (Deposit)Value Date

Funds In Funds Out Remarks

     28/11/80 6,664.95   Interests

earned29/12/80 4,779.66   " "21/01/81 4,024.83   " "21/01/81   119,478.51 Purchase

HK$632,041.33 @5.29 & transferred to its statement A/C

13/02/81 2,321.99   Interests earned

"   100,015.00 Transfer to Cintas Largas A/C Receivable.

17/02/81 55.07   Interests earned

18/03/81 1,317.27   " "  100,000.00 Purchase

HK$525,000.00 @5.25 cheque made payable to Grand Solid Enterprises Co., Ltd.

  5,713.74 Transfer to A/C Receivable (MMP-063)

  ____________ ____________    US$443,975.8

5US$443,975.85[65]

 

  ===========

============

 

MMP 084Statement of Accounts (Deposit)Value Date Funds In Funds Out Remarks     28/11/80

16,374.36   Interests earned

01/12/80

488.16   " "

04/12/80

1,089.06   " "

"   US$250,000.00 Transfer to A/C of Cintas Largas

09/12/80

1,290.56   Interests earned

"   200,000.00 Transfer to Cintas Largas A/R.

18/12/80

1,545.42   Interests earned

  200,000.00 T/T to

Chase Manhattan NY for Credit A/C Allied Capital F/O Frank Chan B/O Grand Solid.

02/03/81

4,608.27   Interests earned

"   20,470.74 Transfer to A/C of Grand Solid

09/03/81

321.91   Interests earned

"   60,000.00 Transfer to A/C of Trinisia Ltd.

20/03/81

213.40   Interests earned

"   45,286.26 T/T to Nitto Trading & Josho Ind. Co., Ltd., Japan.

"   2,028.02 Transfer to A/C Receivable (MMP-084)

"   30.00 Cable Charges

  ____________ _____________    US$777,815.0

2US$777,815.02[66]

 

  ===========

============

 

CINTAS LARGASStatement of Accounts (Deposit)Value Date

Funds In Funds Out Remarks

     31/10/80

5,011.99   Interests earned

17/11/80

8,067.70   " "

"   350,000.00 Transfer to A/C of Grand Solid

09/11/80

3,062.23   Interests earned

"   350,000.00 Purchase HK$1,789,200.00 @5.112, Cheque made payable to Grand Solid.

26/11/80

3,264.34   Interests earned

"   300,000.00 Purchase HK$1,535,100.00 @5.117, Cheque made payable to Grand Solid

21/01/81

1,299.80   Interests earned

" 81,415.00   Remittance from C. Itoh & Co., NY

02/03/81

2,445.49   Interests earned

"   129,529.26 Transfer to Grand Solids A/C

Receivable02/04/81

143,000.00

  Transfer from CLs Statement A/C

10/04/81

456.81   Interests earned

"   50,000.00 Purchase HK$267,150.00 @5.343, Cheque made payable to Grand Solid.

13/04/81

US$ 40.89   Interests earned

21/04/81

311.66   " "

"   US$ 50,000.00 Purchase HK$268,850.00 @5.377, cheque made payable to Grand Solid.

28/04/81

132.04   Interests earned

"   40,000.00 Purchase HK$214,480.00 @5.362, cheque made payable to Grand Solid.

" 52,692.00   Remittance from Dai Ichi Kangyo Bank NY. REF. KOMEIMARU

19/05/81

178,465.18

  Transfer from CLs A/C Receivable

22/05/81

46,472.00   Remittance from C. Itoh & Co., NY Re. Pacific Geory.

26/05/81

28.40   Interests earned

04/06/81

1,242.80   " "

"   50,000.00 Purchase HK$275,750.00 @5.515, Cheque made payable to Grand Solid

11/06/81

2,252.36   Interests earned

"   66,400.00 T/T to Security Pacific Natl Bank LA for A/C of Twentieth Century Fox Intl Corp.

"   15.00 Cable Charge

"   31.65 Purchase HK$175.00 @5.53 for payment of Business Registration Fee.

25/06/81

1,192.24   Interests earned

"   60,000.00 Purchase HK$331,500.00 @5.525, cheque made

payable to Grand Solid.

"   22,656.88 T/T to Daiwa Bank, Los Angeles for A/C of OAC Equipment Corp.

"   45,800.00 T/T to Josho Ind. Co. Ltd., Japan

"   15.00 Cable Charge

03/07/81

165.47   Interests earned

"   11,870.00 T/T to Bank of Tokyo, Kobe Branch for A/C of Furuno Electric Co. Ref.: Mar Tierra Takashiro Maru, Eatelite Nav. and Radar.

"   15.00 Cable Charge

06/07/81

17.60   Interests earned

07/07/81

14.83   " "

"   16,000.00 T/T to Dai Ichi Kangyo Bank, Shimizu Branch for A/C of Takashiro Maru.

"   15.00 Cable

Charge15/09/81

US$ 482.29   Interests earned

"   US$ 1,250.00 Reimbursement of expenses paid to Price Waterhouse & Co.

17/09/81

11.91   Interests earned

"   237.43 Purchase HK$1,421.50 for cheque payment to Price Waterhouse & Co.

08/01/82

70,360.00   Remittance from C. Itoh & Co., NY

19/01/82

268.74   Interests earned

"   3,064.81 Transfer to CLs Margin A/C

"   50,000.00 Purchase HK$295,100.00, cheque made payable to Grand Solid.

"   5,952.38 Transfer to A/C of Trinisia Ltd.

  _____________ _____________  TOTAL :

US$1,756,387.32

US$1,732,103.25

 

  - 24,284.07 Outstanding deposits

  _____________ _____________    US$1,756,38 US$1,756,387.  

7.32 32[67]

  ============

=============

 

Clearly from the foregoing, the withdrawals from the deposit and foreign currency accounts and MMP Nos. 063 and 084 of the CLL, after the respondent remitted the US$340,000, were for the account of the CLL and/or Wilfrido Martinez, and not of the petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is REVERSED AND SET ASIDE. The complaint of the respondent against the petitioner in Civil Case No. C-10811 is DISMISSED. No costs.

SO ORDERED.[G.R. No. 159121. February 3, 2005]PAMPLONA PLANTATION COMPANY, INC. and/or JOSE

LUIS BONDOC, petitioners, vs. RODEL TINGHIL, MARYGLENN SABIHON, ESTANISLAO BOBON, CARLITO TINGHIL, BONIFACIO TINGHIL, NOLI TINGHIL, EDGAR TINGHIL, ERNESTO ESTOMANTE, SALLY TOROY, BENIGNO TINGHIL JR., ROSE ANN NAPAO, DIOSDADO TINGHIL, ALBERTO TINGHIL, ANALIE TINGHIL, and ANTONIO ESTOMANTE, respondents.

D E C I S I O NPANGANIBAN, J.:

To protect the rights of labor, two corporations with identical directors, management, office and payroll should be treated as one entity only. A suit by the employees against one corporation should be deemed as a suit against the other. Also, the rights and claims of workers should not be prejudiced by the acts of the employer that tend to confuse them about its corporate identity. The corporate fiction must yield to truth and justice.The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to annul the January 31, 2003 Decision[2] and the June 17, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 62813. The assailed Decision disposed as follows:WHEREFORE, in view of the foregoing, the petition is GRANTED. The assailed decision of public respondent NLRC dated 19 July 2000 [is] REVERSED and SET ASIDE and a new

one enteredDIRECTING private respondents to reinstate petitioners, except Rufino Bacubac, Felix Torres and Antonio Canolas, to their former positions without loss of seniority rights plus payment of full backwages. However, if reinstatement is no longer feasible, a one-month salary for every year of service shall be paid the petitioners as ordered by the Labor Arbiter in his decision dated 31 August 1998 plus payment of full backwages computed from date of illegal dismissal to the finality of this decision.[4]

The Decision[5] of the National Labor Relations Commission (NLRC),[6] reversed by the CA, disposed as follows:WHEREFORE, premises considered, the decision appealed from is hereby REVERSED, and another one entered DISMISSING the complaint.[7]

The June 17, 2003 Resolution denied petitioners Motion for Reconsideration.The Facts

The CA summarized the antecedents as follows:Sometime in 1993, [Petitioner] Pamplona Plantations Company, Inc. (company for brevity) was organized for the purpose of taking over the operations of the coconut and sugar plantation of Hacienda Pamplona located in Pamplona, Negros Oriental. It appears that Hacienda Pamplona was formerly owned by a certain Mr. Bower who had in his employ several agricultural workers.When the company took over the operation of Hacienda Pamplona in 1993, it did not absorb all the workers of Hacienda Pamplona. Some, however, were hired by the company during harvest season as coconut hookers or sakador, coconut filers, coconut haulers, coconut scoopers or lugiteros, and charcoal makers.Sometime in 1995, Pamplona Plantation Leisure Corporation was established for the purpose of engaging in the business of operating tourist resorts, hotels, and inns, with complementary facilities, such as restaurants, bars, boutiques, service shops, entertainment, golf courses, tennis courts, and other land and aquatic sports and leisure facilities.On 15 December 1996, the Pamplona Plantation Labor Independent Union (PAPLIU) conducted an organizational meeting wherein several [respondents] who are either union members or officers participated in said meeting.Upon learning that some of the [respondents] attended the said

meeting, [Petitioner] Jose Luis Bondoc, manager of the company, did not allow [respondents] to work anymore in the plantation.Thereafter, on various dates, [respondents] filed their respective complaints with the NLRC, Sub-Regional Arbitration Branch No. VII, Dumaguete City against [petitioners] for unfair labor practice, illegal dismissal, underpayment, overtime pay, premium pay for rest day and holidays, service incentive leave pay, damages, attorneys fees and 13th month pay.On 09 October 1997, [respondent] Carlito Tinghil amended his complaint to implead Pamplona Plantation Leisure Corporation x x x.On 31 August 1998, Labor Arbiter Jose G. Gutierrez rendered a decision finding [respondents], except Rufino Bacubac, Antonio Caolas and Felix Torres who were complainants in another case, to be entitled to separation pay.

x x x x x x x x x[Petitioners] appealed the Labor Arbiters decision to [the] NLRC. In the assailed decision dated 19 July 2000, the NLRCs Fourth Division reversed the Labor Arbiter, ruling that [respondents], except Carlito Tinghil, failed to implead Pamplona Plantation Leisure Corporation, an indispensable party and that there exist no employer-employee relation between the parties.

x x x x x x x x x[Respondents] filed a motion for reconsideration which was denied by [the] NLRC in a Resolution dated 06 December 2000.[8]

Respondents elevated the case to the CA via a Petition for Certiorari under Rule 65 of the Rules of Court.Ruling of the Court of Appeals

Guided by the fourfold test for determining the existence of an employer-employee relationship, the CA held that respondents were employees of petitioner-company. Finding there was a power to hire, the appellate court considered the admission of petitioners in their Comment that they had hired respondents as coconut filers, coconut scoopers, charcoal makers, or as pieceworkers. The fact that respondents were paid by piecework did not mean that they were not employees of the company. Further, the CA ruled that petitioners necessarily exercised control over the work they performed, since the latter were working within the premises of the plantation. According to the CA, the mere existence -- not

necessarily the actual exercise -- of the right to control the manner of doing work sufficed to meet the fourth element of an employer-employee relation.

The appellate court also held that respondents were regular employees, because the tasks they performed were necessary and indispensable to the operation of the company. Since there was no compliance with the twin requirements of a valid and/or authorized cause and of procedural due process, their dismissal was illegal.

Hence, this Petition.[9]

IssuesIn their Memorandum, petitioners submit the following

issues for our consideration:1. Whether or not the finding of the Court of Appeals that

herein respondents are employees of Petitioner Pamplona Plantation Company, Inc. is contrary to the admissions of the respondents themselves.

2. Whether or not the Court of Appeals has decided in a way not in accord with law and jurisprudence, and with grave abuse of discretion, in not dismissing the respondents complaint for failure to implead Pamplona Plantation Leisure Corp., which is an indispensable party to this case.

3. Whether or not the Court of Appeals has decided in a way not in accord with law and jurisprudence, and with grave abuse of discretion in ordering reinstatement or payment of separation pay and backwages to the respondents, considering the lack of employer-employee relationship between petitioner and respondents.[10]

The main issue raised is whether the case should be dismissed for the non-joinder of the Pamplona Plantation Leisure Corporation. The other issues will be taken up in the discussion of the main question.The Courts Ruling

The Petition lacks merit.Preliminary Issue:Factual Matters

Section 1 of Rule 45 of the Rules of Court states that only questions of law are entertained in appeals by certiorari to the Supreme Court. However, jurisprudence has recognized several exceptions in which factual issues may be resolved by this Court:[11] (1) the legal conclusions made by the lower tribunal

are speculative;[12] (2) its inferences are manifestly mistaken,[13] absurd, or impossible; (3) the lower court committed grave abuse of discretion; (4) the judgment is based on a misapprehension of facts;[14] (5) the findings of fact of the lower tribunals are conflicting;[15] (6) the CA went beyond the issues; (7) the CAs findings are contrary to the admissions of the parties;[16] (8) the CA manifestly overlooked facts not disputed which, if considered, would justify a different conclusion; (9) the findings of fact are conclusions without citation of the specific evidence on which they are based; and (10) when the findings of fact of the CA are premised on the absence of evidence but such findings are contradicted by the evidence on record.[17]

The very same reason that constrained the appellate court to review the factual findings of the NLRC impels this Court to take its own look at the facts. Normally, the Supreme Court is not a trier of facts.[18] However, since the findings of the CA and the NLRC on this point were conflicting, we waded through the records to find out if there was basis for the formers reversal of the NLRCs Decision. We shall discuss our factual findings together with our review of the main issue.Main Issue:Piercing the Corporate Veil

Petitioners contend that the CA should have dismissed the case for the failure of respondents (except Carlito Tinghil) to implead the Pamplona Plantation Leisure Corporation, an indispensable party, for being the true and real employer. Allegedly, respondents admitted in their Affidavits dated February 3, 1998,[19] that they had been employed by the leisure corporation and/or engaged to perform activities that pertained to its business.

Further, as the NLRC allegedly noted in their individual Complaints, respondents specifically averred that they had worked in the golf course and performed related jobs in the recreational facilities of the leisure corporation. Hence, petitioners claim that, as a sugar and coconut plantation company separate and distinct from the Pamplona Plantation Leisure Corporation, the petitioner-company is not the real party in interest.

We are not persuaded.An examination of the facts reveals that, for both the

coconut plantation and the golf course, there is only one management which the laborers deal with regarding their work.

[20] A portion of the plantation (also called Hacienda Pamplona) had actually been converted into a golf course and other recreational facilities. The weekly payrolls issued by petitioner-company bore the name Pamplona Plantation Co., Inc.[21] It is also a fact that respondents all received their pay from the same person, Petitioner Bondoc -- the managing director of the company. Since the workers were working for a firm known as Pamplona Plantation Co., Inc., the reason they sued their employer through that name was natural and understandable.

True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure Corporation appear to be separate corporate entities. But it is settled that this fiction of law cannot be invoked to further an end subversive of justice.[22]

The principle requiring the piercing of the corporate veil mandates courts to see through the protective shroud that distinguishes one corporation from a seemingly separate one.[23]The corporate mask may be removed and the corporate veil pierced when a corporation is the mere alter ego of another.[24] Where badges of fraud exist, where public convenience is defeated, where a wrong is sought to be justified thereby, or where a separate corporate identity is used to evade financial obligations to employees or to third parties,[25] the notion of separate legal entity should be set aside[26] and the factual truth upheld. When that happens, the corporate character is not necessarily abrogated.[27] It continues for other legitimate objectives. However, it may be pierced in any of the instances cited in order to promote substantial justice.

In the present case, the corporations have basically the same incorporators and directors and are headed by the same official. Both use only one office and one payroll and are under one management. In their individual Affidavits, respondents allege that they worked under the supervision and control of Petitioner Bondoc -- the common managing director of both the petitioner-company and the leisure corporation. Some of the laborers of the plantation also work in the golf course.[28] Thus, the attempt to make the two corporations appear as two separate entities, insofar as the workers are concerned, should be viewed as a devious but obvious means to defeat the ends of the law. Such a ploy should not be permitted to cloud the truth and perpetrate an injustice.

We note that this defense of separate corporate identity was not raised during the proceedings before the labor arbiter.

The main argument therein raised by petitioners was their alleged lack of employer-employee relationship with, and power of control over, the means and methods of work of respondents because of the seasonal nature of the latters work.[29]

Neither was the issue of non-joinder of indispensable parties raised in petitioners appeal before the NLRC.[30] Nevertheless, in its Decision[31] dated July 19, 2000, the Commission concluded that the plantation company and the leisure corporation were two separate and distinct corporations, and that the latter was an indispensable party that should have been impleaded. We quote below pertinent portions of that Decision:Respondent posits that it is engaged in operating and maintaining sugar and coconut plantation. The positions of complainants could only be determined through their individual complaints. Yet all complainants alleged in their affidavits x x x that they were working at the golf course. Worthy to note that only Carlito Tinghil amended his complaint to include Pamplona Leisure Corporation, which respondents maintain is a separate corporation established in 1995. Thus, xxx Pamplona Plantation Co., Inc. and Pamplona Leisure Corporation are two separate and distinct corporations. Except for Carlito Tinghil the complainants have the wrong party respondent. Pamplona Leisure Corporation is an indispensable party without which there could be no final determination of the case.[32]

Indeed, it was only after this NLRC Decision was issued that the petitioners harped on the separate personality of the Pamplona Plantation Co., Inc., vis--vis the Pamplona Plantation Leisure Corporation.

As cited above, the NLRC dismissed the Complaints because of the alleged admission of respondents in their Affidavits that they had been working at the golf course. However, it failed to appreciate the rest of their averments. Just because they worked at the golf course did not necessarily mean that they were not employed to do other tasks, especially since the golf course was merely a portion of the coconut plantation. Even petitioners admitted that respondents had been hired as coconut filers, coconut scoopers or charcoal makers.[33]Consequently, NLRCs conclusion derived from the Affidavits of respondents stating that they were employees of the Pamplona Plantation Leisure Corporation alone was the result of an improper selective appreciation of the entire evidence.

Furthermore, we note that, contrary to the NLRCs findings,

some respondents indicated that their employer was the Pamplona Plantation Leisure Corporation, while others said that it was the Pamplona Plantation Co., Inc. But in all these Affidavits, both the leisure corporation and petitioner-company were identified or described as entities engaged in the development and operation of sugar and coconut plantations, as well as recreational facilities such as a golf course. These allegations reveal that petitioner successfully confused the workers as to who their true and real employer was. All things considered, their faulty belief that the plantation company and the leisure corporation were one and the same can be attributed solely to petitioners. It would certainly be unjust to prejudice the claims of the workers because of the misleading actions of their employer.Non-Joinder of Parties

Granting for the sake of argument that the Pamplona Plantation Leisure Corporation is an indispensable party that should be impleaded, NLRCs outright dismissal of the Complaints was still erroneous.

The non-joinder of indispensable parties is not a ground for the dismissal of an action.[34] At any stage of a judicial proceeding and/or at such times as are just, parties may be added on the motion of a party or on the initiative of the tribunal concerned.[35] If the plaintiff refuses to implead an indispensable party despite the order of the court, that court may dismiss the complaint for the plaintiffs failure to comply with the order. The remedy is to implead the non-party claimed to be indispensable.[36] In this case, the NLRC did not require respondents to implead the Pamplona Plantation Leisure Corporation as respondent; instead, the Commission summarily dismissed the Complaints.

In any event, there is no need to implead the leisure corporation because, insofar as respondents are concerned, the leisure corporation and petitioner-company are one and the same entity. Salvador v. Court of Appeals[37] has held that this Court has full powers, apart from that power and authority which is inherent, to amend the processes, pleadings, proceedings and decisions by substituting as party-plaintiff the real party-in-interest.

In Alonso v. Villamor,[38] we had the occasion to state thus:There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to facilitate the

application of justice to the rival claims of contending parties. They were created, not to hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute the thing itself, which courts are always striving to secure to litigants. They are designed as the means best adapted to obtain that thing. In other words, they are a means to an end. When they lose the character of the one and become the other, the administration of justice is at fault and courts are correspondingly remiss in the performance of their obvious duty.

The controlling principle in the interpretation of procedural rules is liberality, so that they may promote their object and assist the parties in obtaining just, speedy and inexpensive determination of every action and proceeding.[39] When the rules are applied to labor cases, this liberal interpretation must be upheld with even greater vigor.[40] Without in any way depriving the employer of its legal rights, the thrust of statutes and rules governing labor cases has been to benefit workers and avoid subjecting them to great delays and hardships. This intent holds especially in this case, in which the plaintiffs are poor laborers.Employer-Employee Relationship

Petitioners insist that respondents are not their employees, because the former exercised no control over the latters work hours and method of performing tasks. Thus, petitioners contend that under the control test, the workers were independent contractors.

We disagree. As shown by the evidence on record, petitioners hired respondents, who performed tasks assigned by their respective officers-in-charge, who in turn were all under the direct supervision and control of Petitioner Bondoc. These allegations are contained in the workers Affidavits, which were never disputed by petitioners. Also uncontroverted are the payrolls bearing the name of the plantation company and signed by Petitioner Bondoc. Some of these payrolls include the time records of the employees. These documents prove that petitioner-company exercised control and supervision over them.

To operate against the employer, the power of control need not have been actually exercised. Proof of the existence of such power is enough.[41] Certainly, petitioners wielded that power to hire or dismiss, as well as to check on the progress and the

quality of work of the laborers.Jurisprudence provides other equally important

considerations[42] that support the conclusion that respondents were not independent contractors. First, they cannot be said to have carried on an independent business or occupation.[43] They are not engaged in the business of filing, scooping and hauling coconuts and/or operating and maintaining a plantation and a golf course. Second, they do not have substantial capital or investment in the form of tools, equipment, machinery, work premises, and other implements needed to perform the job, work or service under their own account or responsibility.[44] Third, they have been working exclusively for petitioners for several years. Fourth, there is no dispute that petitioners are in the business of growing coconut trees for commercial purposes. There is no question, either, that a portion of the plantation was converted into a golf course and other recreational facilities. Clearly, respondents performed usual, regular and necessary services for petitioners business.

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

SO ORDERED.[G.R. No. 155173. November 23, 2004]LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge

Philippines, Inc.), LUZON CONTINENTAL LAND CORPORATION, CONTINENTAL OPERATING CORPORATION and PHILIP ROSEBERG, petitioners, vs. CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and ANTHONY A. MARIANO, respondents.

D E C I S I O NPANGANIBAN, J.:

May defendants in civil cases implead in their counterclaims persons who were not parties to the original complaints? This is the main question to be answered in this controversy.The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the May 22, 2002[2] and the September 3, 2002 Orders[3] of the Regional Trial Court (RTC) of Quezon City (Branch 80) in Civil Case No. Q-00-41103. The decretal portion of the first assailed Order reads:WHEREFORE, in the light of the foregoing as earlier stated, the plaintiffs motion to dismiss claims is granted. Accordingly, the

defendants claims against Mr. Lim and Mr. Mariano captioned as their counterclaims are dismissed.[4]

The second challenged Order denied petitioners Motion for Reconsideration.The Facts

Briefly, the origins of the present controversy can be traced to the Letter of Intent (LOI) executed by both parties on August 11, 1998, whereby Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -- on behalf of its affiliates and other qualified entities, including Petitioner Luzon Continental Land Corporation (LCLC) -- agreed to purchase the cement business of Respondent Continental Cement Corporation (CCC). On October 21, 1998, both parties entered into a Sale and Purchase Agreement (SPA). At the time of the foregoing transactions, petitioners were well aware that CCC had a case pending with the Supreme Court. The case was docketed as GR No. 119712, entitled Asset Privatization Trust (APT) v. Court of Appeals and Continental Cement Corporation.

In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties, under Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase price a portion of the contract price in the amount of P117,020,846.84 -- the equivalent of US$2,799,140. This amount was to be deposited in an interest-bearing account in the First National City Bank of New York (Citibank) for payment to APT, the petitioner in GR No. 119712.

However, petitioners allegedly refused to apply the sum to the payment to APT, despite the subsequent finality of the Decision in GR No. 119712 in favor of the latter and the repeated instructions of Respondent CCC. Fearful that nonpayment to APT would result in the foreclosure, not just of its properties covered by the SPA with Lafarge but of several other properties as well, CCC filed before the Regional Trial Court of Quezon City on June 20, 2000, a Complaint with Application for Preliminary Attachment against petitioners. Docketed as Civil Case No. Q-00-41103, the Complaint prayed, among others, that petitioners be directed to pay the APT Retained Amount referred to in Clause 2 (c) of the SPA.

Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on forum-shopping. Respondent CCC had allegedly made the same claim it was raising in Civil Case No. Q-00-41103 in another action, which involved the

same parties and which was filed earlier before the International Chamber of Commerce. After the trial court denied the Motion to Dismiss in its November 14, 2000 Order, petitioners elevated the matter before the Court of Appeals in CA-GR SP No. 68688.

In the meantime, to avoid being in default and without prejudice to the outcome of their appeal, petitioners filed their Answer and Compulsory Counterclaims ad Cautelam before the trial court in Civil Case No. Q-00-41103. In their Answer, they denied the allegations in the Complaint. They prayed -- by way of compulsory counterclaims against Respondent CCC, its majority stockholder and president Gregory T. Lim, and its corporate secretary Anthony A. Mariano -- for the sums of (a) P2,700,000 each as actual damages, (b) P100,000,000 each as exemplary damages, (c) P100,000,000 each as moral damages, and (d) P5,000,000 each as attorneys fees plus costs of suit.

Petitioners alleged that CCC, through Lim and Mariano, had filed the baseless Complaint in Civil Case No. Q-00-41103 and procured the Writ of Attachment in bad faith. Relying on this Courts pronouncement in Sapugay v. CA,[5] petitioners prayed that both Lim and Mariano be held jointly and solidarily liable with Respondent CCC.

On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved to dismiss petitioners compulsory counterclaims on grounds that essentially constituted the very issues for resolution in the instant Petition.Ruling of the Trial Court

On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80) dismissed petitioners counterclaims for several reasons, among which were the following: a) the counterclaims against Respondents Lim and Mariano were not compulsory; b) the ruling in Sapugay was not applicable; and c) petitioners Answer with Counterclaims violated procedural rules on the proper joinder of causes of action.[6]

Acting on the Motion for Reconsideration filed by petitioners, the trial court -- in an Amended Order dated September 3, 2002[7] -- admitted some errors in its May 22, 2002 Order, particularly in its pronouncement that their counterclaim had been pleaded against Lim and Mariano only. However, the RTC clarified that it was dismissing the counterclaim insofar as it impleaded Respondents Lim and

Mariano, even if it included CCC.Hence this Petition.[8]

IssuesIn their Memorandum, petitioners raise the following issues

for our consideration:[a] Whether or not the RTC gravely erred in refusing

to rule that Respondent CCC has no personality to move to dismiss petitioners compulsory counterclaims on Respondents Lim and Marianos behalf.

[b] Whether or not the RTC gravely erred in ruling that (i) petitioners counterclaims against Respondents Lim and Mariano are not compulsory; (ii) Sapugay v. Court of Appeals is inapplicable here; and (iii) petitioners violated the rule on joinder of causes of action.[9]

For clarity and coherence, the Court will resolve the foregoing in reverse order.The Courts Ruling

The Petition is meritorious.First Issue:Counterclaims andJoinder of Causes of Action.Petitioners CounterclaimsCompulsory

Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil Procedure as any claim which a defending party may have against an opposing party. They are generally allowed in order to avoid a multiplicity of suits and to facilitate the disposition of the whole controversy in a single action, such that the defendants demand may be adjudged by a counterclaim rather than by an independent suit. The only limitations to this principle are (1) that the court should have jurisdiction over the subject matter of the counterclaim, and (2) that it could acquire jurisdiction over third parties whose presence is essential for its adjudication.[10]

A counterclaim may either be permissive or compulsory. It is permissive if it does not arise out of or is not necessarily connected with the subject matter of the opposing partys claim.[11] A permissive counterclaim is essentially an independent claim that may be filed separately in another case.

A counterclaim is compulsory when its object arises out of

or is necessarily connected with the transaction or occurrence constituting the subject matter of the opposing partys claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.[12]

Unlike permissive counterclaims, compulsory counterclaims should be set up in the same action; otherwise, they would be barred forever. NAMARCO v. Federation of United Namarco Distributors[13] laid down the following criteria to determine whether a counterclaim is compulsory or permissive: 1) Are issues of fact and law raised by the claim and by the counterclaim largely the same? 2) Would res judicata bar a subsequent suit on defendants claim, absent the compulsory counterclaim rule? 3) Will substantially the same evidence support or refute plaintiffs claim as well as defendants counterclaim? 4) Is there any logical relation between the claim and the counterclaim? A positive answer to all four questions would indicate that the counterclaim is compulsory.

Adopted in Quintanilla v. CA[14] and reiterated in Alday v. FGU Insurance Corporation,[15] the compelling test of compulsoriness characterizes a counterclaim as compulsory if there should exist a logical relationship between the main claim and the counterclaim. There exists such a relationship when conducting separate trials of the respective claims of the parties would entail substantial duplication of time and effort by the parties and the court; when the multiple claims involve the same factual and legal issues; or when the claims are offshoots of the same basic controversy between the parties.

We shall now examine the nature of petitioners counterclaims against respondents with the use of the foregoing parameters.

Petitioners base their counterclaim on the following allegations:Gregory T. Lim and Anthony A. Mariano were the persons responsible for making the bad faith decisions for, and causing plaintiff to file this baseless suit and to procure an unwarranted writ of attachment, notwithstanding their knowledge that plaintiff has no right to bring it or to secure the writ. In taking such bad faith actions, Gregory T. Lim was motivated by his personal interests as one of the owners of plaintiff while Anthony A. Mariano was motivated by his sense of personal loyalty to Gregory T. Lim, for which reason he disregarded the fact that plaintiff is without any valid cause.

Consequently, both Gregory T. Lim and Anthony A. Mariano are the plaintiffs co-joint tortfeasors in the commission of the acts complained of in this answer and in the compulsory counterclaims pleaded below. As such they should be held jointly and solidarily liable as plaintiffs co-defendants to those compulsory counterclaims pursuant to the Supreme Courts decision in Sapugay v. Mobil.x x x x x x x x xThe plaintiffs, Gregory T. Lim and Anthony A. Marianos bad faith filing of this baseless case has compelled the defendants to engage the services of counsel for a fee and to incur costs of litigation, in amounts to be proved at trial, but in no case less than P5 million for each of them and for which plaintiff Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily liable.The plaintiffs, Gregory T. Lims and Anthony A. Marianos actions have damaged the reputations of the defendants and they should be held jointly and solidarily liable to them for moral damages of P100 million each.In order to serve as an example for the public good and to deter similar baseless, bad faith litigation, the plaintiff, Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily liable to the defendants for exemplary damages of P100 million each. [16]

The above allegations show that petitioners counterclaims for damages were the result of respondents (Lim and Mariano) act of filing the Complaint and securing the Writ of Attachment in bad faith. Tiu Po v. Bautista[17] involved the issue of whether the counterclaim that sought moral, actual and exemplary damages and attorneys fees against respondents on account of their malicious and unfounded complaint was compulsory. In that case, we held as follows:Petitioners counterclaim for damages fulfills the necessary requisites of a compulsory counterclaim. They are damages claimed to have been suffered by petitioners as a consequence of the action filed against them. They have to be pleaded in the same action; otherwise, petitioners would be precluded by the judgment from invoking the same in an independent action. The pronouncement in Papa vs. Banaag (17 SCRA 1081) (1966) is in point:Compensatory, moral and exemplary damages, allegedly suffered by the creditor in consequence of the debtors action,

are also compulsory counterclaim barred by the dismissal of the debtors action. They cannot be claimed in a subsequent action by the creditor against the debtor.Aside from the fact that petitioners counterclaim for damages cannot be the subject of an independent action, it is the same evidence that sustains petitioners counterclaim that will refute private respondents own claim for damages. This is an additional factor that characterizes petitioners counterclaim as compulsory.[18]

Moreover, using the compelling test of compulsoriness, we find that, clearly, the recovery of petitioners counterclaims is contingent upon the case filed by respondents; thus, conducting separate trials thereon will result in a substantial duplication of the time and effort of the court and the parties.

Since the counterclaim for damages is compulsory, it must be set up in the same action; otherwise, it would be barred forever. If it is filed concurrently with the main action but in a different proceeding, it would be abated on the ground of litis pendentia; if filed subsequently, it would meet the same fate on the ground of res judicata.[19]

Sapugay v. Court of AppealsApplicable to the Case at Bar

Sapugay v. Court of Appeals finds application in the present case. In Sapugay, Respondent Mobil Philippines filed before the trial court of Pasig an action for replevin against Spouses Marino and Lina Joel Sapugay. The Complaint arose from the supposed failure of the couple to keep their end of their Dealership Agreement. In their Answer with Counterclaim, petitioners alleged that after incurring expenses in anticipation of the Dealership Agreement, they requested the plaintiff to allow them to get gas, but that it had refused. It claimed that they still had to post a surety bond which, initially fixed at P200,000, was later raised to P700,000.

The spouses exerted all efforts to secure a bond, but the bonding companies required a copy of the Dealership Agreement, which respondent continued to withhold from them. Later, petitioners discovered that respondent and its manager, Ricardo P. Cardenas, had intended all along to award the dealership to Island Air Product Corporation.

In their Answer, petitioners impleaded in the counterclaim Mobil Philippines and its manager -- Ricardo P. Cardenas -- as defendants. They prayed that judgment be rendered, holding

both jointly and severally liable for pre-operation expenses, rental, storage, guarding fees, and unrealized profit including damages. After both Mobil and Cardenas failed to respond to their Answer to the Counterclaim, petitioners filed a Motion to Declare Plaintiff and its Manager Ricardo P. Cardenas in Default on Defendants Counterclaim.

Among the issues raised in Sapugay was whether Cardenas, who was not a party to the original action, might nevertheless be impleaded in the counterclaim. We disposed of this issue as follows:A counterclaim is defined as any claim for money or other relief which a defending party may have against an opposing party. However, the general rule that a defendant cannot by a counterclaim bring into the action any claim against persons other than the plaintiff admits of an exception under Section 14, Rule 6 which provides that when the presence of parties other than those to the original action is required for the granting of complete relief in the determination of a counterclaim or cross-claim, the court shall order them to be brought in as defendants, if jurisdiction over them can be obtained. The inclusion, therefore, of Cardenas in petitioners counterclaim is sanctioned by the rules.[20]

The prerogative of bringing in new parties to the action at any stage before judgment is intended to accord complete relief to all of them in a single action and to avert a duplicity and even a multiplicity of suits thereby.

In insisting on the inapplicability of Sapugay, respondents argue that new parties cannot be included in a counterclaim, except when no complete relief can be had. They add that [i]n the present case, Messrs. Lim and Mariano are not necessary for petitioners to obtain complete relief from Respondent CCC as plaintiff in the lower court. This is because Respondent CCC as a corporation with a separate [legal personality] has the juridical capacity to indemnify petitioners even without Messrs. Lim and Mariano.[21]

We disagree. The inclusion of a corporate officer or stockholder -- Cardenas in Sapugay or Lim and Mariano in the instant case -- is not premised on the assumption that the plaintiff corporation does not have the financial ability to answer for damages, such that it has to share its liability with individual defendants. Rather, such inclusion is based on the allegations of fraud and bad faith on the part of the corporate

officer or stockholder. These allegations may warrant the piercing of the veil of corporate fiction, so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions.

In Tramat Mercantile v. Court of Appeals,[22] the Court held that generally, it should only be the corporation that could properly be held liable. However, circumstances may warrant the inclusion of the personal liability of a corporate director, trustee, or officer, if the said individual is found guilty of bad faith or gross negligence in directing corporate affairs.

Remo Jr. v. IAC[23] has stressed that while a corporation is an entity separate and distinct from its stockholders, the corporate fiction may be disregarded if used to defeat public convenience, justify a wrong, protect fraud, or defend crime. In these instances, the law will regard the corporation as an association of persons, or in case of two corporations, will merge them into one. Thus, there is no debate on whether, in alleging bad faith on the part of Lim and Mariano the counterclaims had in effect made them indispensable parties thereto; based on the alleged facts, both are clearly parties in interest to the counterclaim.[24]

Respondents further assert that Messrs. Lim and Mariano cannot be held personally liable [because their assailed acts] are within the powers granted to them by the proper board resolutions; therefore, it is not a personal decision but rather that of the corporation as represented by its board of directors.[25] The foregoing assertion, however, is a matter of defense that should be threshed out during the trial; whether or not fraud is extant under the circumstances is an issue that must be established by convincing evidence.[26]

Suability and liability are two distinct matters. While the Court does rule that the counterclaims against Respondent CCCs president and manager may be properly filed, the determination of whether both can in fact be held jointly and severally liable with respondent corporation is entirely another issue that should be ruled upon by the trial court.

However, while a compulsory counterclaim may implead persons not parties to the original complaint, the general rule -- a defendant in a compulsory counterclaim need not file any responsive pleading, as it is deemed to have adopted the allegations in the complaint as its answer -- does not apply. The filing of a responsive pleading is deemed a voluntary submission to the jurisdiction of the court; a new party

impleaded by the plaintiff in a compulsory counterclaim cannot be considered to have automatically and unknowingly submitted to the jurisdiction of the court. A contrary ruling would result in mischievous consequences whereby a party may be indiscriminately impleaded as a defendant in a compulsory counterclaim; and judgment rendered against it without its knowledge, much less participation in the proceedings, in blatant disregard of rudimentary due process requirements.

The correct procedure in instances such as this is for the trial court, per Section 12 of Rule 6 of the Rules of Court, to order [such impleaded parties] to be brought in as defendants, if jurisdiction over them can be obtained, by directing that summons be served on them. In this manner, they can be properly appraised of and answer the charges against them. Only upon service of summons can the trial court obtain jurisdiction over them.

In Sapugay, Cardenas was furnished a copy of the Answer with Counterclaim, but he did not file any responsive pleading to the counterclaim leveled against him. Nevertheless, the Court gave due consideration to certain factual circumstances, particularly the trial courts treatment of the Complaint as the Answer of Cardenas to the compulsory counterclaim and of his seeming acquiescence thereto, as evidenced by his failure to make any objection despite his active participation in the proceedings. It was held thus:It is noteworthy that Cardenas did not file a motion to dismiss the counterclaim against him on the ground of lack of jurisdiction. While it is a settled rule that the issue of jurisdiction may be raised even for the first time on appeal, this does not obtain in the instant case. Although it was only Mobil which filed an opposition to the motion to declare in default, the fact that the trial court denied said motion, both as to Mobil and Cardenas on the ground that Mobils complaint should be considered as the answer to petitioners compulsory counterclaim, leads us to the inescapable conclusion that the trial court treated the opposition as having been filed in behalf of both Mobil and Cardenas and that the latter had adopted as his answer the allegations raised in the complaint of Mobil. Obviously, it was this ratiocination which led the trial court to deny the motion to declare Mobil and Cardenas in default. Furthermore, Cardenas was not unaware of said incidents and the proceedings therein as he testified and was present during

trial, not to speak of the fact that as manager of Mobil he would necessarily be interested in the case and could readily have access to the records and the pleadings filed therein.By adopting as his answer the allegations in the complaint which seeks affirmative relief, Cardenas is deemed to have recognized the jurisdiction of the trial court over his person and submitted thereto. He may not now be heard to repudiate or question that jurisdiction.[27]

Such factual circumstances are unavailing in the instant case. The records do not show that Respondents Lim and Mariano are either aware of the counterclaims filed against them, or that they have actively participated in the proceedings involving them. Further, in dismissing the counterclaims against the individual respondents, the court a quo -- unlike in Sapugay -- cannot be said to have treated Respondent CCCs Motion to Dismiss as having been filed on their behalf.Rules on Permissive Joinder of Causesof Action or Parties Not Applicable

Respondent CCC contends that petitioners counterclaims violated the rule on joinder of causes of action. It argues that while the original Complaint was a suit for specific performance based on a contract, the counterclaim for damages was based on the tortuous acts of respondents.[28] In its Motion to Dismiss, CCC cites Section 5 of Rule 2 and Section 6 of Rule 3 of the Rules of Civil Procedure, which we quote:Section 5. Joinder of causes of action. A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he may have against an opposing party, subject to the following conditions:(a) The party joining the causes of action shall comply with the rules on joinder of parties; x x xSection 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist whether jointly, severally, or in the alternative, may, except as otherwise provided in these Rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest.

The foregoing procedural rules are founded on practicality and convenience. They are meant to discourage duplicity and multiplicity of suits. This objective is negated by insisting -- as the court a quo has done -- that the compulsory counterclaim for damages be dismissed, only to have it possibly re-filed in a separate proceeding. More important, as we have stated earlier, Respondents Lim and Mariano are real parties in interest to the compulsory counterclaim; it is imperative that they be joined therein. Section 7 of Rule 3 provides:Compulsory joinder of indispensable parties. Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or defendants.

Moreover, in joining Lim and Mariano in the compulsory counterclaim, petitioners are being consistent with the solidary nature of the liability alleged therein.Second Issue:CCCs Personality to Move to Dismissthe Compulsory Counterclaims

Characterizing their counterclaim for damages against Respondents CCC, Lim and Mariano as joint and solidary, petitioners prayed:WHEREFORE, it is respectfully prayed that after trial judgment be rendered:

1. Dismissing the complaint in its entirety;2. Ordering the plaintiff, Gregory T. Lim and Anthony A.

Mariano jointly and solidarily to pay defendant actual damages in the sum of at least P2,700,000.00;

3. Ordering the plaintiff, Gregory T. Lim and Anthony A, Mariano jointly and solidarily to pay the defendants LPI, LCLC, COC and Roseberg:a. Exemplary damages of P100 million each;b. Moral damages of P100 million each; and

c. Attorneys fees and costs of suit of at least P5 million each.

Other reliefs just and equitable are likewise prayed for.[29]

Obligations may be classified as either joint or solidary. Joint or jointly or conjoint means mancum or mancomunada or pro rata obligation; on the other hand, solidary obligations may be

used interchangeably with joint and several or several. Thus, petitioners usage of the term joint and solidary is confusing and ambiguous.

The ambiguity in petitioners counterclaims notwithstanding, respondents liability, if proven, is solidary. This characterization finds basis in Article 1207 of the Civil Code, which provides that obligations are generally considered joint, except when otherwise expressly stated or when the law or the nature of the obligation requires solidarity. However, obligations arising from tort are, by their nature, always solidary. We have assiduously maintained this legal principle as early as 1912 in Worcester v. Ocampo,[30] in which we held:x x x The difficulty in the contention of the appellants is that they fail to recognize that the basis of the present action is tort. They fail to recognize the universal doctrine that each joint tort feasor is not only individually liable for the tort in which he participates, but is also jointly liable with his tort feasors. x x xIt may be stated as a general rule that joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit. They are each liable as principals, to the same extent and in the same manner as if they had performed the wrongful act themselves. x x xJoint tort feasors are jointly and severally liable for the tort which they commit. The persons injured may sue all of them or any number less than all. Each is liable for the whole damages caused by all, and all together are jointly liable for the whole damage. It is no defense for one sued alone, that the others who participated in the wrongful act are not joined with him as defendants; nor is it any excuse for him that his participation in the tort was insignificant as compared to that of the others. x x xJoint tort feasors are not liable pro rata. The damages can not be apportioned among them, except among themselves. They cannot insist upon an apportionment, for the purpose of each paying an aliquot part. They are jointly and severally liable for the whole amount. x x xA payment in full for the damage done, by one of the joint tort feasors, of course satisfies any claim which might exist against the others. There can be but satisfaction. The release of one of the joint tort feasors by agreement generally operates to

discharge all. x x xOf course the court during trial may find that some of the alleged tort feasors are liable and that others are not liable. The courts may release some for lack of evidence while condemning others of the alleged tort feasors. And this is true even though they are charged jointly and severally.

In a joint obligation, each obligor answers only for a part of the whole liability; in a solidary or joint and several obligation, the relationship between the active and the passive subjects is so close that each of them must comply with or demand the fulfillment of the whole obligation.[31] The fact that the liability sought against the CCC is for specific performance and tort, while that sought against the individual respondents is based solely on tort does not negate the solidary nature of their liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this point:Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions.

The solidary character of respondents alleged liability is precisely why credence cannot be given to petitioners assertion. According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on grounds that pertain solely to its individual co-debtors.[32] In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of the obligation, from circumstances personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil Code provides:A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (Emphasis supplied).

The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim on grounds that pertain only to its individual co-debtors -- is therefore allowed.

However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it be dismissed. Be that as it may,

Respondent CCC cannot be declared in default. Jurisprudence teaches that if the issues raised in the compulsory counterclaim are so intertwined with the allegations in the complaint, such issues are deemed automatically joined.[33] Counterclaims that are only for damages and attorneys fees and that arise from the filing of the complaint shall be considered as special defenses and need not be answered.[34]

CCCs Motion to Dismiss theCounterclaim on Behalf ofRespondents Lim andMariano Not Allowed

While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that pertain to individual defendants Lim and Mariano, it cannot file the same Motion on their behalf for the simple reason that it lacks the requisite authority to do so. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their behalf, without being so authorized. Thus, unless expressly adopted by Lim and Mariano, the Motion to Dismiss the compulsory counterclaim filed by Respondent CCC has no force and effect as to them.

In summary, we make the following pronouncements:1. The counterclaims against Respondents CCC, Gregory T.

Lim and Anthony A. Mariano are compulsory.2. The counterclaims may properly implead Respondents

Gregory T. Lim and Anthony A. Mariano, even if both were not parties in the original Complaint.

3. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include, in a Motion to Dismiss, defenses available to their co-defendants; nevertheless, the same Motion cannot be deemed to have been filed on behalf of the said co-defendants.

4. Summons must be served on Respondents Lim and Mariano before the trial court can obtain jurisdiction over them.

WHEREFORE, the Petition is GRANTED and the assailed Orders REVERSED. The court of origin is hereby ORDERED to take cognizance of the counterclaims pleaded in petitioners Answer with Compulsory Counterclaims and to cause the service of summons on Respondents Gregory T. Lim and Anthony A. Mariano. No costs.

SO ORDERED.

JARDINE DAVIES, INC., G.R. No. 151438Petitioner,Present: PUNO, J., Chairman,AUSTRIA-MARTINEZ,versus CALLEJO, SR.,TINGA, andCHICO-NAZARIO, JJ.JRB REALTY, INC.,Respondent. Promulgated:July 15, 2005x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x D E C I S I O N  CALLEJO, SR., J.:  

Before us is a petition for review of the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 54201 affirming in toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific performance; and the Resolution dated January 11, 2002 denying the motion for reconsideration thereof.

The facts are as follows: In 1979-1980, respondent JRB Realty, Inc. built a nine-

storey building, named Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the respondents Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net total selling price of P99,586.00.[2] Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH[3] were installed by Aircon. When the units with rotary compressors were installed, they could not deliver the desired cooling temperature. Despite several adjustments and corrective measures, the respondent conceded that Fedders Air Conditioning USAs technology for rotary compressors for big capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter dated March 26, 1981,[4] Aircon stated that it would be replacing the units currently installed with new ones using rotary compressors, at the earliest possible time. Regrettably, however, it could not specify a date when delivery could be effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads,[5] that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc.,

Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc.[6] The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The respondent prayed that judgment be rendered, as follows:  

1. Ordering the defendants to jointly and severally at their account and expense deliver, install and place in operation two 

brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders USAs technology perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

 2. Ordering defendants to jointly and

severally reimburse plaintiff not only the sums of P415,118.95 for unsaved electricity from 21st October 1981 to 7th January 1990 andP99,287.77 for repair costs of the two service units from 7th March 1987 to 11th January 1990, with legal interest thereon from the filing of this Complaint until fully reimbursed, but also like unsaved electricity costs and like repair costs therefrom until Prayer No. 1 above shall have been complied with;

 3. Ordering defendants to jointly and

severally pay plaintiffs P150,000.00 attorneys fees and other costs of litigation, as well as exemplary damages in an amount not less than or equal to Prayer 2 above; and

 4. Granting plaintiff such other and further

relief as shall be just and equitable in the premises.[7]

 Of the four defendants, only the petitioner filed its

Answer. The court did not acquire jurisdiction over Aircon because the latter ceased operations, as its corporate life ended on December 31, 1986.[8] Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in default.[9]

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

 WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial

and Merchandising Corporation, jointly and severally: 

1.                  To deliver, install and place into operation the two (2) brand new units of Fedders unitary packaged airconditioning units each of 10 tons capacity with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building, or to pay plaintiff the current price for two such units;

 2.                  To reimburse plaintiff the

amount of P556,551.55 as and for the unsaved electricity bills from October 21, 1981 up to April 30, 1995; and another amount of P185,951.67 as and for repair costs;

 3.                  To pay plaintiff P50,000.00 as

and for attorneys fees; and 

4.                  Cost of suit.[10]

  

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it liable because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that it had a personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition. The petitioner raises the following assignment of errors:

I.THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE LATTER WAS

FORMERLY JARDINES SUBSIDIARY. II.ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING AIRCONS OBLIGATION TO DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH. 

III.ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING JRBS CAUSES OF ACTION AS HAVING BEEN BARRED BY LACHES.IV.ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES. V.THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEYS FEES.

VI.THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES.[11]

  It is the well-settled rule that factual findings of the trial

court, as affirmed by the CA, are accorded high respect, even finality at times. However, considering that the factual findings of the CA and the RTC were based on speculation and conjectures, unsupported by substantial evidence, the Court finds that the instant case falls under one of the excepted instances. There is, thus, a need to correct the error.

 The trial court ruled that Aircon was a subsidiary of the

petitioner, and concluded, thus: Plaintiffs documentary evidence shows

that at the time it contracted with Aircon on March 13, 1980 (Exhibit D) and on the date the revised agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase A subsidiary of Jardine Davies, Inc. was printed on Aircons letterhead of its March 13, 1980 contract with plaintiff (Exhibit D-1), as well as the Aircons letterhead of Jardines Director and

Senior Vice-President A.G. Morrison and Aircons President in his March 26, 1981 letter to plaintiff (Exhibit J-2) confirming the revised agreement. Aircons newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 (Exhibits E, F and L) also show that defendant Jardine publicly represented Aircon to be its subsidiary.

 Records from the Securities and Exchange

Commission (SEC) also reveal that as per Jardines December 31, 1986 and 1985 Financial Statements that The company acts as general manager of its subsidiaries (Exhibit P). Jardines Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit P-1). Also, Aircons reportorial General Information Sheet as of April 1980 and April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits Q and R) and that out of seven members of the Board of Directors of Aircon, four (4) are also of Jardine.

 Defendant Jardines witness, Atty. Fe delos

Santos-Quiaoit admitted that defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. is one of the subsidiaries of Jardine Davies (TSN, September 22, 1995, p. 12). She also testified that Jardine nominated, elected, and appointed the controlling majority of the Board of Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).

 The foregoing circumstances provide

justifiable basis for this Court to disregard the fiction of corporate entity and treat defendant Aircon as part of the instrumentality of co-defendant Jardine.[12]

  The respondent court arrived at the same conclusion

basing its ruling on the following documents, to wit:

 (a)    Contract/Quotation #78-No. 80-1639

dated March 03, 1980 (Exh. D-1); (b)   Newspaper Advertisements (Exhs. E-1

and F-1); 

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco (Exh. J);

 (d)   News items of Bulletin Today dated

August 30, 1982 (Exh. L); (e)    Balance Sheet of Jardine Davies, Inc. as

of December 31, 1979 listing Aircon as one of its subsidiaries (Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);

 (g) Financial Statement of Aircon as of

December 31, 1981 (Exh. S-1).[13]

   Applying the doctrine of piercing the veil of corporate

fiction, both the respondent and trial courts conveniently held the petitioner liable for the alleged omissions of Aircon, considering that the latter was its instrumentality or corporate alter ego. The petitioner is now before us, reiterating its defense of separateness, and the fact that it is not a party to the contract.

 We find merit in the petition.  It is an elementary and fundamental principle of

corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of

persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or illegality.[14] This is the doctrine of piercing the veil of corporate 

fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.[15] The rationale behind piercing a corporations identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities.[16]

 While it is true that Aircon is a subsidiary of the

petitioner, it does not necessarily follow that Aircons corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,[17] the Court categorically held that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be established: (1) control, not merely majority or complete stock control; (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 acts in contravention of plaintiffs legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[18]

 

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircons majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner.[19]

 Jardine Davies, Inc., incorporated as early as June 28,

1946,[20] is primarily a financial and trading company. Its Articles of Incorporation states among many others that the purposes for which the said corporation was formed, are as follows:

 (a) To carry on the business of merchants,

commission merchants, brokers, factors, manufacturers, and agents; 

(b) Upon complying with the requirements of law applicable thereto, to act as agents of companies and underwriters doing and engaging in any and all kinds of insurance business.[21]

 On the other hand, Aircon, incorporated on December 27,

1952,[22] is a manufacturing firm. Its Articles of Incorporation states that its purpose is mainly -

 To carry on the business of manufacturers of commercial and household appliances and accessories of any form, particularly to manufacture, purchase, sell or deal in air conditioning and refrigeration products of every class and description as well as accessories and parts thereof, or other kindred articles; and to erect, or buy, lease, manage, or otherwise acquire manufactories, warehouses, and depots for manufacturing, assemblage, repair and storing, buying, selling, and dealing in the aforesaid appliances, accessories and products. [23]

  

The existence of interlocking directors, corporate officers and shareholders, which the respondent court considered, is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations.[24] But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.[25] To warrant resort to this extraordinary remedy, there must be proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice.[26] Any piercing of the corporate veil has to be done with caution.[27] The wrongdoing must be clearly and convincingly established. It cannot just be presumed.[28]

 In the instant case, there is no evidence that Aircon was

formed or utilized with the intention of defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air 

conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy the respondent despite several adjustments and corrective measures. In a Letter[29] dated October 22, 1980, the respondent even conceded that Fedders Air Conditioning USA has not yet perhaps perfected its technology of rotary compressors, and agreed to change the compressors with the semi-hermetic type. Thus, Aircon substituted the units with serviceable ones which delivered the cooling temperature needed for the law office. After enjoying ten (10) years of its cooling power, respondent cannot now complain about the performance of these units, nor can it demand a replacement thereof.

 Moreover, it was reversible error to award the respondent

the amount of P556,551.55 representing the alleged 30% unsaved electricity costs and P185,951.67 as maintenance cost without showing any basis for such award. To justify a grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable by the injured party, the actual amount of loss.[30] The respondent merely based its cause of action on Aircons alleged representation that Fedders air conditioners with rotary compressors can save as much as 30% on electricity compared to other brands. Offered in evidence were newspaper advertisements published on April 12 and 26, 1981. The respondent then recorded its electricity consumption from October 21, 1981 up to April 3, 1995 and computed 30% thereof, which amounted to P556,551.55. The Court rules that this amount is highly speculative and merely hypothetical, and for which the petitioner can not be held accountable.

 First. The respondent merely relied on the newspaper

advertisements showing the Fedders window-type air conditioners, which are far different from the big capacity air conditioning units installed at Blanco Center.

 Second. After such print advertisements, the respondent

informed Aircon that it was going to install an electric meter to

register its electric consumption so as to determine the electric costs not saved by the presently installed units with semi-hermetic compressors. Contrary to the allegations of the respondent that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon agreed to the respondents proposition. It was a unilateral act on the part of the respondent, which Aircon did not oblige or commit itself to pay.

 Third. Needless to state, the amounts computed are

mere estimates representing the respondents self-serving claim of unsaved electricity cost, which is too speculative and conjectural to merit consideration. No other proofs, reports or bases of comparison showing that Fedders Air Conditioning USA could indeed cut down electricity cost by 30% were adduced.

 Likewise, there is no basis for the award of P185,951.67

representing maintenance cost. The respondent merely submitted a schedule[31] prepared by the respondents accountant, listing the alleged repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not also be given probative weight, considering that there are no proofs of receipts, vouchers, etc., which would substantiate the amounts paid for such services. Absent any more convincing proof, the Court finds that the respondents claims are without basis, and cannot, therefore, be awarded.

 We sustain the petitioners separateness from that of

Aircon in this case. It bears stressing that the petitioner was never a party to the contract. Privity of contracts take effect only between parties, their successors-in-interest, heirs and assigns.[32] The petitioner, which has a 

separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

 IN VIEW OF THE FOREGOING, the petition

is GRANTED. The assailed decision of the Court of Appeals, affirming the decision of the Regional Trial Court isREVERSED and SET ASIDE. The complaint of the respondent is DISMISSED. Costs against the respondent. SO ORDERED.[G.R. No. 141994. January 17, 2005]FILIPINAS BROADCASTING NETWORK, INC., petitioner,

vs. AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.

D E C I S I O NCARPIO, J.:The Case

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000 Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December 1992 Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi City, the Albay municipalities and other Bicol areas.[6]

In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC) and its administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean of AMECs College of Medicine, filed a complaint for damages[7] against FBNI, Rima and Alegre on 27 February 1990. Quoted are portions of the

allegedly libelous broadcasts:JUN ALEGRE:Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise them to pass all subjects because if they fail in any subject they will repeat their year level, taking up all subjects including those they have passed already. Several students had approached me stating that they had consulted with the DECS which told them that there is no such regulation. If [there] is no such regulation why is AMEC doing the same?xxxSecond: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by DECS. xxxThird: Students are required to take and pay for the subject even if the subject does not have an instructor - such greed for money on the part of AMECs administration. Take the subject Anatomy: students would pay for the subject upon enrolment because it is offered by the school. However there would be no instructor for such subject. Students would be informed that course would be moved to a later date because the school is still searching for the appropriate instructor.xxxIt is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for the past few years since its inception because of funds support from foreign foundations. If you will take a look at the AMEC premises youll find out that the names of the buildings there are foreign soundings. There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign foundations for AMEC is substantial, isnt it? With the report which is the basis of the expose in DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow of support of foreign foundations who assist the medical school on the basis of the latters purpose. But if the purpose of the institution (AMEC) is to deceive students at cross purpose with its reason for being it is possible for these foreign foundations to lift or suspend their donations temporarily.[8]

xxxOn the other hand, the administrators of AMEC-BCCM,

AMEC Science High School and the AMEC-Institute of Mass Communication in their effort to minimize expenses in terms of salary are absorbing or continues to accept rejects. For example how many teachers in AMEC are former teachers of Aquinas University but were removed because of immorality? Does it mean that the present administration of AMEC have the total definite moral foundation from catholic administrator of Aquinas University. I will prove to you my friends, that AMEC is a dumping ground, garbage, not merely of moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies. She is too old to work, being an old woman. Is the AMEC administration exploiting the very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric situation zero visibility the plane cannot land, meaning she is very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the committee on scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently made use of her.xxxMEL RIMA:xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What does this mean? Immoral and physically misfits as teachers.May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont insist.xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at that. The reason is practical cost saving in salaries, because an old person is not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in as Dean.xxxxxx On our end our task is to attend to the interests of students. It is likely that the students would be influenced by evil. When they become members of society outside of campus will be liabilities rather than assets. What do you expect from a doctor who while studying at AMEC is so much burdened with unreasonable imposition? What do you expect from a student

who aside from peculiar problems because not all students are rich in their struggle to improve their social status are even more burdened with false regulations. xxx[9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations, and as such, destroyed plaintiffs (AMEC and Ago) reputation. AMEC and Ago included FBNI as defendant for allegedly failing to exercise due diligence in the selection and supervision of its employees, particularly Rima and Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer[10] alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly impelled by a sense of public duty to report the goings-on in AMEC, [which is] an institution imbued with public interest.

Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on FBNIs behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in the selection and supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and training program after passing the interview. FBNI likewise claimed that it always reminds its broadcasters to observe truth, fairness and objectivity in their broadcasts and to refrain from using libelous and indecent language. Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP) accreditation test and to secure a KBP permit.

On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and Alegre liable for libel except Rima. The trial court held that the broadcasts are libelous per se. The trial court rejected the broadcasters claim that their utterances were the result of straight reporting because it had no factual basis. The broadcasters did not even verify their reports before airing them to show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to exercise diligence in the selection and supervision of its employees.

In absolving Rima from the charge, the trial court ruled that

Rimas only participation was when he agreed with Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech, expression, and of the press. The dispositive portion of the decision reads:WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages caused by the controversial utterances, which are not found by this court to be really very serious and damaging, and there being no showing that indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial courts judgment with modification. The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for damages and attorneys fees because the broadcasts were directed against AMEC, and not against her. The dispositive portion of the Court of Appeals decision reads:WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26 January 2000 Resolution.

Hence, FBNI filed this petition.[15]

The Ruling of the Court of AppealsThe Court of Appeals upheld the trial courts ruling that the

questioned broadcasts are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found Rima and Alegres claim that they were actuated by their moral and social duty to inform the public of the students gripes as insufficient to justify the utterance of the defamatory remarks.

Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled that the broadcasts were made with reckless disregard as to whether they were true or false. The appellate court pointed out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained against AMEC. Rima and Alegre merely gave a single name when asked to identify the students. According to the Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters claim that they were impelled by their moral and social duty to inform the public about the students gripes.

The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to minimize expenses on its employees salaries; and (3) AMEC burdened the students with unreasonable imposition and false regulations.[16]

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos claim for damages and attorneys fees because the libelous remarks were directed against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.Issues

FBNI raises the following issues for resolution:I. WHETHER THE BROADCASTS ARE LIBELOUS;II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER;

andIV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND

ALEGRE FOR PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts RulingWe deny the petition.This is a civil action for damages as a result of the allegedly

defamatory remarks of Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint reveals that AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article

30[18] authorizes a separate civil action to recover civil liability arising from a criminal offense. On the other hand, Article 33[19] particularly provides that the injured party may bring a separate civil action for damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article 19[20] of the Civil Code to justify its claim for damages. AMEC cites Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I.Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory of one who is dead.[24]

There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks such as greed for money on the part of AMECs administrators; AMEC is a dumping ground, garbage of xxx moral and physical misfits; and AMEC students who graduate will be liabilities rather than assets of the society are libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a money-making institution where physically and morally unfit teachers abound.

However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were plainly impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence that ill will or spite motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since there is no malice, there is no libel.

FBNIs contentions are untenable.Every defamatory imputation is presumed malicious.

[25] Rima and Alegre failed to show adequately their good intention and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or public affairs program, Rima and Alegre should have presented the public issues free from inaccurate and misleading information.[26] Hearing the students alleged complaints a month before the

expos,[27] they had sufficient time to verify their sources and information. However, Rima and Alegre hardly made a thorough investigation of the students alleged gripes. Neither did they inquire about nor confirm the purported irregularities in AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely went to AMEC to verify his report from an alleged AMEC official who refused to disclose any information. Alegre simply relied on the words of the students because they were many and not because there is proof that what they are saying is true.[28] This plainly shows Rima and Alegres reckless disregard of whether their report was true or not.

Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some courts in the United States apply the privilege of neutral reportage in libel cases involving matters of public interest or public figures. Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory statements made against public figures is shielded from liability, regardless of the republishers subjective awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot invoke the privilege of neutral reportage because unfounded comments abound in the broadcasts. Moreover, there is no existing controversy involving AMEC when the broadcasts were made. The privilege of neutral reportage applies where the defamed person is a public figure who is involved in an existing controversy, and a party to that controversy makes the defamatory statement.[30]

However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged communications for being commentaries on matters of public interest. Such being the case, AMEC should prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.

FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment, thus:[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for libel or slander. The doctrine of fair comment means that while in general every discreditable imputation publicly made is deemed false, because every man is presumed innocent until his guilt is judicially proved, and every false imputation is deemed

malicious, nevertheless, when the discreditable imputation is directed against a public person in his public capacity, it is not necessarily actionable. In order that such discreditable imputation to a public official may be actionable, it must either be a false allegation of fact or a comment based on a false supposition. If the comment is an expression of opinion, based on established facts, then it is immaterial that the opinion happens to be mistaken, as long as it might reasonably be inferred from the facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is genuinely imbued with public interest. The welfare of the youth in general and AMECs students in particular is a matter which the public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with matters of public interest. However, unlike inBorjal, the questioned broadcasts are not based on established facts. The record supports the following findings of the trial court:xxx Although defendants claim that they were motivated by consistent reports of students and parents against plaintiff, yet, defendants have not presented in court, nor even gave name of a single student who made the complaint to them, much less present written complaint or petition to that effect. To accept this defense of defendants is too dangerous because it could easily give license to the media to malign people and establishments based on flimsy excuses that there were reports to them although they could not satisfactorily establish it. Such laxity would encourage careless and irresponsible broadcasting which is inimical to public interests.Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their duties, did not verify and analyze the truth of the reports before they aired it, in order to prove that they are in good faith.Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years before the controversial broadcast, accreditation to offer Physical Therapy course had already been given the plaintiff, which certificate is signed by no less than the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful enough to verify. And yet,

defendants were very categorical and sounded too positive when they made the erroneous report that plaintiff had no permit to offer Physical Therapy courses which they were offering.The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of plaintiff school was given the name Mcdonald building, that was only in order to honor the first missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a single centavo appears to be received by plaintiff school from the aforementioned McDonald Foundation which does not exist.Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical students fail in one subject, they are made to repeat all the other subject[s], even those they have already passed, nor their claim that the school charges laboratory fees even if there are no laboratories in the school. No evidence was presented to prove the bases for these claims, at least in order to give semblance of good faith.As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older people prove to be effective teachers like Supreme Court Justices who are still very much in demand as law professors in their late years. Counsel for defendants is past 75 but is found by this court to be still very sharp and effective. So is plaintiffs counsel.Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and docile.The contention that plaintiffs graduates become liabilities rather than assets of our society is a mere conclusion. Being from the place himself, this court is aware that majority of the medical graduates of plaintiffs pass the board examination easily and become prosperous and responsible professionals.[33]

Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion happens to be mistaken, as long as it might reasonably be inferred from the facts.[34] However, the comments of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.

The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x4. Public affairs program shall present public

issues free from personal bias, prejudice and inaccurate and misleading information. x x x Furthermore, the station shall strive to present balanced discussion of issues. x x x.

x x x7. The station shall be responsible at all times in the

supervision of public affairs, public issues and commentary programs so that they conform to the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public interest, general welfare and good order in the presentation of public affairs and public issues.[36]

(Emphasis supplied)The broadcasts fail to meet the standards prescribed in the

Radio Code, which lays down the code of ethical conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry on its own members. The Radio Code is a public warranty by the radio broadcast industry that radio broadcast practitioners are subject to a code by which their conduct are measured for lapses, liability and sanctions.

The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct of their profession, just like other professionals. A professional code of conduct provides the standards for determining whether a person has acted justly, honestly and with good faith in the exercise of his rights and performance of his duties as required by Article 19[37] of the Civil Code. A professional code of conduct also provides the standards for determining whether a person who willfully causes loss or injury to another has acted in a manner contrary to morals or good customs under Article 21[38] of the Civil Code.

II.Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages

because it is a corporation.[39]

A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral damages. However, the Courts statement inMambulao that a corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages is an obiter dictum.[42]

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219[43] of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages.[44]

Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages.[46] Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of some damages.[47] In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

However, we find the award of P300,000 moral damages unreasonable. The record shows that even though the broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to its reputation. Therefore, we reduce the award of moral damages from P300,000 to P150,000.III.Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorneys fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208[48] of the Civil Code.

The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the trial and appellate courts failed to explicitly

state in their respective decisions the rationale for the award of attorneys fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsels fees are not to be awarded every time a party wins a suit. The power of the court to award attorneys fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the award is a conclusion without a premise, its basis being improperly left to speculation and conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorneys fees.[51](Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the court and depends upon the circumstances of each case, the Court of Appeals failed to point out any circumstance to justify the award.

IV.Whether FBNI is solidarily liable with Rima and Alegrefor moral damages, attorneys feesand costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorneys fees because it exercised due diligence in the selection and supervision of its employees, particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a very regimented process before they are allowed to go on air. Those who apply for broadcaster are subjected to interviews, examinations and an apprenticeship program.

FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the diligence of a good father of a family in selecting and supervising them. Rimas accreditation lapsed due to his non-payment of the KBP annual fees while Alegres accreditation card was delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that membership in the KBP is merely voluntary and not required by any law or government regulation.

FBNIs arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort which they commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of the Civil Code.

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory statements published by radio or television may be had from the owner of the station, a licensee, the operator of the station, or a person who procures, or participates in, the making of the defamatory statements.[54] An employer and employee are solidarily liable for a defamatory statement by the employee within the course and scope of his or her employment, at least when the employer authorizes or ratifies the defamation.[55] In this case, Rima and Alegre were clearly performing their official duties as hosts of FBNIs radio program Expos when they aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their work at that time. There was likewise no showing that FBNI did not authorize and ratify the defamatory broadcasts.

Moreover, there is insufficient evidence on record that FBNI exercised due diligence in the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised diligence in the selection of its broadcasters without introducing any evidence to prove that it observed the same diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to observe truth, fairness and objectivity and to refrain from using libelous and indecent language is not enough to prove due diligence in the supervision of its broadcasters. Adequate training of the broadcasters on the industrys code of conduct, sufficient information on libel laws, and continuous evaluation of the broadcasters performance are but a few of the many ways of showing diligence in the supervision of broadcasters.

FBNI claims that it has taken all the precaution in

the selection of Rima and Alegre as broadcasters, bearing in mind their qualifications. However, no clear and convincing evidence shows that Rima and Alegre underwent FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster. Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong commitment to observe the broadcast industrys rules and regulations. Clearly, these circumstances show FBNIs lack of diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.

WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award of moral damages is reduced from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against petitioner.

SO ORDERED.G.R. No. L-12719             May 31, 1962THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs.THE CLUB FILIPINO, INC. DE CEBU, respondent.Office of the Solicitor General for petitioner.V. Jaime and L. E. Petilla for respondent.PAREDES, J.:This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant.As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento

saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums: —

As percentage tax on its gross receipts during the tax years 1946 to 1951 P9,599.07Surcharge therein 2,399.77As fixed tax for the years 1946 to 1952 70.00

Compromise penalty 500.00The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review.The dominant issues involved in this case are twofold:1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax

Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the periods mentioned above; and2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso factoattach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profitor livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that

there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1äwphï1.ñëtIt is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur.Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits.

Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law.A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty.WHEREFORE, the decision appealed from is affirmed without costs.G.R. No. L-33320 May 30, 1983RAMON A. GONZALES, petitioner, vs.THE PHILIPPINE NATIONAL BANK, respondent.Ramon A. Gonzales in his own behalf.Juan Diaz for respondent. VASQUEZ, J.:Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his written request for such examination was denied by the respondent. The trial court having dismissed the petition for mandamus, the instant appeal to review the said dismissal was filed.The facts that gave rise to the subject controversy have been set forth by the trial court in the decision herein sought to be reviewed, as follows:

Briefly stated, the following facts gathered from the stipulation of the parties served as the backdrop of this proceeding.Previous to the present action, the petitioner instituted several cases in this Court questioning different transactions entered into by the Bark with other parties. First among them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the Commissioner of Public Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and General Motors Corporation In the course of the hearing of said case on August 3, 1967, the personality of herein petitioner to sue the bank and question the letters of credit it has extended for the importation by the Republic of the Philippines of public works equipment intended for the massive development program of the President was raised. In view thereof, he expressed and made known his intention to acquire one share of stock from Congressman Justiniano Montano which, on the following day, August 30, 1967, was transferred in his name in the books of the Bank.Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner, in his dual capacity as a taxpayer and stockholder, filed the following cases involving the bank or the members of its Board of Directors to wit:l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central Inc.;3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of both the

PNB and DBP;On January 11, 1969, however, petitioner addressed a letter to the President of the Bank (Annex A, Pet.), requesting submission to look into the records of its transactions covering the purchase of a sugar central by the Southern Negros Development Corp. to be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice-President and Legal Counsel of the Bank answered petitioner's letter denying his request for being not germane to his interest as a one-share stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.' (Rollo, pp. 16-18.)

The petitioner has adopted the above finding of facts made by the trial court in its brief which he characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books and records of the respondent bank regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative remedies.Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

Sec. 51. ... The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours.

Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired examination is necessary for its exercise, there is nothing improper in his purpose for asking for the examination and inspection herein involved.Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines."The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:

The records of all business transactions of the corporation and the minutes of any meeting shag be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or

order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

As may be noted from the above-quoted provisions, among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following the records must be kept at the principal office of the corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information through a prior examination, and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand."The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder.We also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. — The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank'Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, except by order of a Court of competent jurisdiction,'Sec. 30. Penalties for violation of the provisions of

this Act.— Any director, officer, employee, or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. supplemented by the provisions of this Code, insofar as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank.WHEREFORE, the petition is hereby DISMISSED, without costs.G.R. No. 129459 September 29, 1998SAN 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.: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 FactsThe 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 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:

AGREEMENTKNOW 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 —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 FABRICATORSTRANSFEROR TRANSFEREE

[SGD.] [SGD.]By. NENITA LEE GRUENBERG By: ANDRES T. CO

Treasurer PresidentSigned 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 IssuesBefore this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant caseII. Whether or not the appellate court may consider matters which the parties failed to raise in the lower courtIII. Whether or not there is a valid and enforceable contract between the petitioner and the respondent corporationIV. 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, 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 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 ImmaterialPetitioner 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?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 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.G.R. No. L-2598             June 29, 1950C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs.EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc.,respondents.Claro M. Recto for petitioners.Ramon Diokno and Jose W. Diokno for respondents.BENGZON, J.:This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance of Leyte and to enjoin the respondent judge from further acting upon the same.Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto.(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers.(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental office, the

respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses.(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the receiver, but the respondent judge refused to accept the offer and to discharge the receiver. Whereupon, the present special civil action was instituted in this court. It is based upon two main propositions, to wit:(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because it being ade facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance with section 19 of the Corporation Law.(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation but only a partnership.Discussion: The second proposition may at once be dismissed. All the parties are informed that the Securities and Exchange Commission has not, so far, issued the corresponding certificate of incorporation. All of them know, or sought to know, that the personality of a corporation begins to exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law). The complaining associates have not represented to the others that they were incorporated any more than the latter had made similar representations to them. And as nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is not an instance requiring the enforcement of contracts with the corporation through the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction to take cognizance of said civil case number 381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation under this Act and its right to exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may be a party, but such inquiry may be had at the suit of the Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders — may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.There might be room for argument on the right of minority stockholders to sue for dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject to review on appeal. Whkch brings us to one principal reason why this petition may not prosper, namely: the

petitioners have their remedy by appealing the order of dissolution at the proper time.There is a secondary issue in connection with the appointment of a receiver. But it must be admitted that receivership is proper in proceedings for dissolution of a company or corporation, and it was no error to reject the counter-bond, the court having declared the dissolution. As to the amount of the bond to be demanded of the receiver, much depends upon the discretion of the trial court, which in this instance we do not believe has been clearly abused.Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore issued will be dissolved.[G.R. No. 141735. June 8, 2005]SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE

COURT OF APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH INVESTMENT BANK OF THE PHILIPPINES, respondents.

D E C I S I O NCHICO-NAZARIO, J.:

This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision[1] of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn affirmed Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and dismissing him from the service, and its Resolution[2] of 15 December 1999 dismissing petitioners Motion for Reconsideration.

The records show that petitioner Sappari K. Sawadjaan was among the first employees of the Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02 August 1973. He rose through the ranks, working his way up from his initial designation as security guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/ inspector, and eventually, loans analyst.[3]

In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to inspect the properties offered as collaterals by Compressed Air Machineries and Equipment Corporation (CAMEC) for a credit line of Five

Million Pesos (P5,000,000.00). The properties consisted of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of his Inspection and Appraisal Report,[4] the PAB granted the loan application. When the loan matured on 17 May 1989, CAMEC requested an extension of 180 days, but was granted only 120 days to repay the loan.[5]

In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.[6]

In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which created the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP,[7] and the existing personnel of the PAB were to continue to discharge their functions unless discharged.[8] In the ensuing reorganization, Sawadjaan was among the personnel retained by the AIIBP.

When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP, discovered that TCT No. N-130671 was spurious, the property described therein non-existent, and that the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one Divina Pablico.

On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look into the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in losses.[9] The subsequent events, as found and decided upon by the Court of Appeals,[10] are as follows:On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo charging him with Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and preventively suspending him.In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee that he could not submit himself to the jurisdiction of the Committee because of its alleged partiality. For his failure to appear before the hearing set on 17 September 1993, after the hearing of 13 September 1993 was postponed due to the Manifestation of even date filed by petitioner, the Investigating Committee declared petitioner in default and the prosecution was allowed to present its evidence ex parte.On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of which reads as follows:

In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank, respondent should be held liable therefore. At this juncture, however, the Investigating Committee is of the considered opinion that he could not be held liable for the administrative offense of dishonesty considering the fact that no evidence was adduced to show that he profited or benefited from being remiss in the performance of his duties. The record is bereft of any evidence which would show that he received any amount in consideration for his non-performance of his official duties.This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties resulted to the prejudice and substantial damage to the Islamic Bank for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.Premises considered, the Investigating Committee recommends that respondent SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in accordance with the Civil Service Commissions Memorandum Circular No. 30, Series of 1989.On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No. 2309 finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and imposing the penalty of Dismissal from the Service.On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner from dismissal to suspension for a period of six (6) months and one (1) day.On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB).On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of Islamic Bank.On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for Reconsideration.On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following assignment of errors:

I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a grave abuse of discretion amounting to excess or lack of jurisdiction when it initiated and conducted administrative investigation without a validly promulgated rules of procedure in the adjudication of administrative cases at the Islamic Bank.

II. Public respondent Civil Service Commission has committed a grave abuse of discretion amounting to lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the case not appealed to it, but to the Merit System Protection Board.

III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan of having deliberately reporting false information and therefore guilty of Dishonesty and Conduct Prejudicial to the Best Interest of the Service and penalized with dismissal from the service.On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable Court pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.We do not find merit [in] the petition.Anent the first assignment of error, a reading of the records would reveal that petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure governing the adjudication and disposition of administrative cases involving its personnel. It is a rule that issues not properly brought and ventilated below may not be raised for the first time on appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of which, however, obtain in this case. Granting arguendo that the issue is of such exceptional character that the Court may take cognizance of the same, still, it must fail. Section 26 of Republic Act No. 6848 (1990) provides:Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out effectively the provisions of this Charter as well as internal rules and regulations necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration. (Italics ours)On the other hand, Item No. 2 of Executive Order No. 26 (1992)

entitled Prescribing Procedure and Sanctions to Ensure Speedy Disposition of Administrative Cases directs, all administrative agencies to adopt and include in their respective Rules of Procedure provisions designed to abbreviate administrative proceedings.The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP] to promulgate rules of procedure before administrative discipline may be imposed upon its employees. The internal rules of procedures ordained to be adopted by the Board refers to that necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration. On the contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic Bank the broadest powers to manage the Islamic Bank. This grant of broad powers would be an idle ceremony if it would be powerless to discipline its employees.The second assignment of error must likewise fail. The issue is raised for the first time via this petition for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could have raised the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By filing the Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction over him, as it is settled rule that a party who asks for an affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction after an adverse result was meted to him. Although jurisdiction over the subject matter of a case may be objected to at any stage of the proceedings even on appeal, this particular rule, however, means that jurisdictional issues in a case can be raised only during the proceedings in said case and during the appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is a petition [for] certiorari and not an appeal.But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated 29 June 1993, provides:Decisions in administrative cases involving officials and employees of the civil service appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987) including personnel actions such as contested appointments shall now be appealed directly to the Commission and not to the MSPB.

In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:. . . The functions of the MSPB relating to the determination of administrative disciplinary cases were, in other words, re-allocated to the Commission itself.Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this case, administrative agency) has jurisdiction or not, the provisions of the law should be inquired into. Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it will not be held to exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law abovecited, the Civil Service Commission clearly has jurisdiction over the Administrative Case against petitioner.Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he should not be liable, as in the first place, he was not qualified to perform the functions of appraiser/investigator because he lacked the necessary training and expertise, and therefore, should not have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that the position of appraiser/inspector is one of the most serious [and] sensitive job in the banking operations. He should have been aware that accepting such a designation, he is obliged to perform the task at hand by the exercise of more than ordinary prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of the documents presented by the borrower by comparing them with the originals on file with the proper government office. He should have made it sure that the technical descriptions in the location plan on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of the collateral offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly annotated at the back of the copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner failed to do, for which he must be held liable. That he did not profit from his false report is of no moment. Neither the fact that it was not deliberate or willful, detracts from the nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really was not sure that it was so.WHEREFORE, above premises considered, the instant Petition is DISMISSED, and the assailed Resolutions of the Civil Service

Commission are hereby AFFIRMED.On 24 March 1999, Sawadjaans counsel notified the court a

quo of his change of address,[11] but apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New Trial[12] in the Court of Appeals based on the following grounds: fraud, accident, mistake or excusable negligence and newly discovered evidence. He claimed that he had recently discovered that at the time his employment was terminated, the AIIBP had not yet adopted its corporate by-laws. He attached a Certification[13] by the Securities and Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-laws to the SEC, and that its registration was being held in abeyance pending certain corrections being made thereon. Sawadjaan argued that since the AIIBP failed to file its by-laws within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law, the bank and its stockholders had already forfeited its franchise or charter, including its license to exist and operate as a corporation,[14] and thus no longer have the legal standing and personality to initiate an administrative case.

Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a motion for reconsideration.[15] This motion was denied by the court a quo in its Resolution of 15 December 1999.[16]

Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of Court challenging the above Decision and Resolution of the Court of Appeals on the ground that the court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in affirming an unconscionably harsh and/or excessive penalty; and vi) in failing to consider newly discovered evidence and reverse its

decision accordingly.Subsequently, petitioner Sawadjaan filed an Ex-

parte Urgent Motion for Additional Extension of Time to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the Philippines),[17] Reply (to Respondents Consolidated Comment,)[18] and Reply (to the Alleged Comments of Respondent Al-Amanah Islamic Bank of the Philippines).[19] On 13 October 2000, he informed this Court that he had terminated his lawyers services, and, by himself, prepared and filed the following: 1) Motion for New Trial;[20] 2) Motion to Declare Respondents in Default and/or Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial;[21] 3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit them from Appearing in this Case Until they Can Present Valid Evidence of Legal Authority;[22] 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment);[23] 5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance of a Warrant of Arrest);[25] 7) Memorandum for Petitioner;[26] 8) Opposition to SolGens Motion for Clarification with Motion for Default and/or Waiver of Respondents to File their Memorandum;[27] 9) Motion for Contempt of Court and Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File Memorandum;[28] 10) Motion for Enforcement (In Defense of the Rule of Law);[29] 11) Motion and Opposition (Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest; and Opposition to their Alleged Manifestation and Motion Dated February 5, 2002);[30] 12) Motion for Reconsideration of Item (a) of Resolution dated 5 February 2002 with Supplemental Motion for Contempt of Court;[31] 13) Motion for Reconsideration of Portion of Resolution Dated 12 March 2002;[32] 14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum (To: CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs

Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to File Reply Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply Memorandum (To: OGCCs Memorandum for Respondent AIIBP).[35]

Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive flaws.

The general rule is that the remedy to obtain reversal or modification of the judgment on the merits is appeal. This is true even if the error, or one of the errors, ascribed to the court rendering the judgment is its lack of jurisdiction over the subject matter, or the exercise of power in excess thereof, or grave abuse of discretion in the findings of fact or of law set out in the decision.[36]

The records show that petitioners counsel received the Resolution of the Court of Appeals denying his motion for reconsideration on 27 December 1999. The fifteen day reglamentary period to appeal under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of the resolution denying his motion for reconsideration, the petitioner filed his petition for certiorari under Rule 65.

It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of appeal,[37] and though there are instances[38] where the extraordinary remedy ofcertiorari may be resorted to despite the availability of an appeal,[39] we find no special reasons for making out an exception in this case.

Even if we were to overlook this fact in the broader interests of justice and treat this as a special civil action for certiorari under Rule 65,[40] the petition would nevertheless be dismissed for failure of the petitioner to show grave abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the fact that since respondent AIIBP failed to file its by-laws within the designated 60 days from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP and its officers and Board of Directors,. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file administrative charges and investigate petitioner in the manner they did and allegedly passed Board Resolution No. 2309 on December 13, 1993 which is null and void for lack of an ( sic)   authorized and valid by-laws .

The CIVIL SERVICE COMMISSION was therefore affirming, erroneously, a null and void Resolution No. 2309 dated December 13, 1993 of the Board of Directors of Al-Amanah Islamic Investment Bank of the Philippines in CSC Resolution No. 94-4483 dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its Resolution No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud, falsifications and misrepresentations of the alleged Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged Islamic Bank.[41]

Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition for certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite the volume of pleadings he has submitted thus far, he has added nothing substantial to his arguments.

The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here represented by the Office of the Government Corporate Counsel, the principal law office of government-owned corporations, one of which is respondent bank.[42] At the very least, by its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation[43] whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party.[44]

Moreover, a corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations,[45] details the procedures and remedies that may be availed of before an order of revocation can be issued. There is no showing that such a procedure has been initiated in this case.

In any case, petitioners argument is irrelevant because this case is not a corporate controversy, but a labor dispute; and it is an employers basic right to freely select or discharge its employees, if only as a measure of self-protection against acts inimical to its interest.[46] Regardless of whether AIIBP is a

corporation, a partnership, a sole proprietorship, or a sari-saristore, it is an undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain his services during its reorganization, controlled the means and methods by which his work was to be performed, paid his wages, and, eventually, terminated his services.[47]

And though he has had ample opportunity to do so, the petitioner has not alleged that he is anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a stockholder or an officer of the corporation. Having accepted employment from AIIBP, and rendered his services to the said bank, received his salary, and accepted the promotion given him, it is now too late in the day for petitioner to question its existence and its power to terminate his services. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.[48]

Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we would be hard pressed to find error in the decision of the AIIBP.

As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the properties offered by CAMEC as collaterals and check the copies of the certificates of title against those on file with the Registry of Deeds. Not only did he fail to conduct these routine checks, but he also deliberately misrepresented in his appraisal report that after reviewing the documents and conducting a site inspection, he found the CAMEC loan application to be in order. Despite the number of pleadings he has filed, he has failed to offer an alternative explanation for his actions.

When he was informed of the charges against him and directed to appear and present his side on the matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of the members of the investigating committee and refusing to recognize their jurisdiction over him. Nevertheless, the investigating committee rescheduled the hearing to give the petitioner another chance, but he still refused to appear before it.

Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty and dismissing him from service. He sought a reconsideration of this decision and the same committee whose impartiality he questioned reduced

their recommended penalty to suspension for six months and one day. The board of directors, however, opted to dismiss him from service.

On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties greatly prejudiced the AIIBP, for which he should be held accountable. It held that:. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of his duties as appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he could have easily noticed that the property located at Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had respondent reflected such fact in his appraisal/inspection report on said property the ISLAMIC BANK would not have approved CAMECs loan of P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks policy of not accepting encumbered properties as collateral.Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and verify from the Registry of Deeds of Marikina the authenticity of the property located at Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and which is one of the properties offered as collateral by CAMEC for its P5 Million loan in 1988. If he only visited and verified with the Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily discovered that TCT No. N-130671 is fake and the property described therein non-existent.. . .This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties resulted to the prejudice and substantial damage to the ISLAMIC BANK for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.[49]

From the foregoing, we find that the CSC and the court a quo committed no grave abuse of discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction, or, in other words, where the power is exercised in an arbitrary or despotic

manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law.[50] The records show that the respondents did none of these; they acted in accordance with the law.

WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its Resolution of 15 December 1999 are hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.G.R. No. L-26649             July 13, 1927THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General), plaintiff, vs.EL HOGAR FILIPINO, defendant.Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for defendant.Wm. J. Rohde as amicus curiae.STREET, J.:This is a quo warranto proceeding instituted originally in this court by the Government of the Philippine Islands on the relation of the Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said corporation. The complaint enumerates seventeen distinct causes of action, to all of which the defendant has answered upon the merits, first admitting the averments of the first paragraph in the statement of the first cause of action, wherein it is alleged that the defendant was organized in the year 1911 as a building and loan association under the laws of the Philippine Islands, and that, since its organization, the corporation has been doing business in the Philippine Islands, with its principal office in the City of Manila. Other facts alleged in the various causes of action in the complaint are either denied in the answer or controverted in legal effect by other facts.After issue had been thus joined upon the merits, the attorneys

entered into an elaborate agreement as to the fact, thereby removing from the field of dispute such matters of fact as are necessary to the solution of the controversy. It follows that we are here confronted only with the legal questions arising upon the agreed statement.On March 1, 1906, the Philippine Commission enacted what is known as the Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to 190, inclusive, of this Act are devoted to the subject of building and loan associations, defining their objects making various provisions governing their organization and administration, and providing for the supervision to be exercised over them. These provisions appear to be adopted from American statutes governing building and loan associations and they of course reflect the ideals and principles found in American law relative to such associations. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last above-mentioned the association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81.First cause of action. — The first cause of action is based upon the alleged illegal holding by the respondent of the title to real property for a period in excess of five years after the property had been bought in by the respondent at one of its own

foreclosure sales. The provision of law relevant to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law.) In both of these provisions it is in substance declared that while corporations may loan funds upon real estate security and purchase real estate when necessary for the collection of loans, they shall dispose of real estate so obtained within five years after receiving the title.In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a recorded mortgage upon a tract of land in the municipality of San Clemente, Province of Tarlac, as security for a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners of said property. The borrowers having defaulted in their payments, El Hogar Filipino foreclosed the mortgage and purchased the land at the foreclosure sale for the net amount of the indebtedness, namely, the sum of P23,744.18. The auction sale of the mortgaged property took place November 18, 1920, and the deed conveying the property to El Hogar Filipino was executed and delivered December 22, 1920. On December 27, 1920, the deed conveying the property to El Hogar Filipino was sent to the register of deeds of the Province of Tarlac, with the request that the certificate of title then standing in the name of the former owners be cancelled and that a new certificate of title be issued in the name of El Hogar Filipino. Said deed was received in the office of the register of deeds of Tarlac on December 28, 1920, together with the old certificate of title, and thereupon the register made upon the said deed the following annotation:

The foregoing document was received in this office at 4.10 p. m., December 28, 1920, according to entry 1898, page 50 of Book One of the Day Book and registered on the back of certificate of title No. 2211 and its duplicate, folio 193 of Book A-10 of the register of original certificate. Tarlac, Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.

For months no reply was received by El Hogar Filipino from the register of deeds of Tarlac, and letters were written to him by El Hogar Filipino on the subject in March and April, 1921, requesting action. No answer having been received to these letters, a complaint was made by El Hogar Filipino to the Chief of the General Land Registration Office; and on May 7, 1921, the certificate of title to the San Clemente land was received by

El Hogar Filipino from the register of deeds of Tarlac.On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution authorizing Vicente Bengzon, an agent of the corporation, to endeavor to find a buyer for the San Clemente land. On July 27, 1921, El Hogar Filipino authorized one Jose Laguardia to endeavor to find a purchaser for the San Clemente land for the sum of P23,000 undertaking to pay the said Laguardia a commission of 5 per centum of the selling price for his services, but no offers to purchase were obtained through this agent or through the agent Bengzon. In July, 1923, plans of the San Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as prospective purchasers, but no offers were received from them. In January, 1926, the agent not having succeeded in finding a buyer, the San Clemente land was advertised for sale by El Hogar Filipino in El Debate, La Vanguardia andTaliba, three newspapers of general circulation in the Philippine Islands published in the City of Manila. On March 16, 1926, the first offer for the purchase of the San Clemente land was received by El Hogar Filipino. This offer was made to it in writing by one Alcantara, who offered to buy it for the sum of P4,000, Philippine currency, payable P500 in cash, and the remainder within thirty days. Alcantara's offer having been reported by the manager of El Hogar Filipino to its board of directors, it was decided, by a resolution adopted at a meeting of the board held on March 25, 1926, to accept the offer, and this acceptance was communicated to the prospective buyer. Alcantara was given successive extensions of the time, the last of which expired April 30, 1926, within which to make the payment agreed upon; and upon his failure to do so El Hogar Filipino treated the contract with him as rescinded, and efforts were made at once to find another buyer. Finally the land was sold to Doña Felipa Alberto for P6,000 by a public instrument executed before a notary public at Manila, P. I., on July 30, 1926.Upon consideration of the facts above set forth it is evident that the strict letter of the law was violated by the respondent; but it is equally obvious that its conduct has not been characterized by obduracy or pertinacity in contempt of the law. Moreover, several facts connected with the incident tend to mitigate the offense. The Attorney-General points out that the respondent acquired title on December 22, 1920, when the deed was executed and delivered, by which the property was conveyed to

it as purchaser at its foreclosure sale, and this title remained in it until July 30, 1926, when the property was finally sold to Felipa Alberto. The interval between these two conveyances is thus more than five years; and it is contended that the five year period did not begin to run against the respondent until May 7, 1921, when the register of deeds of Tarlac delivered the new certificate of title to the respondent pursuant to the deed by which the property was acquired. As an equitable consideration affecting the case this contention, though not decisive, is in our opinion more than respectable. It has been held by this court that a purchaser of land registered under the Torrens system cannot acquire the status of an innocent purchaser for value unless his vendor is able to place in his hands an owner's duplicate showing the title of such land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible title to any purchaser. In this connection it will be noted that section 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of the Corporation Law, allow the corporation "five years after receiving the title," within which to dispose of the property. A fair interpretation of these provisions would seem to indicate that the date of the receiving of the title in this case was the date when the respondent received the owner's certificate, or May 7, 1921, for it was only after that date that the respondent had an unequivocal and unquestionable power to pass a complete title. The failure of the respondent to receive the certificate sooner was not due in any wise to its fault, but to unexplained delay on the part of the register of deeds. For this delay the respondent cannot be held accountable.Again, it is urged for the respondent that the period between March 25, 1926, and April 30, 1926, should not be counted as part of the five-year period. This was the period during which the respondent was under obligation to sell the property to Alcantara, prior to the rescission of the contract by reason of Alcantara's failure to make the stipulated first payment. Upon this point the contention of the respondent is, in our opinion, well founded. The acceptance by it of Alcantara's offer obligated the respondent to Alcantara; and if it had not been for the default of Alcantara, the effective sale of the property would have resulted. The respondent was not at all chargeable with

the collapse of these negotiations; and hence in any equitable application of the law this period should be deducted from the five-year period within which the respondent ought to have made the sale. Another circumstance explanatory of the respondent's delay in selling the property is found in the fact that it purchased the property for the full amount of the indebtedness due to it from the former owner, which was nearly P24,000. It was subsequently found that the property was not salable for anything like that amount and in the end it had to be sold for P6,000, notwithstanding energetic efforts on the part of the respondent to find a purchaser upon better terms.The question then arises whether the failure of the respondent to get rid of the San Clemente property within five years after it first acquired the deed thereto, even supposing the five-year period to be properly counted from that date, is such a violation of law as should work a forfeiture of its franchise and require a judgment to be entered for its dissolution in this action of quo warranto. Upon this point we do not hesitate to say that in our opinion the corporation has not been shown to have offended against the law in a manner that should entail a forfeiture of its charter. Certainly no court with any discretion to use in the matter would visit upon the respondent and its thousands of shareholders the extreme penalty of the law as a consequence of the delinquency here shown to have been committed.The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure, as applied by this court in Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to be rendered against a corporation in an action of quo warranto, among other things says:

. . . When it is found and adjudged that a corporation has offended in any matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be rendered that it be outset from the continuance of such offense or the exercise of such power.

This provision clearly shows that the court has a discretion with respect to the infliction of capital punishment upon corporation and that there are certain misdemeanors and misuses of franchises which should not be recognized as requiring their

dissolution. In Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15), it was found that the offending corporation had been largely (though indirectly) engaged in the buying and holding or real property for speculative purposes in contravention of its charter and contrary to the express provisions of law. Moreover, in that case the offending corporation was found to be still interested in the properties so purchased for speculative at the time the action was brought. Nevertheless, instead of making an absolute and unconditional order for the dissolution of the corporation, the judgment of ouster was made conditional upon the failure of the corporation to discontinue its unlawful conduct within six months after final decision. In the case before us the respondent appears to have rid itself of the San Clemente property many months prior to the institution of this action. It is evident from this that the dissolution of the respondent would not be an appropriate remedy in this case. We do not of course undertake to say that a corporation might not be dissolved for offenses of this nature perpetrated in the past, especially if its conduct had exhibited a willful obduracy and contempt of law. We content ourselves with holding that upon the facts here before us the penalty of dissolution would be excessively severe and fraught with consequences altogether disproportionate to the offense committed.The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail (mayorazgo) or other similar institution by which land could be fettered and its alienation hampered over long periods of time. In the case before us the respondent corporation has in good faith disposed of the piece of property which appears to have been in its hands at the expiration of the period fixed by law, and a fair explanation is given of its failure to dispose of it sooner. Under these circumstances the destruction of the corporation would bring irreparable loss upon the thousand of innocent shareholders of the corporation without any corresponding benefit to the public. The discretion permitted to this court in the application of the remedy of quo warranto forbids so radical a use of the remedy.But the case for the plaintiff supposes that the discretion of this court in matters like that now before us has been expressly taken away by the third section of Act No. 2792, and that the dissolution of the corporation is obligatory upon the court a

mere finding that the respondent has violated the provision of the Corporation Law in any respect. This makes necessary to examine the Act last above-mentioned with some care. Upon referring thereto, we find that it consists of three sections under the following style:

No. 2792. — An Act to amend certain sections of the Corporation Law, Act Numbered Fourteen hundred and fifty-nine, providing for the publication of the assets and liabilities of corporations registering in the Bureau of Commerce and Industry, determining the liability of the officers of corporations with regard to the issuance of stock or bonus, establishing penalties for certain things, and for other purposes.

The first two section contain amendments to the Corporation Law with respect to matters with which we are not here concurred. The third section contains anew enactment to be inserted as section 190 (A) in the corporation Law immediately following section 190. This new section reads as follows:

SEC. 190. (A). Penalties. — The violation of any of the provisions of this Act and its amendments not otherwise penalized therein, shall be punished by a fine of not more than one thousand pesos, or by imprisonment for not more than five years, or both, in the discretion of the court. If the violation being proved, be dissolved by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal, by order of said Attorney-General: Provided, That nothing in this section provided shall be construed to repeal the other causes for the dissolution of corporation prescribed by existing law, and the remedy provided for in this section shall be considered as additional to the remedies already existing.

The contention for the plaintiff is to the effect that the second sentence in this enactment has entirely abrogated the discretion of this court with respect to the application of the remedy of qou warranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now mandatory upon us to dissolved any corporation whenever we find that it has committed any violation of the Corporation Law, however trivial. In our opinion in this radical view of the meaning of the enactment is untenable. When the statute says, "If the violation is committed by a corporation, the same shall, upon such

violation being proved, be dissolved by quo warranto proceedings . . .," the intention was to indicate that the remedy against the corporation shall be by action of quo warranto. There was no intention to define the principles governing said remedy, and it must be understood that in applying the remedy the court is still controlled by the principles established in immemorial jurisprudence. The interpretation placed upon this language in the brief of the Attorney-General would be dangerous in the extreme, since it would actually place the life of all corporate investments in the official. No corporate enterprise of any moment can be conducted perpetually without some trivial misdemeanor against corporate law being committed by some one or other of its numerous employees. As illustrations of the preposterous effects of the provision, in the sense contended for by the Attorney-General, the attorneys for the respondent have called attention to the fact that under section 52 of the Corporation Law, a business corporation is required to keep a stock book and a transfer book in which the names of stockholders shall kept in alphabetical order. Again, under section 94, railroad corporations are required to cause all employees working on passenger trains or at a station for passengers to wear a badge on his cap or hat which will indicate his office. Can it be supposed that the Legislature intended to penalize the violation of such provisions as these by dissolution of the corporation involved? Evidently such could not have been the intention; and the only way to avoid the consequence suggested is to hold, as we now hold, that the provision now under consideration has not impaired the discretion of this court in applying the writ of quo warranto.Another way to put the same conclusion is to say that the expression "shall be dissolved by quo warrantoproceedings" means in effect, "may be dissolved by quo warranto proceedings in the discretion of the court." The proposition that the word "shall" may be construed as "may", when addressed by the Legislature to the courts, is well supported in jurisprudence. In the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of Pennsylvania had under consideration a statute providing as follows:

It shall be the duty of the court . . . to examine, inquire and ascertain whether such corporation does in fact

posses the right or franchise to do the act from which such alleged injury to private rights or to the rights and franchises of other corporations results; and if such rights or franchises have not been conferred upon such corporations, such courts, it exercising equitable power, shall, by injunction, at suit of the private parties or other corporations, restrain such injurious acts.

In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. But this was denied the court saying:

Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be granted unless a proper case for injunction be made out, in accordance with the principles and practice of equity. The word "shall" when used by the legislature to a court, is usually a grant of authority and means "may", and even if it be intended to be mandatory it must be subject to the necessary limitation that a proper case has been made out for the exercise of the power.

Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West Wisconsin R. Co.vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506; Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-matter of this section is not expressed in the title of the Act, with the result that the section is invalid. This criticism is in our opinion well founded. Section 3 of our organic law (Jones Bill) declares, among other things, that "No bill which may be enacted into law shall embrace more than one subject, and that subject shall be expressed in the title of the bill." Any law or part of a law passed by the Philippine Legislature since this provision went into effect and offending against its requirement is necessarily void.Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are successively dealt with in the first three sections of the Act. But it will be noted that these three matters all relate to the Corporation Law; and it is at once

apparent that they might properly have been embodied in a single Act if a title of sufficient unity and generality had been prefixed thereto. Furthermore, it is obvious, even upon casual inspection, that the subject-matter of each of the first two sections is expressed and defined with sufficient precision in the title. With respect to the subject-matter of section 3 the only words in the title which can be taken to refer to the subject-matter of said section are these, "An Act . . . establishing penalties for certain things, and for other purposes." These words undoubtedly have sufficient generality to cover the subject-matter of section 3 of the Act. But this is not enough. The Jones Law requires that the subject-matter of the bill "shall be expressed in the title of the bill."When reference is had to the expression "establishing penalties for certain things," it is obvious that these words express nothing. The constitutional provision was undoubtedly adopted in order that the public might be informed as to what the Legislature is about while bills are in process of passage. The expression "establishing penalties for certain things" would give no definite information to anybody as to the project of legislation intended under this expression. An examination of the decided cases shows that courts have always been indulgent of the practices of the Legislature with respect to the form and generality of title, for if extreme refinements were indulged by the courts, the work of legislation would be unnecessarily hampered. But, as has been observed by the California court, there must be some reasonable limit to the generality of titles that will be allowed. The measure of legality is whether the title is sufficient to give notice of the general subject of the proposed legislation to the persons and interests likely to be affected.In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise the Code of Civil Procedure of the State of California, by amending certain sections, repealing others, and adding certain new sections." This title was held to embrace more than one subject, which were not sufficiently expressed in the title. In discussing the question the court said:

* * * It is apparent that the language of the title of the act in question, in and of itself, express no subject whatever. No one could tell from the title alone what subject of legislation was dealt with in the body of the act; such subject so far as the title of the act informs us, might

have been entirely different from anything to be found in the act itself.We cannot agree with the contention of some of respondent's counsel — apparently to some extent countenanced by a few authorities — that the provision of the constitution in question can be entirely avoided by the simple device of putting into the title of an act words which denote a subject "broad" enough to cover everything. Under that view, the title, "An act concerning the laws of the state," would be good, and the convention and people who framed and adopted the constitution would be convicted of the folly of elaborately constructing a grave constitutional limitation of legislative power upon a most important subject, which the legislature could at once circumvent by a mere verbal trick. The word "subject" is used in the constitution embrace but "one subject" it necessarily implies — what everybody knows — that there are numerous subjects of the legislation, and declares that only one of these subjects shall embraced in any one act. All subjects cannot be conjured into one subject by the mere magic of a word in a title.

In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey made the following observation:

* * * It is true, that it may be difficult to indicate, by a formula, how specialized the title of a statute must be; but it is not difficult to conclude that it must mean something in the way of being a notice of what is doing. Unless it does not enough that it embraces the legislative purpose — it must express it; and where the language is too general, it will accomplish the former, but not the latter. Thus, a law entitled "An act for a certain purpose," would embrace any subject, but would express none, and, consequently, it would not stand the constitutional test.

The doctrine properly applicable in matters of this kind is, we think, fairly summed up in a current repository of jurisprudence in the following language:

* * * While it may be difficult to formulate a rule by which to determine the extent to which the title of a bill must specialize its object, it may be safely assumed that the title must not only embrace the subject of proposed

legislation, but also express it clearly and fully enough to give notice of the legislative purpose. (25 R. C. L., p. 853.)

In dealing with the problem now before us the words "and for other purposes "found at the end of the caption of Act No. 2792, must be laid completely out of consideration. They express nothing, and amount to nothing as a compliance with the constitutional requirement to which attention has been directed. This expression "(for other purposes") is frequently found in the title of acts adopted by the Philippine Legislature; and its presence in our laws is due to the adoption by our Legislature of the style used in Congression allegation. But it must be remembered that the legislation of Congress is subject to no constitutional restriction with respect to the title of bills. Consequently, in Congressional legislation the words "and for other purposes" at least serve the purpose of admonishing the public that the bill whose heading contains these words contains legislation upon other subjects than that expressed in the title. Now, so long as the Philippine Legislature was subject to no restriction with respect to the title of bills intended for enactment into general laws, the expression "for other purposes" could be appropriately used in titles, not precisely for the purpose of conveying information as to the matter legislated upon, but for the purpose ad admonishing the public that any bill containing such words in the title might contain other subjects than that expressed in the definitive part of the title. But, when congress adopted the Jones Law, the restriction with which we are now dealing became effective here and the words "for other purposes" could no longer be appropriately used in the title of legislative bills. Nevertheless, the custom of using these words has still been followed, although they can no longer serve to cover matter not germane to the bill in the title of which they are used. But the futility of adding these words to the style of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)In the brief for the plaintiff it is intimated that the constitutional restriction which we have been discussing is more or less of a dead letter in this jurisdiction; and it seems to be taken for granted that no court would ever presume to hold a legislative act or part of a legislative act invalid for non-compliance with the requirement. This is a mistake; and no utterance of this court can be cited as giving currency to any such notion. On the

contrary the discussion contained in Central Capiz vs. Ramirez (40 Phil., 883), shows that when a case arises where a violation of the restriction is apparent, the court has no alternative but to declare the legislation affected thereby to be invalid.Second cause of action. — The second cause of action is based upon a charge that the respondent is owning and holding a business lot, with the structure thereon, in the financial district of the City of Manila is excess of its reasonable requirements and in contravention of subsection 5 of section 13 of the corporation Law. The facts on which this charge is based appear to be these:On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of Juan Luna Street and the Muelle de la Industria, in the City of Manila, immediately adjacent to the building then occupied by the Hongkong and Shanghai Banking Corporation. At the time the respondent acquired this lot there stood upon it a building, then nearly fifty years old, which was occupied in part by the offices of an importing firm and in part by warehouses of the same firm. The material used in the construction was Guadalupe stone and hewn timber, and the building contained none of the facilities usually found in a modern office building.In purchase of a design which had been formed prior to the purchase of the property, the directors of the El Hogar Filipino caused the old building to be demolished; and they erected thereon a modern reinforced concrete office building. As at first constructed the new building was three stories high in the main, but in 1920, in order to obtain greater advantage from the use of the land, an additional story was added to the building, making a structure of four stories except in one corner where an additional story was place, making it five stories high over an area of 117.52 square meters. It is admitted in the plaintiffs brief that this "noble and imposing structure" — to use the words of the Attorney-General — "has greatly improved the aspect of the banking and commercial district of Manila and has greatly contributed to the movement and campaign for the Manila Beautiful." It is also admitted that the competed building is reasonably proportionate in value and revenue producing capacity to the value of the land upon which it stands. The total outlay of the respondent for the land and the improvements thereon was P690,000 and at this valuation the property is

carried on the books of the company, while the assessed valuation of the land and improvements is at P786,478.Since the new building was completed the respondent has used about 324 square meters of floor space for its own offices and has rented the remainder of the office space in said building, consisting of about 3,175 square meters, to other persons and entities. In the second cause of action of the complaint it is supposed that the acquisition of this lot, the construction of the new office building thereon, and the subsequent renting of the same in great part to third persons, are ultra vires acts on the part of the corporation, and that the proper penalty to be enforced against it in this action is that if dissolution.With this contention we are unable to agree. Under subsection 5 of section 13 of the Corporation Law, every corporation has the power to purchase, hold and lease such real property as the transaction of the lawful business of the corporation may reasonably and necessarily require. When this property was acquired in 1916, the business of El Hogar Filipino had developed to such an extent, and its prospects for the future were such as to justify its directors in acquiring a lot in the financial district of the City of Manila and in constructing thereon a suitable building as the site of its offices; and it cannot be fairly said that the area of the lot — 1,413 square meters — was in excess of its reasonable requirements. The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society.We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner; and an intention to discriminate between owners in this respect is not lightly to be imputed to the

Legislature. The point here involved has been the subject of consideration in many decisions of American courts under statutes even more restrictive than that which prevails in this jurisdiction; and the conclusion has uniformly been that a corporations whose business may properly be conducted in a populous center may acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate requirements.Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared that the respondent corporation owned and controlled a large ten-story business block in the City of Chicago, worth $2,000,000, and that it occupied only about one-fourth thereof for its own purposes, leasing the remainder to others at heavy rentals. The corporate charter merely permitted the holding of such real estate by the respondent as might be necessary for the successful prosecution of its business. An attempt was made to obtain the dissolution of the corporation in a quo warranto proceeding similar to that now before us, but the remedy was denied.In Rector vs. Hartford Deposit Co., a question was raised as to the power of the Deposit Company to erect and own a fourteen-story building — containing eight storerooms, one hundred suites of offices, and one safety deposit vault, under a statute authorizing the corporation to possess so much real estate "as shall be necessary for the transaction of their business." The court said:

That the appellee company possessed ample power to acquire real property and construct a building thereon for the purpose of transacting therein the legitimate business of the corporation is beyond the range of debate. Nor is the contrary contended, but the insistence is that, under the guise of erecting a building for corporate purposes, the appellee company purposely constructed a much larger building than its business required, containing many rooms intended to be rented to others for offices and business purposes, — among them, the basement rooms contracted to be leased to the appellant, — and that in so doing it designedly exceeded its corporate powers. The position off appellant therefore is that the appellee corporation has flagrantly abused its general power to acquire real estate and construct a building thereon . . . It was within the general

scope of the express powers of the appellee corporation to own and possess a building necessary for its proper corporate purposes. In planning and constructing such a building, as was said in People vs. Pullman's Palace Car Co., supra, the corporation should not necessarily be restricted to a building containing the precise number of rooms its then business might require, and no more, but that the future probable growth and volume of its business might be considered and anticipated, and a larger building, and one containing more rooms than the present volume of business required be erected, and the rooms not needed might be rented by the corporation, — provided, of course, such course should be taken in good faith, and not as a mere evasion of the public law and the policy of the state relative to the ownership of real estate by corporations. In such state of case the question is whether the corporation has abused or excessively and unjustifiably used the power and authority granted it by the state to construct buildings and own real estate necessary for its corporate purposes.

In Home savings building Association vs. Driver (129 Ky., 754), one of the questions before the court was precisely the same as that now before us. Upon this the Supreme Court of Kentucky said:

The third question is, has the association the right to erect, remodel, or own a building of more than sufficient capacity to accommodate its own business and to rent out the excess? There is nothing in the Constitution, charter of the association, or statutes placing any limitation upon the character of a building which a corporation may erect as a home in which to conduct its business. A corporation conducting a business of the character of that in which appellant is engaged naturally expects its business to grow and expand from time to time, and, in building a home it would be exercising but a short-sighted judgment if it did not make provision for the future by building a home large enough to take care of its expanding business, and hence, even if it should build a house larger and roomier than its present needs or interests require, it would be acting clearly with the exercise of its corporate right and power. The limitation which the statute imposes is that proper conduct of its

business, but it does not attempt to place any restriction or limitation upon the right of the corporation or association as to the character of building it shall erect on said real estate; and, while the Constitution and the statutes provide that no corporation shall engage in any business other than that expressly authorized by its charter, we are of opinion that, in renting out the unoccupied and unused portions of the building so erected, the association could not be said to engaged in any other business than that authorized by its charter. The renting of the unused portions of the building is a mere incident in the conduct of its real business. We would not say that a building association might embark in the business of building houses and renting or leasing them, but there is quite a difference in building or renting a house in which to conduct its own business and leasing the unused portion thereof for the time being, or until such time as they may be needed by the association, and in building houses for the purpose of renting or leasing them. The one might properly be said to be the proper exercise of a power incident to the conduct of its legitimate business, whereas the other would be a clear violation of that provision of the statute which denies to any corporation the right to conduct any business other than that authorized by its charter. To hold otherwise would be to charge most of the banking institutions, trust companies and other corporations, such as title guaranty companies, etc., doing with violating the law; for it is known that there are few of such institutions that do not, at times, rent out or lease the unneeded portions of the building occupied by them as homes. We do not think that in so doing they are violating any provisions of the law, but that the renting out of the unused or unoccupied portions of their buildings is but an incident in the conduct of their business.

In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a stockholder sought to enjoin the bank from building a six-story building owned by the bank in the commercial district of Hagerstown of which only the first story was to be used by the bank, the remaining stories to be rented out for offices and places of business, on the theory that such action was ultra vires and in violation of the provisions of the

national banking act confining such corporations to the holding, only, of such real estate "as shall be necessary for its immediate accommodation in the transaction of its business."The injunction was denied, the court adopting the opinion of the lower court in which the following was said:

'The other ground urged by the complainant is that the proposed action is violative of the restriction which permits a national bank to hold only such real estate as shall be necessary for its immediate accommodation in the transaction of its business, and that, therefore, the erection of a building which will contain offices not necessary for the business of the bank is not permitted by the law, although that method of improving the lot may be the most beneficial use that can be made of it. It is matter of common knowledge that the actual practice of national banks is to the contrary. Where ground is valuable, it may probably be truly said that the majority of national bank buildings are built with accommodations in excess of the needs of the bank for the purpose of lessening the bank's expense by renting out the unused portion. If that were not allowable, many smaller banks in cities would be driven to become tenants as the great cost of the lot would be prohibitive of using it exclusively for the banking accommodation of a single bank. As indicative of the interpretation of the law commonly received and acted upon, reference may be made to the reply of the Comptroller of the Currency to the injury by the bank in this case asking whether the law forbids the bank constructing such a building as was contemplated.'The reply was follows: "Your letter of the 9th instant received, stating that the directors contemplate making improvements in the bank building and inquiring if there is anything in the national banking laws prohibiting the construction of a building which will contain floors for offices to be rented out by the bank as well as the banking room. Your attention is called to the case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court held that: 'If the land which a national bank purchases or leases for the accommodation of its business is very valuable it may exercise the same rights that belong to other landowners of improving it in a way that will yield the largest income, lessen its own rent, and

render that part of its funds which are invested in realty most productive.'" This seems to be the common sense interpretation of the act of Congress and is the one which prevails.'

It would seem to be unnecessary to extend the opinion by lengthy citations upon the point under consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as being in harmony with the foregoing authorities. In dealing with the powers of a national bank the court, in this case, said:

When an occasion arises for an investment in real property for either of the purposes specified in the statute the national bank act permits banking associations to act as any prudent person would act in making an investment in real estate, and to exercise the same measure of judgment and discretion. The act ought not to be construed in such as way as to compel a national bank, when it acquires real property for a legitimate purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with such property.

In the brief of the Attorney-General reliance is place almost entirely upon two Illinois cases, namely Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380), and First Methodist Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our opinion these cases are either distinguishable from that now before us, or they reflect a view of the law which is incorrect. At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts alleged in the second cause of action to have been done by the respondent in excess of its powers that we refrain from commenting at any length upon said cases. The ground stated in the second cause of action is in our opinion without merit.Third cause of action. — Under the third cause of action the respondent is charged with engaging in activities foreign to the purposes for which the corporation was created and not reasonable necessary to its legitimate ends. The specifications under this cause of action relate to three different sorts of activities. The first consist of the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public. As stated in the discussion connected with the second cause of action, the respondent uses only about ten per cent of the office space in the El Hogar

building for its own purposes, and it leases the remainder to strangers. In the years 1924 and 1925 the respondent received as rent for the leased portions of the building the sums of P75,395.06 and P58,259.27, respectively. The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful.The second specification under the third cause of action has reference to the administration and management of properties belonging to delinquent shareholders of the association. In this connection it appears that in case of delinquency on the part of its shareholders in the payment of interest, premium, and dues, the association has been accustomed (pursuant to clause 8 of its standard mortgage) to take over and manage the mortgaged property for the purpose of applying the income to the obligations of the debtor party. For these services the respondent charges a commission at the rate of 2½ per centum on sums collected. The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt. The second specification under this cause of action is therefore without merit, as was true of the first.The third specification under this cause of action relates to certain activities which are described in the following paragraphs contained in the agreed statements of facts:.

El Hogar Filipino has undertaken the management of some parcels of improved real estate situated in Manila

not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so. The number of properties so managed during the years 1921 to 1925, inclusive, was as follows:

1921 eight properties1922 six properties1923 ten properties1924 fourteen properties1925 fourteen properties.

This service is limited to shareholders; but some of the persons whose properties are so managed for them became shareholders only to enable them to take advantage thereof.The services rendered in the management of such improved real estate by El Hogar Filipino consist in the renting of the same, the payment of real estate taxes and insurance for the account of the owner, causing the necessary repairs for upkeep to be made, and collecting rents due from tenants. For the services so rendered in the management of such properties El Hogar Filipino receives compensation in the form of commissions upon the gross receipts from such properties at rates varying from two and one-half per centum to five per centum of the sums so collected, according to the location of the property and the effort involved in its management.The work of managing real estate belonging to non-borrowing shareholders administered by El Hogar Filipino is carried on by the same members of the staff who attend to the details of the management of properties administered by the manager of El Hogar Filipino under the provisions of paragraph 8 of the standard mortgage form, and of properties bought in on foreclosure of mortgage.

The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. Such was the view taken by the bank examiner of the Treasury Bureau in his report to the Insular Treasurer on December 21, 1925, wherein the practice in question was criticized. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this criticism is directed relates of course

solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the owner of the property may have been required to subscribe to one or more shares of the association with a view to qualifying him to receive this service is of no significance. It is a general rule of law that corporations possess only such express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort.Fourth cause of action. — It appears that among the by laws of the association there is an article (No. 10) which reads as follows:

The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable.

This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. In November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the view that said article was invalid. It was therefore suggested that the article in question should be eliminated from the by-laws. At the next meeting of the board of directors the matter was called to their attention and it was resolved to recommend to the shareholders that in their next annual meeting the article in question be abrogated. It appears,

however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of shareholders to constitute a quorum, with the result that the provision referred to has no been eliminated from the by-laws, and it still stands among the by-laws of the association, notwithstanding its patent conflict with the law.It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action.Fifth cause of action. — In section 31 of the Corporation Law it is declared that, "at all elections of directors there must be present, either in person or by representative authorized to act by written proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ." Conformably with this requirement it is declared in article 61 of the by-laws of El Hogar Filipino that, "the attendance in person or by proxy of shareholders owning one-half plus one of the shareholders shall be necessary to constitute a quorum for the election of directors. At the general annual meetings of the El Hogar Filipino held in the years 1911 and 1912, there was a quorum of shares present or represented at the meetings and directors were duly elected accordingly. As the corporation has grown, however, it has been fond increasingly difficult to get together a quorum of the shareholders, or their proxies, at the annual meetings; and with the exception of the annual meeting held in 1917, when a new directorate was elected, the meetings have failed for lack of quorum. It has been foreseen by the officials in charge of the respondent that this condition of affairs would lead to embarrassment, and a special effort was made by the management to induce a sufficient number of shareholders to attend the annual meeting for February, 1923. In addition to the publication of notices in the newspapers, as required by the by-laws, a letter of notification was sent to every shareholder at his last known address, together with a blank form of proxy to be

used in the event the shareholder could not personally attend the meeting. Notwithstanding these special efforts the meeting was attended only by shareholders, in person and by proxy, representing 3,889 shares, out of a total of 106,491 then outstanding and entitled to vote.Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in article 71 of the by-laws, which reads as follows:

ART. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting.

The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been experienced and successful business and professional men of means, enjoying earned incomes of from P12,000 to P50,000 per annum, with an annual average of P30,000 in addition to such income as they derive from their properties. Moreover, it appears that several of the individuals constituting the original directorate and persons chosen to supply vacancies therein belong to prominent Filipino families, and that they are more or less related to each other by blood or marriage. In addition to this it appears that it has been the policy of the directorate to keep thereon some member or another of a single prominent American law firm in the city.It is supposed in the statement of the fifth cause of action in the complaint that the failure of the corporation to hold annual meetings and the filling of vacancies in the directorate in the manner described constitute misdemeanors on the part of the respondent which justify the resumption of the franchise by the Government and dissolution of the corporation; and in this connection it is charge that the board of directors of the respondent has become a permanent and self perpetuating body composed of wealthy men instead of wage earners and persons of moderate means. We are unable to see the slightest merit in the charge. No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings; and their non-attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted.

Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to holdover until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs.Home Town Matual Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated finds expressions in article 66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one year on until their successors shall have been elected and taken possession of their offices."It results that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to then personality of the individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of electing poor persons to so responsible a position. The possession of means does not disqualify a man for filling positions of responsibility in corporate affairs.Sixth cause of action. — Under the sixth cause of action it is alleged that the directors of El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, — as the complaint supposes would be proper, — have been receiving large compensation, varying in amount from time to time, out of the profits of the respondent. The facts relating to this cause of action are in substance these:Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance sheet is distributed to the directors in proportion to their attendance at meetings of the board. The compensation paid to the directors from time to time since the organization was organized in 1910 to the end of the year 1925, together with the number of meetings of the board held each year, is exhibited in the

following table:

Year

Compensation paid directors as a whole

Number of meetings 

held

Rate per meeting 

as a whole

1911 .................................. P 4,167.96 25 P 166.71

1912 .................................. 10,511.87 29 362.47

1913 .................................. 15,479.29 27 573.30

1914 .................................. 19,164.72 27 709.80

1915 .................................. 24,032.85 25 961.31

1916 .................................. 27,539.50 28 983.55

1917 .................................. 31,327.00 26 1,204.88

1918 .................................. 32,858.35 20 1,642.91

1919 .................................. 36,318.78 21 1,729.46

1920 .................................. 63,517.01 28 2,268.46

1921 .................................. 36,815.33 25 1,472.61

1922 .................................. 43,133.73 25 1,725.34

1923 ......................... 39,773.61 27 1,473.09

.........1924 .................................. 38,651.92 26 1,486.61

1925 .................................. 35,719.27 26 1,373.81

It will be note that the compensation above indicated as accruing to the directorate as a whole has been divided among the members actually present at the different meetings. As a result of this practice, and the liberal measure of compensation adopted, we find that the attendance of the membership at the board meetings has been extraordinarily good. Thus, during the years 1920 to 1925, inclusive, when the board was composed of nine members, the attendance has regularly been eight meeting with the exception of two years when the average attendance was seven. It is insisted in the brief for the Attorney-General that the payment of the compensation indicated is excessive and prejudicial to he interests of the shareholders at large. For the respondent, attention is directed to the fact that the liberal policy adopted by the association with respect to the compensation of the directors has had highly beneficial results, not only in securing a constant attendance on the part of the membership, but in obtaining their intelligent attention to the affairs of the association. Certainly, in this connection, the following words from the report of the government examiners for 1918 to the Insular Treasurer contain matter worthy of consideration:The management of the association is entrusted to men of recognized ability in financial affairs and it is believed that they have long foreseen all possible future contingencies and that under such men the interests of the stockholders are duly protected. The steps taken by the directorate to curtail the influx of unnecessary capital into the association's coffers, as mentioned above, reveals how the men at grasp the situation and to apply the necessary remedy as the circumstances were found in the same excellent condition as in the previous examination.In so far as this court is concerned the question here before us is not one concerning the propriety and wisdom of the measure of compensation adopted by the respondent but rather the

question of the validity of the measure. Upon this point there can, it seems to us, be no difference of intelligent opinion. The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated. The justice and property of this provision was a proper matter for the shareholders when the by-laws were framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would probably be necessary to secure adequate service from them is matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action is in our opinion without merit.Seventh cause of action. — It appears that the promoter and organizer of El Hogar Filipino was Mr. Antonio Melian, and in the early stages of the organization of the association the board of directors authorized the association to make a contract with him with regard to the services him therefor. Pursuant to this authority the president of the corporation, on January 11, 1911, entered into a written agreement with Mr. Melian, which is reproduced in the agreed statement of facts and of which the important clauses are these:

1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y Prestamos," and on its behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio Melian the office of manager of said association for the period of one year from the date of this contract.2. Don Antonio Melian accepts said office and undertakes to render the services thereto corresponding for the period of one year, as prescribed by the by-laws of the corporation, without salary.3. Don Antonio Melian furthermore undertakes to pay for his own account, all the expenses incurred in the

organization of the corporation.4. Don Antonio Melian further undertakes to lend to the corporation, without interest the sum of six thousand pesos (P6,000), Philippine Currency, for the purpose of meeting the expense of rent, office supplies, etcetera, until such time as the association has sufficient funds of its own with which to return this loan: Provided, nevertheless, That the maximum period thereof shall not exceed three (3) years.5. Don Antonio Melian undertakes that the capital of the association shall amount to the sum of four hundred thousand pesos (P400,000), Philippine currency, par value, during the first year of its duration.6. In compensation of the studies made and services rendered by Don Antonio Melian for its organization, the expenses incurred by him to that end, and in further consideration of the said loan of six thousand pesos (P6,000), and of the services to be rendered by him as manager, and of the obligation assumed by him that the nominal value of the capital of the association shall reach the sum of four hundred thousand pesos (P400,000) during the first year of its duration, the corporation 'El Hogar Filipino Sociedad Mutua de Construccion y Prestamos' hereby grants him five per centum (5%) of the net profits to be earned by it in each year during the period fixed for the duration of the association by its articles of incorporation;Provided, that this participation in the profits shall be transmitted to the heirs of Señor Melian in the event of his death; And provided further, that the performance of all the obligations assumed by Señor Melian in favor of the association, in accordance with this contract, shall and does constitute a condition precedent to the acquisition by Señor Melian of the right to the said participation in the profits of the association, unless the non-performance of such obligations shall be due to a fortuitous event or force majeure.

In conformity with this agreement there was inserted in section 92 of the by-laws of the association a provision recognizing the rights of Melian, as founder, to 5 per centum of the net profits shown by the annual balance sheet, payment of the same to be made to him or his heirs during the life of the association. It is declared in said article that this portion of the earnings of the

association is conceded to him in compensation for the studies, work and contributions made by him for the organization of El Hogar Filipino and the performance on his part of the contract of January 11, 1911, above quoted. During the whole life of the association, thus far, it has complied with the obligations assumed by it in the contract above- mentioned; and during the years 1911 to 1925, inclusive, it paid to him as founder's royalty the sum of P459,011.19, in addition to compensation received from the association by him in to remuneration of services to the association in various official capacities.As a seventh cause of action it is alleged in the complaint that this royalty of the founder is "unconscionable, excessive and out of all proportion to the services rendered, besides being contrary to and incompatible with the spirit and purpose of building and loan associations." It is not alleged that the making of this contract was beyond the powers of the association (ultra vires); nor it alleged that it is vitiated by fraud of any kind in its procurement. Nevertheless, it is pretended that in making and observing said contract the respondent committed an offense requiring its dissolution, or, as is otherwise suggested, that the association should be enjoined from performing the agreement.It is our opinion that this contention is entirely without merit. Stated in its true simplicity, the primary question here is whether the making of a (possibly) indiscreet contract is a capital offense in a corporation, — a question which answers itself. No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent years.If the Melian contract had been clearly ultra vires — which is not charged and is certainly untrue — its continued performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the

proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect.The mere fact that the compensation paid under this contract is in excess of what, in the full light of history, may be considered appropriate is not a proper consideration for this court, and supplies no ground for interfering with its performance. In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995), which was before this court nearly ten years ago, this court held that the El Hogar Filipino is contract with Mr. Melian did not affect the association's legal character. The inference is that the contract under consideration was then considered binding, and it occurred to no one that it was invalid. It would be a radical step indeed for a court to attempt to substitute its judgment for the judgment of the contracting parties and to hold, as we are invited to hold under this cause of action, that the making of such a contract as this removes the respondent association from the pale of the law. The majority of the court is of the opinion that our traditional respect for the sanctity of the contract obligation should prevail over the radical and innovating tendencies which find acceptance with some and which, if given full rein, would go far to sink legitimate enterprise in the Islands into the pit of populism and bolshevism. The seventh count is not sustainable.Eight cause of action. — Under the fourth cause of action we had case where the alleged ground for the revocation of the respondent's charter was based upon the presence in the by-laws of article 10 that was found to be inconsistent with the express provisions of law. Under the eight cause of action the alleged ground for putting an end to the corporate life of the respondent is found in the presence of other articles in the by-laws, namely, articles 70 and 76, which are alleged to be unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in effect requires that persons elected to the board of directors must be holders of shares of the paid up value of P5,000 which shall be held as security may be put up in the behalf of any director by some other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors waive their right as shareholders to receive loans from the association.It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the requirement for security, a poor member, or wage-earner, cannot serve as director, irrespective

of other qualifications and that as a matter of fact only men of means actually sit on the board. Article 76 is criticized on the ground that the provision requiring directors to renounce their right to loans unreasonably limits their rights and privileges as members. There is nothing of value in either of theses suggestions. Section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors; and the requirement of security from them for the proper discharge of the duties of their office, in the manner prescribed in article 70, is highly prudent and in conformity with good practice. Article 76, prohibiting directors from making loans to themselves, is of course designed to prevent the possibility of the looting of the corporation by unscrupulous directors. A more discreet provision to insert in the by-laws of a building and loan association would be hard to imagine. Clearly, the eighth cause of action cannot be sustained.Ninth cause of action. — The specification under this head is in effect that the respondent has abused its franchise in issuing "special" shares. The issuance of these shares is allege to be illegal and inconsistent with the plan and purposes of building and loan associations; and in particular, it is alleged and inconsistent with the plan and purposes of building and loan associations; and in particular, it is alleged that they are, in the main, held by well-to-wage-earners for accumulating their modest savings for the building of homes.In the articles of incorporation we find the special shares described as follows:

"Special" shares shall be issued upon the payment of 80 per cent of their par value in cash, or in monthly dues of P10. The 20 per cent remaining of the par value of such shares shall be completed by the accumulation thereto of their proportionate part of the profits of the corporation. At the end of each quarter the holders of special shares shall be entitled to receive in cash such part of the net profits of the corporation corresponding to the amount on such date paid in by the holders of special shares, on account thereof, as shall be determined by the directors, and at the end of each year the full amount of the net profits available for distribution corresponding to the special shares. The directors shall apply such part as they deem advisable to the amortization of the subscription to

capital with respect to shares not fully paid up, and the remainder of the profits, if any, corresponding to such shares, shall be delivered to the holders thereof in accordance with the provision of the by-laws.

The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of security which may be issued by the association. In the agreed statement of facts it is said that special shares are issued upon two plans. By the second, the shareholder, upon subscribing, pays in cash P10 for each share taken, and undertakes to pay P10 a month, as dues, until the total so paid in amounts to P160 per share. On December 31, 1925, there were outstanding 20,844 special shares of a total paid value (including accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since 1915, has been to accumulate to each special share, at the end of the year, one-tenth of the divident declared and to pay the remainder of the divident in cash to the holders of shares. Since the same year dividend have been declared on the special and common shares at the rate of 10 per centum per annum. When the amount paid in upon any special share plus the accumulated dividends accruing to it, amounts to the par value of the share (P200), such share matures and ceases to participate further in the earning. The amount of the par value of the share (P200) is then returned to the shareholder and the share cancelled. Holders of special and ordinary shares participate ratably in the dividends declared and distributed, the part pertaining to each share being computed on the basis of the capital paid in, plus the accumulated dividends pertaining to each share at the end of the year. The total number of shares of El Hogar Filipino outstanding on December 31, 1925, was 125,750, owned by 5,826 shareholders, and dividend into classes as follows:

Preferred shares .................................. 1,503

Special shares ..................................... 20,884Ordinary shares .................................. 103,363

The matter of the propriety of the issuance of special shares by El Hogar Filipino has been before this court in two earlier cases, in both of which the question has received the fullest

consideration from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of such shares constituted a departure on the part of the association from the principle of mutuality; and it was claimed by the Collector of Internal Revenue that this rendered the association liable for the income tax to which other corporate entities are subject. It was held that this contention was untenable and that El Hogar Filipino was a legitimate building and loan association notwithstanding the issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2 and the related cases of Gervasio Miraflores and Gil Lopes against the same entity, it was asserted by the plaintiffs that the emission of special shares deprived the herein responded of the privileges and immunities of a building and loan association and that as a consequence the loans that had been made to the plaintiffs in those cases were usurious. Upon an elaborate review of the authorities, the court, though divided, adhered to the principle announced in the earlier case and held that the issuance of the special shares did not affect the respondent's character as a building and loan association nor make its loans usurious. In view of the lengthy discussion contained in the decisions above-mentioned, it would appear to be an act of supererogation on our part to go over the same ground again. The discussion will therefore not be repeated, and what is now to be said should be considered supplemental thereto.Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where evidently created for the purpose of meeting the condition cause by the prepayment of dues that is there permitted. The language of this provision is as follow "payment of dues or interest may be made in advance, but the corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a longer period than one year." In one sort of special shares the dues are prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a greater rate than six per centum per annum nor for a longer period than one year. The word "interest " as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares; and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance payments made by him; and no other incentive is necessary to induce inventors to purchase the stock.It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par.From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The complaint consequently fails also as regards the stated in the ninth cause of action.Tenth cause of action. — Under this head of the complaint it is alleged that the defendant is pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real properties acquired by it at its sales; and it is alleged that this rate is excessive. From the agreed statement it appears that since its organization in 1910 El Hogar Filipino, prior to the end of the year 1925, had made 1,373 loans to its shareholders

secured by first mortgages on real estate as well as by the pledge of the shares of the borrowers. In the same period the association has purchased at foreclosure sales the real estate constituting the security for 54 of the aforesaid loans. In making these purchases the association has always bid the full amount due to it from the debtor, after deducting the withdrawal value of the shares pledged as collateral, with the result that in no case has the shareholder been called upon to pay a deficiency judgement on foreclosure.El Hogar Filipino places real estate so purchased in its inventory at actual cost, as determined by the amount bid on foreclosure sale; and thereafter until sold the book value of such real estate is depreciated at the rate fixed by the directors in accordance with their judgment as to each parcel, the annual average depreciation having varied from nothing to a maximum of 14.138 per cent. The sales thereof, but sales are made for the best prices obtainable, whether greater or less than the book value.It is alleged in the complaint that depreciation is charged by the association at the rate of 10 per centum per annum. The agreed statement of facts on this point shows that the annual average varies from nothing to a maximum of something over 14 per centum. We are thus left in the dark as to the precise depreciation allowed from year to year. It is not claimed for the Government that the association is without power to allow some depreciation; and it is quite clear that the board of directors possesses a discretion in this matter. There is no positive provision of law prohibiting the association from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real profits; and article 74 of its by-laws expressly authorizes the board of directors to determine each year the amount to be written down upon the expenses of installation and the property of the corporation. There can be no question that the power to adopt such a by-law is embraced within the power to make by-laws for the administration of the corporate affairs of the association and for the management of its business, as well as the care, control and disposition of its property (Act No. 1459, sec. 13 [7]). But the Attorney-General questions the exercise of the direction confided to the board; and it is insisted that the excessive depreciation of the property of the association is objectionable in several respects, but mainly because it tends to increase unduly the reserves of the

association, thereby frustrating the right of the shareholders to participate annually and equally in the earnings of the association.This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well founded.Eleventh and twelfth causes of action. — The same comment is appropriate with respect to the eleventh and twelfth causes of action, which are treated together in the briefs, and will be here combined. The specification in the eleventh cause of action is that the respondent maintains excessive reserve funds, and in the twelfth cause of action that the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 per centum, regardless of losses suffered and profits made by the corporation and in contravention of the requirements of section 188 of the Corporation Law. The facts relating to these two counts in the complaint, as set forth in the stipulation, are these:In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net profits earned each year, as shown by the annual balance sheet shall be carried to a reserve fund. The fund so created is called the General Reserve. Article 93 of the by-laws authorizes the directors to carry funds to a special reserve, whenever in their judgment it is advisable to do so, provided that the annual dividend in the year in which funds are carried to special reserve exceeds 8 per centum. It appears to have been the policy of the board of directors for several years past to place in the special reserve any balance in the profit and loss account after the satisfaction of preferential charges and the payment of a dividend of 10 per centum to all special and ordinary shares (with accumulated dividends). As things stood in 1926 the general reserve contained an amount equivalent to about 5 per centum of the paid-in value of shared. This fund has

never been drawn upon for the purpose of maintaining the regular annual dividend; but recourse has been had to the special reserve on three different occasions to make good the amount necessary to pay dividends. It appears that in the last five years the reserves have declined from something over 9 per cent to something over 7.It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the Corporation Law. Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of a fixed dividend which is contrary to the intention of the statute.Upon careful consideration of the questions involved we find no reason to doubt the right of the respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence.The question now under consideration is not new in jurisprudence, for the American courts have been called upon more than once to consider the legality of the maintenance of reserves by institutions of this or similar character.In Greeff vs. Equitable Life Assurance Society, the court had under consideration a charter provision of a life insurance company, organized on the mutual plan, in its relation to the power of the company to provide reserves. There the statute provided that "the officers of the company, within sixty days from the expiration of the first five years, from December 31, 1859, and within the first sixty days of every subsequent period of five years, shall cause a balance to be struck of the affairs of the company, which shall exhibit its assets and liabilities, both present and contingent, and also the net surplus, after

deducting a sufficient amount to cover all outstanding risks and other obligations. Each policy holder shall be credited with an equitable share of the said surplus."The court said:

No prudent person would be inclined to take a policy in a company which had so improvidently conducted its affairs that it only retained a fund barely sufficient to pay its present liabilities, and, therefore, was in a condition where any change by the reduction of interest upon, or depreciation in, the value of its securities, or any increase of mortality, would render it insolvent and subject to be placed in the hands of a receiver. The evident purpose of the provisions of the defendant's charter and policy relating to this subject was to vest in the directors of the corporation a discretion to determine the proportion of its surplus which should be dividend each year.

In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg. and Loan Association vs. Knolt, the court, in commenting on the nature of these reserves, said:

The apparent function of this fund is to insure the stockholders against losses. Its purpose is not unlike that of the various forms of insurance now in such common use. This contribution is as legitimate an item of expense as are the premiums paid on any insurance policy. (See Clarks and Chase, Building and Loan Association, footnote, page 344.)

In commenting on the necessity of such funds, Sundheim says:It is optional with the association whether to maintain such a fund or not, but justice and good business policy seem to require it. The retiring stockholder must be paid the value of his stock in cash and leave for those remaining a large number of securities and perhaps some real estate purchased to protect the associations interest. How much will be realized on these securities, or real estate, no human foresight can tell. Further, the realizing on these securities may entail considerable litigation and expense. There are many other contingencies which might cause a shrinkage in the association's assets, such as defective titles, undisclosed defalcations on the part of an officer, a miscalculation of assets and liabilities, and many other errors and omissions which must always be reckoned within the

conduct of human affairs.The contingent fund is merely insurance against possible loss. That losses may occur from time to time seems almost inevitable and it is, therefore, inequitable that the remaining stockholders should be compelled to accept all securities at par, so, to say the least, the maintenance of this fund is justified. The association teaches the duty of providing for the proverbial rainy day. Why should it not provide for the hour of adversity? The reserve fund has protected the maturing or withdrawing member during the period of his membership. In case of loss it has or would have reimbursed him and, at all times, it has protected him and given strength and standing to the association. Losses may occur, after his membership ceases, that arose from some mistake or mismanagement committed during the period of his membership, and in fairness and equity the remaining members should have some protection against this. (Sundheim, Law of Building and Loan Association, sec. 53.)

The government insists, we thing, upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met.Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit.

Thirteenth cause of action. — The specification under this head is, in effect, that the respondent association has made loans which, to the knowledge of the associations officers were intended to be used by the borrowers for other purposes than the building of homes. In this connection it appears that, though loans have been made by the association exclusively to its shareholders, no attempt has been made by it to control the borrowers with respect to the use made of the borrowed funds, the association being content to see that the security given for the loan in each case is sufficient. On December 31, 1925, the respondent had five hundred forty-four loans outstanding secured by mortgages upon real estate and by the pledge of the borrowers' shares in an amount sufficient at maturity to amortize the loans. With respect to the nature of the real estate upon which these loans were made it appears that three hundred fifty-one loans were secured by mortgages upon city residences, seven by mortgages upon commercial building in cities, and three mortgages upon unimproved city lots. At the same time one hundred eighty-three of the loans were secured by mortgages upon groves, sugar land, and rice land, with a total area of about 7,558 hectares. From information gathered by the association from voluntary statements of borrowers given at the time of application with respect to the use intended to be made of the borrowed funds, it appears that the amount of P693,200 was borrowed to redeem real property from existing mortgages or pactos de retro, P280,800 to buy real estate, P449,100 to erect buildings, P24,000 to improve and repair buildings, P1,480,900 for agricultural purposes, while the amount of P5,763,700 was borrowed for purposes not disclosed.Upon these facts an elaborate argument has been constructed in behalf of the plaintiff to the effect that in making loans for other purposes than the building of residential houses the association has illegally departed from its character and made itself amenable to the penalty of dissolution. Aside from being directly opposed to the decision of this court in Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil., 249), this contention finds no substantial support in the prevailing decisions made in American courts; and our attention has not been directed to a single case wherein the dissolution of a building and loan association has been decreed in a quo warranto proceeding because the association allowed its borrowers to use the loans

for other purposes than the acquisition of homes.The case principally relied upon for the Government appears to be Pfeister vs. Wheeling Building Association (19 W. Va., 676, 716),which involved the question whether a building and loan association could recover the full amount of a note given to it by a member and secured by a mortgage from a stranger. At the time the case arose there was a statute in force in the State of West Virginia expressly forbidding building and loan associations to use or direct their funds for or to any other object or purpose than the buying of lots or houses or in building and repairing houses, and it was declared that in case the funds should be improperly directed to other objects, the offending association should forfeit all rights and privileges as a corporation. Under the statute so worded the court held that the plaintiff could only recover the amount actually advanced by it with lawful interest and fines, without premium; and judgment was given accordingly. The suggestion in that case that the result would have been the same even in the absence of statute was mere dictum and is not supported by respectable authority.Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving Association. The statute in force in the State of Tennessee at the time this action arose provided that all loans should be made to the members of the association at open stated meetings and that the money should be lent to the highest bidder. Inconsistently with this provision, there was inserted in the by-laws of the association a provision to the effect that no loan should be made at a greater premium than 30 per cent, nor at a less premium than 29 7/8 per cent. It was held that this by-law made free and open competition impossible and that it in effect established a fixed premium. It was accordingly held, in the case cited, that an association could not recover such part of the loan as had been applied by it to the satisfaction of a premium of 30 per centum.We have no criticism to make upon the result reached in either of the two decisions cited, but it is apparent that much of the discussion contained in the opinions in those cases does not reflect the doctrine now prevailing in the United States; and much less are those decisions applicable in this jurisdiction. There is no statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the building of homes is mentioned in

section 171 of the Corporation Law as only one among several ends which building and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association from time to time to fix the premium to be charged.In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the idea is developed that the primary design of building and loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community. Judging from the past history of these institutions it can be truly said that they have done more to encourage thrift, economy and saving among the people at large than any other institution of modern times, not excepting even the saving banks. In this connection Mr. Sundheim, in a late treatise upon the subject of the law of building and loan associations, makes the following comment:

They have grown to such an extent in recent years that they no longer restrict their money to the home buyer, but loan their money to the mere investor or dealer in real estate. They are the holder of large mortgages secured upon farms, factories and other business properties and rows of stores and dwellings. This is not an abuse of their powers or departure from their main purposes, but only a natural and proper expansion along healthy and legitimate lines. (Sundheim, Building and Loan Associations, sec. 7.)

Speaking of the purpose for which loans may be made, the same author adds:

Loans are made for the purpose of purchasing a homestead, or other real estate, or for any lawful purpose or business, but there is no duty or obligation of the association to inquire for what purpose the loan is obtained, or to require any stipulation from the borrower as to what use he will make of the money, or in any manner to supervise or control its disbursement. (Sundheim, Building and Loan Association, sec. 111.)

In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros, this court had before it the question whether a loan made by the respondent association upon the security of a mortgage upon agricultural land, — where the loan was doubtless used for agricultural purposes, — was usurious or not; and the case turned upon the point whether, in making such loans, the association had violated the law and departed from its fundamental purposes. The conclusion of the court was that the loan was valid and could be lawfully enforced by a nonjudicial foreclosure in conformity with the terms of the contract between the association and the borrowing member. We now find no reason to depart from the conclusion reached in that case, and it is unnecessary to repeat what was then said. The thirteenth cause of action must therefore be pronounced unfounded.Fourteenth cause of action. — The specification under this head is that the loans made by the defendant for purposes other than building or acquiring homes have been extended in extremely large amounts and to wealthy persons and large companies. In this connection attention is directed to eight loans made at different times in the last several years to different persons or entities, ranging in amounts from P120,000 to P390,000 and to two large loans made to the Roxas Estate and to the Pacific Warehouse Company in the amounts of P1,122,000 and P2,320,000, respectively. In connection with the larger of the two after this loan was made the available funds of El Hogar Filipino were reduced to the point that the association was compelled to take advantage of certain provisions of its by-laws authorizing the postponement of the payment of claims resulting from withdrawals, whereas previously the association had always settled these claims promptly from current funds. At no time was there apparently any delay in the payment of matured shares; but in four or five cases there was as much as ten months delay in the payment of withdrawal applications.There is little that can be said upon the legal aspects of this cause of action. In so far, as it relates to the purposes for which these loans were made, the matter is covered by what was said above with reference to the thirteenth cause of action; and in so far as it relates to the personality of the borrowers, the question belongs more directly to the discussion under the sixteenth cause of action, which will be found below. The point, then, which remains for consideration here is whether it is a suicidal

act on the part of a building and loan association to make loans in large amount. If the loans which are here the subject of criticism had been made upon inadequate security, especially in case of the largest two, the consequences certainly would have been disastrous to the association in the extreme; but no such fact is alleged; and it is to be assumed that none of the ten borrowers have defaulted in their contracts.Now, it must be admitted that two of these loans at least are of a very large size, considering the average range of financial transaction in this country; and the making of the largest loan was followed, as we have already see, with unpleasant consequences to the association in dealing with current claims. Nevertheless the agreed statement of facts shows that all of the loan referred to are only ten out of a total of five hundred forty-four outstanding on December 31, 1925; and the average of all the loans taken together is modest enough. It appears that the chief examiner of banks and corporations of the Philippine Treasury, after his examination of El Hogar Filipino at the end of the year 1925, made a report concerning this association as of January 31, 1926, in which he criticized the Pacific Warehouse Company loan as being so large that it temporarily crippled the lending power of the association for some time. This criticism was apparently justified as proper comment on the activities of the association; but the question for us here to decide is whether the making of this and the other large loans constitutes such a misuser of the franchise as would justify us in depriving the association of its corporate life. This question appears to us to be so simple as almost to answer itself. The law states no limit with respect to the size of the loans to be made by the association. That matter is confided to the discretion of the board of directors; and this court cannot arrogate to itself a control over the discretion of the chosen officials of the company. If it should be thought wise in the future to put a limit upon the amount of loans to be made to a single person or entity, resort should be had to the Legislature; it is not a matter amenable to judicial control. The fourteenth cause of action is therefore obviously without merit.Fifteenth cause of action. — The criticism here comes back to the supposed misdemeanor of the respondent in maintaining its reserve funds, — a matter already discussed under the eleventh and twelfth causes of action. Under the fifteenth cause of action it is claimed that upon the expiration of the franchise of the

association through the effluxion of time, or earlier liquidation of its business, the accumulated reserves and other properties will accrue to the founder, or his heirs, and the then directors of the corporation and to those persons who may at that time to be holders of the ordinary and special shares of the corporation. In this connection we note that article 95 of the by-laws reads as follows:

ART. 95. The funds obtained by the liquidation of the association shall be applied in the first place to the repayment of shares and the balance, if any, shall be distribute in accordance with the system established for the distribution of annual profits.

It will be noted that the cause of action with which we are now concerned is not directed to any positive misdemeanor supposed to have been committed by the association. It has exclusive relation to what may happen some thirty-five years hence when the franchise expires, supposing of course that the corporation should not be reorganized and continued after that date. There is nothing in article 95 of the by-laws which is, in our opinion, subject to criticism. The real point of criticism is that upon the final liquidation of the corporation years hence there may be in existence a reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation of the company. It seems to us that this is matter that may be left to the prevision of the directors or to legislative action if it should be deemed expedient to require the gradual suppression of the reserve funds as the time for dissolution approaches. It is no matter for judicial interference, and much less could the resumption of the franchise on this ground be justified. There is no merit in the fifteenth cause of action.Sixteenth cause of action. — This part of the complaint assigns as cause of action that various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans. In this connection it appears from the stipulation of facts that of the 5,826 shareholders of El Hogar Filipino, which composed its membership on December 31, 1925, twenty-eight are juridical entities, comprising sixteen corporations and fourteen partnerships; while of the five hundred forty-four loans of the association outstanding on the same date, nine had been made to corporations an five to partnerships. It is also admitted

that some of these juridical entities became shareholders merely for the purpose of qualifying themselves to take loans from the association, and the same is said with respect to many natural persons who have taken shares in the association. Nothing is said in the agreed statement of facts on the point whether the corporations and partnerships that have taken loans from the respondent are qualified by law governing their own organization to enter into these contracts with the respondent.In section 173 of the Corporation Law it is declared that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is said that five or more "persons", although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173, that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief.Seventeenth cause of action. — Under the seventeenth cause of action, it is charged that in disposing of real estates purchased

by it in the collection of its loans, the defendant has no various occasions sold some of the said real estate on credit, transferring the title thereto to the purchaser; that the properties sold are then mortgaged to the defendant to secure the payment of the purchase price, said amount being considered as a loan, and carried as such in the books of the defendant, and that several such obligations are still outstanding. It is further charged that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant.This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan in law. The contention of the Government under this head is untenable.In conclusion, the respondent is enjoined in the future from administering real property not owned by itself, except as may be permitted to it by contract when a borrowing shareholder defaults in his obligation. In all other respects the complaint is dismissed, without costs. So ordered.G.R. No. L-43350 December 23, 1937CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant, vs.TEODORO SANDIKO, defendant-appellee.Arsenio P. Dizon for appellant.

Sumulong, Lavides and Sumulong for appellee.LAUREL, J.:This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from the plaintiff's complaint.Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer certificate of title No. 217.On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and, to the condition that the certificate of title to said lands shall not be transferred to the name of the plaintiff company until the latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank.The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land described in transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by the defendant in favor of

the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance with which the four parcels of land were given a security for the payment of the promissory note, Exhibit C. All these three instrument were dated February 15, 1932.The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the costs of the suits. After trial, the court below, on December 18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion for new trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year. After due exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.In dismissing the complaint against the defendant, the court below, reached the conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree with this conclusion, we have however voted to affirm the judgment appealed from the reasons which we shall presently state.The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the incorporation of the company. Unquestionably, a duly organized corporation has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una sociedad en vias de

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

Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. As has already been stated, general law authorizing the formation of corporations are general offers to any persons who may bring themselves within their provisions; and if conditions precedent are prescribed in the statute, or certain acts are required to be done, they are terms of the offer, and must be complied with substantially before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or

fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the registered owner of the four parcels of land, which he succeeded in mortgaging to the Philippine National Bank so that he might have the necessary funds with which to convert and develop them into fishery. He appeared to have met with financial reverses. He formed a corporation composed of himself, his wife, and a few others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of land, always treated Tabora as the owner of the same. (SeeExhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and in both cases a writ of attachment against the four parcels of land was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D and in making him, among other things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of land.If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.Some of the members of this court are also of the opinion that

the transfer from Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was affected the corporation was non-existent, we deem it unnecessary to discuss this point.lawphil.netThe decision of the lower court is accordingly affirmed, with costs against the appellant. So Ordered.G.R. No. L-28113               March 28, 1969THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO BALINDONG, petitioners, vs.PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR LAO. respondents.L. Amores and R. Gonzales for petitioners. Jose W. Diokno for respondents.CASTRO, J.:  The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors, of the municipality of Balabagan of the same province. Balabagan was formerly a part of the municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.  The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the respondent municipal officials from performing the functions of their respective office relying on the ruling of this Court inPelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3

  In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section 23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the

power to create barrios in the provincial board, is a "statutory denial of the presidential authority to create a new barrio [and] implies a negation of thebigger power to create municipalities," and (2) that section 68 of the Administrative Code, insofar as it gives the President the power to create municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative power and (b) because it offends against section 10 (1) of article VII of the Constitution, which limits the President's power over local governments to mere supervision. As this Court summed up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as it certainly does, said section 68, as part of the Revised Administrative Code, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory enactment."  On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless argue that the rule announced in Pelaez can have no application in this case because unlike the municipalities involved inPelaez, the municipality of Balabagan is at least a de facto corporation, having been organized under color of a statute before this was declared unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged its corporate functions for the past five years preceding the institution of this action. It is contended that as a de facto corporation, its existence cannot be collaterally attacked, although it may be inquired into directly in an action for quo warranto at the instance of the State and not of an individual like the petitioner Balindong.  It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few exceptions may a private person exercise this function of government. 4 But the rule disallowing collateral attacks applies only where the municipal corporation is at least a de facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its existence may be, questioned collaterally or directly in any action or proceeding by any one whose rights or interests ate affected thereby, including the citizens of the territory incorporated unless they are estopped by their conduct from doing so. 6

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

  Accordingly, we address ourselves to the question whether a statute can lend color of validity to an attempted organization of a municipality despite the fact that such statute is subsequently declared unconstitutional.lawphi1.ñet  This has been a litigiously prolific question, sharply dividing courts in the United States. Thus, some hold that ade facto corporation cannot exist where the statute or charter creating it is unconstitutional because there can be no de facto corporation where there can be no de jure one, 8 while others hold otherwise on the theory that a statute is binding until it is condemned as unconstitutional. 9

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

  It appears that the true basis for denying to the corporation a de facto status lay in the absence of any legislative act to give vitality to its creation. An examination of the cases holding, some of them unreservedly, that a de facto office or municipal corporation can exist under color of an unconstitutional statute will reveal that in no instance did the invalid act give life to the corporation, but that either in other valid acts or in the constitution itself the office or the corporation was potentially created....  The principle that color of title under an unconstitutional statute can exist only where there is some other valid law under which the organization may be effected, or at least an authority in potentia by the state constitution, has its counterpart in the negative propositions that there can be no color of authority in an unconstitutional statute that plainly so appears on its face or that attempts to authorize the ousting of a de jure or de facto municipal corporation upon the same territory; in the one case the fact would imply the imputation of bad faith, in the other the new organization must be regarded as a mere usurper....  As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the apparently conflicting decisions:

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

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

II. There can be no de facto municipal corporation unless either directly or potentially, such a de jurecorporation is authorized by some legislative fiat.III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face.

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

  In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid law giving corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is no other valid statute to give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a similar petition for prohibition and nullified an executive order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was created in 1961, before section 68 of the Administrative Code, under which the President had acted, was invalidated. 'Of course the issue of de facto municipal corporation did not arise in that case.  In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in

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

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

  There is then no basis for the respondents' apprehension that the invalidation of the executive order creating Balabagan would have the effect of unsettling many an act done in

reliance upon the validity of the creation of that municipality. 14

  ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the respondents are hereby permanently restrained from performing the duties and functions of their respective offices. No pronouncement as to costs.G.R. No. L-19118             January 30, 1965MARIANO A. ALBERT, plaintiff-appellant, vs.UNIVERSITY PUBLISHING CO., INC., defendant-appellee.Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.Aruego, Mamaril & Associates for defendant-appellees.BENGZON, J.P., J.:No less than three times have the parties here appealed to this Court.In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled to damages (for breach of contract) but reduced the amount from P23,000.00 to P15,000.00.Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that the judgment for P15,000.00 which had become final and executory, should be executed to its full amount, since in fixing it, payment already made had been considered.Now we are asked whether the judgment may be executed against Jose M. Aruego, supposed President of University Publishing Co., Inc., as the real defendant.Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co., Inc. Plaintiff allegedinter alia that defendant was a corporation duly organized and existing under the laws of the Philippines; that on July 19, 1948, defendant, through Jose M. Aruego, its President, entered into a contract with plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the exclusive right to publish his revised Commentaries on the Revised Penal Code and for his share in previous sales of the book's first edition; that defendant had undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948; that per contract failure to pay one installment would render the rest due; and that defendant had failed to pay the second installment.Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the execution and terms of the contract dated July 19, 1948; but alleged that it was plaintiff

who breached their contract by failing to deliver his manuscript. Furthermore, defendant counterclaimed for damages.1äwphï1.ñëtPlaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for him.The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating in the dispositive portion —

IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff and against the defendant the University Publishing Co., Inc., ordering the defendant to pay the administrator Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest from the date of the filing of this complaint until the whole amount shall have been fully paid. The defendant shall also pay the costs. The counterclaim of the defendant is hereby dismissed for lack of evidence.

As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full. Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution writ against University Publishing Co., Inc. Plaintiff, however, on August 10, 1961, petitioned for a writ of execution against Jose M. Aruego, as the real defendant, stating, "plaintiff's counsel and the Sheriff of Manila discovered that there is no such entity as University Publishing Co., Inc." Plaintiff annexed to his petition a certification from the securities and Exchange Commission dated July 31, 1961, attesting: "The records of this Commission do not show the registration of UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." "University Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law firm), a "manifestation" stating that "Jose M. Aruego is not a party to this case," and that, therefore, plaintiff's petition should be denied.Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through counsel, would not want Jose M. Aruego to be considered a party to the present case: should a separate action be now instituted against Jose M. Aruego, the plaintiff will have to reckon with the statute of limitations.The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff has appealed.The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange Commission has not been disputed. Defendant would only raise the point that "University

Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that "University Publishing Co., Inc." is an existing corporation with an independent juridical personality. Precisely, however, on account of the non-registration it cannot be considered a corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently.The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was "a corporation duly organized and existing under the laws of the Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069)."University Publishing Co., Inc." purported to come to court, answering the complaint and litigating upon the merits. But as stated, "University Publishing Co., Inc." has no independent personality; it is just a name. Jose M. Aruego was, in reality, the one who answered and litigated, through his own law firm as counsel. He was in fact, if not, in name, the defendant.Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent." Had Jose M. Aruego been named as party defendant instead of, or together with, "University Publishing Co., Inc.," there would be no room for debate as to his personal liability. Since he was not so named, the matters of "day in court" and "due process" have arisen.In this connection, it must be realized that parties to a suit are "persons who have a right to control the proceedings, to make defense, to adduce and cross-examine witnesses, and to appeal from a decision" (67 C.J.S. 887) — and Aruego was, in reality,

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

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

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party to the contract sued upon; that he was the one who reaped the benefits resulting from it, so much so that partial payments of the consideration were made by him; that he violated its terms, thereby precipitating the suit in question; and that in the litigation he was the real defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him.We need hardly state that should there be persons who under the law are liable to Aruego for reimbursement or contribution with respect to the payment he makes under the judgment in question, he may, of course, proceed against them through proper remedial measures.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego. So ordered.[G.R. No. 125221. June 19, 1997]REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R.

DE LOS SANTOS, Presiding Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA,respondents.

D E C I S I O NPUNO, J.:

This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court, Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.

The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil Case No. 1214 for damages against respondent Antonio Anda before the Municipal Circuit Trial Court (MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the president of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA) while respondent Anda was the president of the Samahang Angeles-Mabalacat Jeepney Operators' and Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers' Association, Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of officers who shall be given the sole authority to collect the daily dues from the members of the consolidated association; elections were held on October 29, 1995 and both petitioner and private respondent ran for president; petitioner won; private respondent protested and, alleging fraud, refused to recognize the results of the election; private respondent also refused to abide by their agreement and continued collecting the dues from the members of his association despite several demands to desist. Petitioner was thus constrained to file the complaint to restrain private respondent from collecting the dues and to order him to pay damages in the amount of P25,000.00 and attorney's fees of P500.00.[1]

Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction was lodged with the Securities and Exchange Commission (SEC). The MCTC denied the motion on February 9, 1996.[2] It denied reconsideration on March 8, 1996.[3]

Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58, Angeles City.[4] The trial court found the dispute to be intracorporate, hence, subject to the jurisdiction of the SEC, and ordered the MCTC to dismiss Civil Case No. 1214 accordingly.[5] It denied reconsideration on May 31, 1996.[6]

Hence this petition. Petitioner claims that:"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING THAT THE SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION OVER A CASE OF DAMAGES BETWEEN HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC] APPROVED AND REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION."[7]

The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of Presidential Decree No. 902-A. Section 5 reads as follows:"Section 5. x x x [T]he Securities and Exchange Commission [has] original and exclusive jurisdiction to hear and decide cases involving:(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission.(b) Controversies arising out of intracorporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members, or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity.(c) Controversies in the election or appointment of directors,

trustees, officers or managers of such corporations, partnerships or associations.(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respect very fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree."The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the law.[8] This jurisdiction is determined by a concurrence of two elements: (1) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy.[9]

The first element requires that the controversy must arise out of intracorporate or partnership relations between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State in so far as it concerns their individual franchises.[10] The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation, partnership or association or deal with the internal affairs of the corporation, partnership or association.[11] After all, the principal function of the SEC is the supervision and control of corporations, partnerships and associations with the end in view that investments in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development.[12]

There is no intracorporate nor partnership relation between petitioner and private respondent. The controversy between them arose out of their plan to consolidate their respective jeepney drivers' and operators' associations into a single common association. This unified association was, however, still a proposal. It had not been approved by the SEC, neither had its officers and members submitted their articles of consolidation in accordance with Sections 78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the

certificate of consolidation by the SEC.[13] When the SEC, upon processing and examining the articles of consolidation, is satisfied that the consolidation of the corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate of consolidation which makes the reorganization official.[14] The new consolidated corporation comes into existence and the constituent corporations dissolve and cease to exist.[15]

The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly registered with the SEC, but these associations are two separate entities. The dispute between petitioner and private respondent is not within the KAMAJDA nor the SAMAJODA. It is between members of separate and distinct associations. Petitioner and private respondent have no intracorporate relation much less do they have an intracorporate dispute. The SEC therefore has no jurisdiction over the complaint.

The doctrine of corporation by estoppel[16] advanced by private respondent cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties.[17] It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of the court.[18]

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness.[19] It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel.[20]

IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside.The Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to proceed with dispatch in resolving Civil Case No. 1214. No costs.

SO ORDERED.G.R. No. 22106           September 11, 1924ASIA BANKING CORPORATION, plaintiff-appellee, vs.

STANDARD PRODUCTS, CO., INC., defendant-appellant.Charles C. De Selms for appellant.Gibbs & McDonough and Roman Ozaeta for appellee.OSTRAND, J.:This action is brought to recover the sum of P24,736.47, the balance due on the following promissory note:

P37,757.22MANILA, P. I.,     Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their office in Manila, for value received, together with interest at the rate of ten per cent per annum.No. ________ Due __________

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

                By     PresidentThe court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and the costs. From this judgment the defendant appeals to this court.At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error.There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances taking the case out of the rules stated.The judgment appealed from is affirmed, with the costs against the appellant. So ordered.G.R. No. L-11442             May 23, 1958MANUELA T. VDA. DE SALVATIERRA, petitioner, vs.HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.Jimenez, Tantuico, Jr. and Tolete for petitioner.Francisco Astilla for respondent Segundino Refuerzo.FELIX, J.:This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the net income accruing from the harvest of any, crop without being responsible for the cost of production thereof; and that after every harvest, the lessee was bound to declare at the earliest

possible time the income derived therefrom and to deliver the corresponding share due the lessor.Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of the commencement of the action, already harvested, processed and sold by defendants; that notwithstanding that fact, defendants refused to render an accounting of the income derived therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a rescission was but proper.As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It was further provide that upon defendants' failure to abide by the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30 per cent of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956, defendant Segundino Refuerzo filed a

motion claiming that the decision rendered in said Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties belonging to the movant that might have already been attached, after finding that the evidence on record made no mention or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the order complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such a motion may be filed, prescribes that:

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

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6 months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party

adversely affected by a decision or order is certainly an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to protect his interest. Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be granted. However, taking note of the question presented by the motion for relief involved herein, We deem it wise to delve in and pass upon the merit of the same.Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that the complaint filed with the lower court contained no allegation which would hold him liable personally, for while it was stated therein that he was a signatory to the lease contract, he did so in his capacity as president of the corporation. And this allegation was found by the Court a quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending that her failure to specify defendant's personal liability was due to the fact that all the time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff

Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with law.There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been attached in the

execution of such judgment, is hereby set aside and nullified as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered.G.R. No. L-5827            August 4, 1910THE CHINESE CHAMBER OF COMMERCE, plaintiff-appellee, vs.PUA TE CHING, ET AL., defendants-appellants.O'Brien and De Witt, for appellants.Chicote and Miranda, for appellee.ARELLANO, C.J.:In the Court of First Instance of Manila, the plaintiff had prosecuted three suits against Pua Te Ching, registered under Nos. 6347, 6348 and 6349, all for the recovery of a sum of money. The court decided them by judging that Pua Te Ching should pay the amounts claimed. Pua Te Ching, for the purpose of staying the execution of the judgments rendered, during the pendency of his appeal, presented as sureties in the three aforesaid cases, Pua Ti, of Calle Rosario No. 150, and Jose Temprado Yap Chatco, of Calle Sagasta, San Fernando, Pampanga, executed the proper bonds: In case No. 6347, for P3,784; in No. 6348, for P4.00; and in No. 6349, for P1,000, "for which payments well and truly made," the bond reads, "we, the appellant and the sureties, jointly and severally bind ourselves," it being expressly stipulated "that the appellant and the sureties are held and firmly bound to the appellee, jointly and severally, in the sum expressed in each bond, to secure the fulfillment and payment of the judgment so appealed, together with the costs, in case the same should be affirmed, in whole or in part, or in case the judgment should become effective on account of the appellant's having abandoned or withdrawn the appeal, or in case it should be dismissed or declared to be improperly allowed.The appeal having been heard by this court, which rendered a decision affirming the judgment of the lower court and, while the latter was about to proceed with the execution of the said judgment, the sureties Jose Tempardo Yap Chatco and Pua Ti set forth: That Pua Te Ching died intestate on September 2, 1909, and the decision of this court was rendered after his death; that the estate of the late Pua Te Ching was in the course of administration; and that, therefore, the decision of the Supreme Court was null and of no value, it having been pronounced against a person already dead, and that an

execution thereof could not be issued against the said Pua Te Ching.The lower court decided that, notwithstanding the death of the principal surety, the sureties who subscribed the bond were liable for the amount of the judgment entered "that the judgment entered in these cases against the defendant Pua Te Ching and in favor of the plaintiff shall be extensive against the sureties who subscribed the bond, named Pua Ti and Jose Temprado Yap Chatco, jointly and severally, and execution shall issue on the said judgments.These sureties filed notice of appeal and, having forwarded their bill of exceptions, alleged error against the judgment appealed from it that therein the execution of a judgment was ordered notwithstanding the death of the appellant which occurred before the affirmation of the decision of the lower court. In support of their allegation they invoke sections 119 and 448 of the Code of Civil Procedure, the provisions of which, especially those of sections 448, may be invoked by the sureties in their favor by virtue of the provisions of articles 1148 and 1853, in relation to article 1822, of the Civil Code.Article 1822, invoked by the appellant, provides that "if the surety binds himself jointly with the principal debtor, the provisions of section fourth, chapter third, title first, of this book shall be observed," that is, of book fourth of the Civil Code. Section fourth of the chapter, title, and book mentioned provides that "a creditor may sue any of the joint debtors or all of them simultaneously." (art. 1144), In conformity having bound themselves in solidum (jointly and severally) with the principal debtor Pua Te Ching, the creditor, that is, the Chinese Chamber of Commerce, may sue any of them or all of them simultaneously: which is what the Chinese Chamber of Commerce did in filing suit against the joints and several debtors.But the basis of appellant's argument in alleging error because of the application of this provision of the law, is the benefit granted by articles 1148 and 1853.Article 1853, which is one of the provisions made in the matter of bonds and is a reproduction of article 1148 or joint and several obligations in general, reads as follows:

A surety may set up against the creditor all the exceptions which pertain to the principal debtor and which may be inherent to the debt; but not those which

may be purely personal to the debtor.The whole question which this court has to decide is whether the sureties Pua Ti and Yap Chatco have set up against the creditor any exception which pertains to the principal debtor, Pua Te Ching, and which may beinherent to the debt. If the exception which pertains to the principal debtor, Pua Te Ching, is purely personal to him, it is evident that the sureties of Pua Te Ching can not set it up against the creditor.Exceptions of the principal debtor which the surety may utilize and which may be inherent to the debt, are all those connected with the obligation secured by the bond, all those which may contribute to weaken or destroy thevinculum juris existing between them creditor and the principal debtor, all means of defense which may invalidate the original contract from which the right or the action of the creditor arises against the surety, such as the exceptions of fraud or of violence, which annul consent, that of sine atione agis founded on a payment already made, that of res adjudicata that of prescription, that of nullity of the loan made to a minor child, and others of the same class. (12 Manresa, Civil Code, 363.)The exceptions which, according to the appellants, pertains to the principal debtor Pua Te Ching inasmuch as he died, is that provided by sections 119 and 448 of the Code of Civil Procedure. Section 119 relates to the continuance of the action by or against the executor, administrator or other legal representative of the deceased, and, if the action is for the recovery of money, the payment of a debt or of damages, to its discontinuance and prosecution in the proceeding instituted for the settlement of the estate of the deceased; and section 448 provides that, notwithstanding the death of a party after the judgment, "execution thereon may be issued, or one already issued may be enforced as follows:(1) In case of the death of the judgment creditor, upon the application of his executor or administrator or successor in interest; (2), in case of the death of the judgment debtor, if the judgment be for the recovery of real or personal property, or the enforcement of a lien thereon." All these provisions concern the manner of execution relative to the obligation against the estate of Pua Te Ching, but in nowise effect the validity and force of the obligation contracted by Pua Te Ching toward the Chinese Chamber of Commerce in such a way as to serve the joint and several sureties of Pua Te Ching as a defense inherent to the latter's debt to be set up against

the execution, now that they are the judgment debtors made liable for payment. They are all defenses to oppose an execution against the estate of Pua Te Ching, as the appellants say, and all of them are against the execution of the obligation, but not against the obligation itself. They are not even personal defenses of the principal debtor against the obligation; still less are they defenses inherent to the debt itself, which are the only ones that, as pertaining to the principal debtor, may be utilized by the sureties.It is useless to allege the impropriety of an execution of a judgment against the estate of a person deceased when it is not a question of such an execution against the estate of a deceased person.It is useless to allege how the payment of money should be sued against the estate of a deceased person, when it is not a question of a suit of this kind, nor of any other, but of the execution of a judgment against certain sureties who bound themselves jointly and severally to pay the amount of the obligation concerned in the case at bar "in case the judgment should be affirmed in whole or in part." The judgment sentencing the principal debtor Pua Te Ching to pay the amounts claimed, having been wholly affirmed, the case now stands for execution to issue against the sureties for securing payment of the said amounts by them in place of Pua Te Ching or with Pua Te Ching, as they had bound themselves to do. The creditor having chosen alone without Pua Te Ching, they alone, without Pua Te Ching and without reference whatever to the estate of Pua Te Ching, must be compelled to pay by means of judicial compulsion through execution.The provisions contained in articles 1148 and 1853 of the Civil Code do not apply to the sureties, the appellants; and the judgment of the trial court, which finds the sureties liable for the payment of the debt, put into execution by virtue of final decision, is entirely in accord with the law.The record does not show that it is a question of the execution of a judgment entered after the death of the principal debtor. No proof whatever exists of this fact, nor even of the fact of the death of the principal debtor.The lower court, on the truth of this hypothesis, decided that, notwithstanding the death of the principal obligor, the sureties are compelled to pay the amount set forth in the judgment rendered.

That this court should not render a decision affirmatory or that of the lower court on account of the death of the defendant, is a point that absolutely does not concern this incident of the execution of judgment, nor was evidence adduced to show anything specific against the rendering of such an affirmatory decision.The judgment appealed from is affirmed, with the costs of this instance against the appellants. So ordered.G.R. No. L-8431           October 30, 1958MADRIGAL SHIPPING COMPANY, INC., petitioner, vs.JESUS G. OGILVIE, SALVADOR ORTILE, MIGUEL M. FERMIN, ANTONIO C. MILITAR and THE COURT OF APPEALS, respondents.Bausa and Ampil for petitioner.Luis Manalang and Flor Garcia-Manalang and Galang, Angeles and Galang for respondents.PADILLA, J.:Jesus G. Ogilvie, Salvador Ortile, Miguel M. Fermin and Antonio C. Militar brought an action in the Court of First Instance of Manila to collect from the Madrigal Shipping Company, Inc., the aggregate sum of P12,104.50 for salaries and subsistence from 19 March to 30 September 1948 (Civil No. 8446, Annex A). The defendant moved for the dismissal of the complaint on the ground of lack of jurisdiction over the subject matter of the action (Annex B). The Court denied the motion and directed the defendant to answer the complaint within ten days from receipt of a copy of the order (Annex C). As the defendant failed to answer the complaint as directed, upon motion of the plaintiffs (Annex D) the Court declared it in default and set the case for hearing on 30 September 1949 (Annex E). The defendant filed a motion to set aside the order of default (Annex F) which was denied (Annex I). A motion for reconsideration of the previous order (Annex J) was likewise denied (Annex K). The defendant filed a petition for a writ of certiorari with preliminary injunction in this Court to annul and set aside the order of default, which was dismissed for the reason that appeal was the proper remedy (Annex L).1 The trial court then proceed to hear the plaintiffs' evidence and after the hearing it rendered judgment dismissing the plaintiffs' complaint upon the sole ground that the plaintiffs failed to prove that the defendant is a corporation duly organized and existing under the laws of the Philippines. A

motion was filed praying that plaintiffs be allowed to submit evidence to prove that the defendant is a duly organized and existing corporation under the laws of the Philippines (Annex O), which was granted (Annex P). After hearing the additional evidence presented by the plaintiffs showing that the defendant is an organized and existing juridical entity under the laws of the Philippines, the trial court dismissed the complaint on the ground that the evidence was not new but forgotten (Annex Q). The plaintiffs appealed to the Court of Appeals. The judgment appealed from was reversed and the defendant was ordered to pay Jesus G. Ogilvie the sum of P3,226.50 and Salvador Ortile, Miguel M. Fermin and Antonio C. Militar the sum of P2,934 each. The defendant has brought the case to this Court by way of certiorari to have the judgment of the Court of Appeals reviewed.The respondents herein, appellants in the Court of Appeals, did not furnish the herein petitioner, defendant in the court of first instance, with a copy of their brief in the Court of Appeals for the reason that as the petitioner had been declared in default by the trial court it had lost its standing in court and hence was not entitled to service of appellants' brief on appeal. In a special division of five justices of the Court of Appeals, a majority of four and one dissenting upheld the respondents contention that the case was deemed submitted and ready for disposition or judgment, and proceeded to determine the case on appeal without the petitioner's brief, a view now assailed by the petitioner who claims that it had been deprived of its day in court.In Lim To Co vs. Go Fay, 80 Phil. 166, interpreting section 9, Rule 27, which provides:

No service of papers shall be necessary on a party in default except when he files a motion to set aside the order of default, in which event he is entitled to notice of all further proceedings, this Court held that "a defendant in default is not entitled to notice of the proceedings until the final termination of the case, and therefore he has no right to be heard or file brief or memoranda on appeal."2

A defendant in default loses his standing in or is considered out of Court, and consequently can not appear in court; adduce evidence; and be heard, and for that reason he is not entitled to notice. If he is not entitled to notice of the proceedings in the case and to

be heard, he can not appeal from the judgment rendered by the court on the merits, because he can not file a notice of appeal, and file an appeal bond and the record on appeal, for approval by the court. The only exception provided by law is when the defendant in default files a motion to set aside the order of default on the grounds stated in Rule 38 "in which event he is entitled to notice of all further proceedings." That a defendant in default can not be heard in the suit, not only in the trial court but also in the final hearing, that is, on appeal which is part of the proceedings in a suit, is the ruling laid down for guidance of courts and practitioners by this Court in the case of Velez vs. Ramos, 40 Phil., 787, . . . . (Lim To Co vs. Go Fay, supra, p. 169.)

And the remedy available to a party who was declared in default to regain his standing in court and be entitled once more to notice of the proceedings is to move for the setting aside of the order of default under section 2, Rule 38 and to appeal therefrom if denied.3

Counsel argue that an order of default being interlocutory, the petitioner could not appeal therefrom. True, but from a denial of a motion to set aside an order of default, as the petitioner's "urgent motion to set aside order of default" (Annex F), which may be deemed to fall under section 2, Rule 38, the petitioner could have appealed. Instead of taking an appeal from such denial, the petitioner chose to bring the matter to this Court by petition for a writ of certiorari with a prayer for a writ of preliminary injunction which was correctly dismissed for the remedy was an appeal from the order denying the motion to set aside the order of default entered against the petitioner because of mistake or excusable neglect. Not having appealed from the order denying the motion to set aside the order of default under section 2, Rule 38, the order of default remained in force with all the consequences that the party against whom it had been entered must suffer. One of them is the loss of the right to be served with the brief of the herein respondents, appellants in the Court of Appeals.Turning now to the merits of the case, the Court of Appeals found that the services of Jesus G. Ogilvie, Salvador Ortile, Antonio C. Militar and Miguel M. Fermin were engaged by Manuel Mascuñana, master or captain employed by the petitioner Madrigal Shipping Company, Inc., to man and fetch

the vessel "S.S. Bridge" from Sasebu, Japan, as evidenced by a contract executed on 24 December 1947 in Manila (Exhibit A), the pertinent provision of which is as follows:

(a) The several persons whose names are hereto subscribed, and whose descriptions are contained herein, engaged as seamen, hereby agree to serve on board the S.S. Bridge of which M. MASCUÑANA is master, in the several capacities expressed against their respective names, on a voyage from THE CREW WILL ENPLANE FROM MANILA TO JAPAN. IN JAPAN THE CREW WILL MAN THE SHIP TO MANILA. THIS CONTRACT EXPIRES ON THE ARRIVAL OF THIS BOAT AT THE PORT OF MANILA. EXTENSION OF THIS CONTRACT IS VALID ONLY WHEN SIGNED BY THE OFFICIAL SKIPPER.

On 7 January 1948, another contract of similar terms and conditions was executed in Manila before the Consul General of the Republic of Panama (Exhibit A-1) for the reason that the S.S. Bridge was registered under the laws of that Republic. Pursuant thereto the respondents were flown to Sasebu, Japan, and they manned the vessel out of the port of Sasebu. On 16 March 1948, when the vessel reached Hongkong, the respondents were dismissed and replaced by a crew of Chinese nationality. The respondents were flown back to Manila and paid their respective salaries up to the date of their dismissal. The total sum of P12,104.50 which the respondents seek to collect represents salaries and subsistence allowance from 17 March 1948 to 30 September 1948 when the vessel arrived in the port of Manila.In its motion to dismiss the complaint the petitioner invoked and relied solely upon lack of jurisdiction of the court over the subject matter of the action and did not deny ownership of the S.S. Bridge nor disavow the authority of Manuel Mascuñana, its captain, to engage the services of the respondents. More, in the answer of the petitioner (Annex H) attached to its "urgent motion to set aside order of default" (Annex F), the averments under its special defenses substantially admit the allegations of the respondents' complaint. The termination of the services of the respondents as members of the crew was not due to their fault. Upon the ship's arrival in Hongkong it was found that repairs had to be made on her before she could proceed on her voyage to Manila. A motion to dismiss an action must include all the grounds available at the time of its filing, and all grounds

not so included are deemed waived, except lack of jurisdiction over the subject matter.4 In the same motion to dismiss the complaint the petitioner, defendant in the court of first instance, alleged that "On the date of the execution of the service contract between the plaintiff and the defendant (January 7, 1948), the subject vessel was in Sasebu, Japan, . . .," thereby implying that the petitioner in truth and in fact contracted the service of the respondents, plaintiffs in the court of first instance, to man its vessel. Furthermore, Moises J. Lopez, manager of the defendant shipping company, testified that he recalled having contracted the services of several persons to form a crew to man theS.S. Bridge belonging to the petitioner. How could the latter now disclaim ownership of the S.S. Bridge and the authority of Manuel Mascuñana, its captain, to engage the services of the respondents?Granting that the petitioner may not be sued for lack of juridical personality, as held by the trial court, and pressed by its counsel in this Court, it is now estopped from denying the existence of such personality to evade responsibility on the contract it had entered into, because it has taken advantage of the respondents' services and has profited thereby. Moreover, the trial court committed an error when it refused to take into account the evidence presented by the respondents to prove that the petitioner was a corporation duly organized and existing under the laws of the Philippines, the documents showing that fact having been reconstituted only after the first hearing of the case, upon the sole ground that it was not new but forgotten evidence. Such ground could be relied upon to deny a motion for new trial, but not after the motion had been granted, for official or public documents presented to show or prove the juridical personality or entity of a party to an action not known or available at the first hearing could not be ignored. The trial court could not close its eyes to reality.Again, granting that it was not the Madrigal Shipping Company, Inc., that owned the S.S. Bridge but the Madrigal & Company, a corporation with a juridical personality distinct from the former, yet as the former was the subsidiary of the latter, and that the former was a business conduit of the latter, as found by the Court of Appeals, the fiction of corporate existence may be disregarded and the real party ordered to pay the respondents their just due.The services of the respondents were engaged by the petitioner

to man its vessel for a determinate time or voyage, with an express stipulation that "this contract expires on the arrival of this boat at the port of Manila." Article 605 of the Code of Commerce provides:

If the contracts of the captain and members of the crew with the ship agent should he for a definite period or voyage, they may not be discharged until after the fulfillment of their contracts except by reason of insubordination in serious matters, robbery, theft, habitual drunkenness, or damage caused to the vessel or its cargo through malice or manifest or proven negligence.

Not having been discharged for any of the causes enumerated in the foregoing article, the respondents are entitled to the amounts they respectively seek to collect from the petitioner.The petition is denied, with costs against the petitioner.G.R. No. L-58028 April 18, 1989CHIANG KAI SHEK SCHOOL, petitioner, vs.COURT OF APPEALS and FAUSTINA FRANCO OH, respondents. CRUZ, J.:An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment for the next semester. Oh was shocked. She had been teaching in the school since 1932 for a continuous period of almost 33 years. And now, out of the blue, and for no apparent or given reason, this abrupt dismissal.Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity benefits and moral and exemplary damages. 1 The original defendant was the Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could not be sued, the complaint was amended. 2 Certain officials of the school were also impleaded to make them solidarily liable with the school.The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was set aside by the respondent court, which held the school suable and liable while absolving the other defendants. 4 The motion for reconsideration having been denied, 5 the school then came to

this Court in this petition for review on certiorari.The issues raised in the petition are:1. Whether or not a school that has not been incorporated may be sued by reason alone of its long continued existence and recognition by the government,2. Whether or not a complaint filed against persons associated under a common name will justify a judgment against the association itself and not its individual members.3. Whether or not the collection of tuition fees and book rentals will make a school profit-making and not charitable.4. Whether or not the Termination Pay Law then in force was available to the private respondent who was employed on a year-to-year basis.5. Whether or not the awards made by the respondent court were warranted.We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules of Court clearly provides that "only natural or juridical persons may be parties in a civil action." It is also not denied that the school has not been incorporated. However, this omission should not prejudice the private respondent in the assertion of her claims against the school.As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which provided as follows:

Unless exempted for special reasons by the Secretary of Public Instruction, any private school or college recognized by the government shall be incorporated under the provisions of Act No. 1459 known as the Corporation Law, within 90 days after the date of recognition, and shall file with the Secretary of Public Instruction a copy of its incorporation papers and by-laws.

Having been recognized by the government, it was under obligation to incorporate under the Corporation Law within 90 days from such recognition. It appears that it had not done so at the time the complaint was filed notwithstanding that it had been in existence even earlier than 1932. The petitioner cannot now invoke its own non-compliance with the law to immunize it from the private respondent's complaint.There should also be no question that having contracted with the private respondent every year for thirty two years and thus represented itself as possessed of juridical personality to do so,

the petitioner is now estopped from denying such personality to defeat her claim against it. According to Article 1431 of the Civil Code, "through estoppel an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying on it."As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15, under which the persons joined in an association without any juridical personality may be sued with such association. Besides, it has been shown that the individual members of the board of trustees are not liable, having been appointed only after the private respondent's dismissal. 6It is clear now that a charitable institution is covered by the labor laws 7 although the question was still unsettled when this case arose in 1968. At any rate, there was no law even then exempting such institutions from the operation of the labor laws (although they were exempted by the Constitution from ad valorem taxes). Hence, even assuming that the petitioner was a charitable institution as it claims, the private respondent was nonetheless still entitled to the protection of the Termination Pay Law, which was then in force.While it may be that the petitioner was engaged in charitable works, it would not necessarily follow that those in its employ were as generously motivated. Obviously, most of them would not have the means for such charity. The private respondent herself was only a humble school teacher receiving a meager salary of Pl80. 00 per month.At that, it has not been established that the petitioner is a charitable institution, considering especially that it charges tuition fees and collects book rentals from its students. 8 While this alone may not indicate that it is profit-making, it does weaken its claim that it is a non-profit entity.The petitioner says the private respondent had not been illegally dismissed because her teaching contract was on a yearly basis and the school was not required to rehire her in 1968. The argument is that her services were terminable at the end of each year at the discretion of the school. Significantly, no explanation was given by the petitioner, and no advance notice either, of her relief after teaching year in and year out for all of thirty-two years, the private respondent was simply told she could not teach any more.The Court holds, after considering the particular circumstance

of Oh's employment, that she had become a permanent employee of the school and entitled to security of tenure at the time of her dismissal. Since no cause was shown and established at an appropriate hearing, and the notice then required by law had not been given, such dismissal was invalid.The private respondent's position is no different from that of the rank-and-file employees involved in Gregorio Araneta University Foundation v. NLRC, 9 of whom the Court had the following to say:

Undoubtedly, the private respondents' positions as deans and department heads of the petitioner university are necessary in its usual business. Moreover, all the private respondents have been serving the university from 18 to 28 years. All of them rose from the ranks starting as instructors until they became deans and department heads of the university. A person who has served the University for 28 years and who occupies a high administrative position in addition to teaching duties could not possibly be a temporary employee or a casual.

The applicable law is the Termination Pay Law, which provided:SECTION 1. In cases of employment, without a definite period, in a commercial, industrial, or agricultural establishment or enterprise, the employer or the employee may terminate at any time the employment with just cause; or without just cause in the case of an employee by serving written notice on the employer at least one month in advance, or in the case of an employer, by serving such notice to the employee at least one month in advance or one-half month for every year of service of the employee, whichever, is longer, a fraction of at least six months being considered as one whole year.The employer, upon whom no such notice was served in case of termination of employment without just cause may hold the employee liable for damages.The employee, upon whom no such notice was served in case of termination of employment without just cause shall be entitled to

compensation from the date of termination of his employment in an I amount equivalent to his salaries or wages correspond to the required period of notice. ... .

The respondent court erred, however, in awarding her one month pay instead of only one-half month salary for every year of service. The law is quite clear on this matter. Accordingly, the separation pay should be computed at P90.00 times 32 months, for a total of P2,880.00.Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School Teachers, confers security of tenure on the teacher upon appointment as long as he possesses the required qualification. 10 And under the present policy of the Department of Education, Culture and Sports, a teacher becomes permanent and automatically acquires security of tenure upon completion of three years in the service. 11While admittedly not applicable to the case at bar, these I rules nevertheless reflect the attitude of the government on the protection of the worker's security of tenure, which is now guaranteed by no less than the Constitution itself. 12We find that the private respondent was arbitrarily treated by the petitioner, which has shown no cause for her removal nor had it given her the notice required by the Termination Pay Law. As the respondent court said, the contention that she could not report one week before the start of classes is a flimsy justification for replacing her.13 She had been in its employ for all of thirty-two years. Her record was apparently unblemished. There is no showing of any previous strained relations between her and the petitioner. Oh had every reason to assume, as she had done in previous years, that she would continue teaching as usual.It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning told she was dismissed. There was not even the amenity of a formal notice of her replacement, with perhaps a graceful expression of thanks for her past services. She was simply informed she was no longer in the teaching staff. To put it bluntly, she was fired.For the wrongful act of the petitioner, the private respondent is entitled to moral damages. 14 As a proximate result of her illegal dismissal, she suffered mental anguish, serious anxiety, wounded feelings and even besmirched reputation as an experienced teacher for more than three decades. We also find

that the respondent court did not err in awarding her exemplary damages because the petitioner acted in a wanton and oppressive manner when it dismissed her. 15The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are always at the forefront in the battle against illiteracy and ignorance. If only because it is they who open the minds of their pupils to an unexplored world awash with the magic of letters and numbers, which is an extraordinary feat indeed, these humble mentors deserve all our respect and appreciation.WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the award of separation pay, which is reduced to P2,880.00. All the other awards are approved. Costs against the petitioner.This decision is immediately executory.SO ORDERED.

G.R. No. 109272 August 10, 1994GEORG GROTJAHN GMBH & CO., petitioner, vs.HON. LUCIA VIOLAGO ISNANI, Presiding Judge, Regional Trial Court, Makati, Br. 59; ROMANA R. LANCHINEBRE; and TEOFILO A. LANCHINEBRE, respondents.A.M. Sison, Jr. & Associates for petitioner.Pedro L. Laso for private respondents. PUNO, J.:Petitioner impugns the dismissal of its Complaint for a sum of money by the respondent judge for lack of jurisdiction and lack of capacity to sue.The records show that petitioner is a multinational company organized and existing under the laws of the Federal Republic of Germany. On July 6, 1983, petitioner filed an application, dated July 2, 1983, 1 with the Securities and Exchange Commission (SEC) for the establishment of a regional or area headquarters in the Philippines, pursuant to Presidential Decree No. 218. The application was approved by the Board of Investments (BOI) on September 6, 1983. Consequently, on September 20, 1983, the SEC issued a Certificate of Registration and License to petitioner. 2

Private respondent Romana R. Lanchinebre was a sales

representative of petitioner from 1983 to mid-1992. On March 12, 1992, she secured a loan of twenty-five thousand pesos (P25,000.00) from petitioner. On March 26 and June 10, 1992, she made additional cash advances in the sum of ten thousand pesos (P10,000.00). Of the total amount, twelve thousand one hundred seventy pesos and thirty-seven centavos (P12,170.37) remained unpaid. Despite demand, private respondent Romana failed to settle her obligation with petitioner.On July 22, 1992, private respondent Romana Lanchinebre filed with the Arbitration Branch of the National Labor Relations Commission (NLRC) in Manila, a Complaint for illegal suspension, dismissal and non-payment of commissions against petitioner. On August 18, 1992, petitioner in turn filed against private respondent a Complaint for damages amounting to one hundred twenty thousand pesos (P120,000.00) also with the NLRC Arbitration Branch (Manila). 3 The two cases were consolidated.On September 2, 1992, petitioner filed another Complaint for collection of sum of money against private respondents spouses Romana and Teofilo Lanchinebre which was docketed as Civil Case No. 92-2486 and raffled to the sala of respondent judge. Instead of filing their Answer, private respondents moved to dismiss the Complaint. This was opposed by petitioner.On December 21, 1992, respondent judge issued the first impugned Order, granting the motion to dismiss. She held, viz:Jurisdiction over the subject matter or nature of the action is conferred by law and not subject to the whims and caprices of the parties.Under Article 217 of the Labor Code of the Philippines, the Labor Arbiters shall have original and exclusive jurisdiction to hear and decide, within thirty (30) calendar days after the submission of the case by the parties for decision, the following cases involving all workers, whether agricultural or non-agricultural:(4) claims for actual, moral, exemplary and other forms of damages arising from an employer-employee relations.xxx xxx xxx(6) Except claims for employees compensation, social security, medicare and maternity benefits, all other claims arising from employer-employee relations, including those of persons in domestic or household service, involving an amount exceeding five thousand pesos (P5,000.00) regardless of whether or not

accompanied with a claim for reinstatement.In its complaint, the plaintiff (petitioner herein) seeks to recover alleged cash advances made by defendant (private respondent herein) Romana Lanchinebre while the latter was in the employ of the former. Obviously the said cash advances were made pursuant to the employer-employee relationship between the (petitioner) and the said (private respondent) and as such, within the original and exclusive jurisdiction of the National Labor Relations Commission.Again, it is not disputed that the Certificate of Registration and License issued to the (petitioner) by the Securities and Exchange Commission was merely "for the establishment of a regional or area headquarters in the Philippines, pursuant to Presidential Decree No. 218 and its implementing rules and regulations." It does not include a license to do business in the Philippines. There is no allegation in the complaint moreover that (petitioner) is suing under an isolated transaction. It must be considered that under Section 4, Rule 8 of the Revised Rules of Court, facts showing the capacity of a party to sue or be sued or the authority of a party to sue or be sued in a representative capacity or the legal existence of an organized association of persons that is made a party must be averred. There is no averment in the complaint regarding (petitioner's) capacity to sue or be sued.Finally, (petitioner's) claim being clearly incidental to the occupation or exercise of (respondent) Romana Lanchinebre's profession, (respondent) husband should not be joined as party defendant. 4

On March 8, 1993, the respondent judge issued a minute Order denying petitioner's Motion for Reconsideration.Petitioner now raises the following assignments of errors:ITHE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE REGULAR COURTS HAVE NO JURISDICTION OVER DISPUTES BETWEEN AN EMPLOYER AND AN EMPLOYEE INVOLVING THE APPLICATION PURELY OF THE GENERAL CIVIL LAW.IITHE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PETITIONER HAS NO CAPACITY TO SUE AND BE SUED IN THE PHILIPPINES DESPITE THE FACT THAT PETITIONER IS DULY

LICENSED BY THE SECURITIES AND EXCHANGE COMMISSION TO SET UP AND OPERATE A REGIONAL OR AREA HEADQUARTERS IN THE COUNTRY AND THAT IT HAS CONTINUOUSLY OPERATED AS SUCH FOR THE LAST NINE (9) YEARS.IIITHE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE ERRONEOUS INCLUSION OF THE HUSBAND IN A COMPLAINT IS A FATAL DEFECT THAT SHALL RESULT IN THE OUTRIGHT DISMISSAL OF THE COMPLAINT.IVTHE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE HUSBAND IS NOT REQUIRED BY THE RULES TO BE JOINED AS A DEFENDANT IN A COMPLAINT AGAINST THE WIFE.There is merit to the petition.Firstly, the trial court should not have held itself without jurisdiction over Civil Case No. 92-2486. It is true that the loan and cash advances sought to be recovered by petitioner were contracted by private respondent Romana Lanchinebre while she was still in the employ of petitioner. Nonetheless, it does not follow that Article 217 of the Labor Code covers their relationship.Not every dispute between an employer and employee involves matters that only labor arbiters and the NLRC can resolve in the exercise of their adjudicatory or quasi-judicial powers. The jurisdiction of labor arbiters and the NLRC under Article 217 of the Labor Code is limited to disputes arising from an employer-employee relationship which can only be resolved by reference to the Labor Code, other labor statutes, or their collective bargaining agreement. In this regard, we held in the earlier case of Molave Motor Sales, Inc. vs. Laron, 129 SCRA 485 (1984),viz:Before the enactment of BP Blg. 227 on June 1, 1982, Labor Arbiters, under paragraph 5 of Article 217 of the Labor Code had jurisdiction over "all other cases arising from employer-employee relation, unless expressly excluded by this Code." Even then, the principal followed by this Court was that, although a controversy is between an employer and an employee, the Labor Arbiters have no jurisdiction if the Labor Code is not involved. In Medina vs. Castro-Bartolome, 116 SCRA 597, 604 in negating jurisdiction of the Labor Arbiter, although the parties were an employer and two employees, Mr. Justice Abad Santos stated:

The pivotal question to Our mind is whether or not the Labor Code has any relevance to the reliefs sought by plaintiffs. For if the Labor Code has no relevance, any discussion concerning the statutes amending it and whether or not they have retroactive effect is unnecessary.xxx xxx xxxAnd in Singapore Airlines Limited vs. Paño, 122 SCRA 671, 677, the following was said:Stated differently, petitioner seeks protection under the civil laws and claims no benefits under the Labor Code. The primary relief sought is for liquidated damages for breach of a contractual obligation. The other items demanded are not labor benefits demanded by workers generally taken cognizance of in labor disputes, such as payment of wages, overtime compensation or separation pay. The items claimed are the natural consequences flowing from breach of an obligation, intrinsically a civil dispute.xxx xxx xxxIn San Miguel Corporation vs. NLRC, 161 SCRA 719 (1988), we crystallized the doctrines set forth in the Medina, Singapore Airlines, and Molave Motors cases, thus:. . . The important principle that runs through these three (3) cases is that where the claim to the principal relief sought is to be resolved not by reference to the Labor Code or other labor relations statute or a collective bargaining agreement but by the general civil law, the jurisdiction over the dispute belongs to the regular courts of justice and not to the Labor Arbiter and the NLRC. In such situations, resolutions of the dispute requires expertise, not in labor management relations nor in wage structures and other terms and conditions of employment, but rather in the application of the general civil law. Clearly, such claims fall outside the area of competence or expertise ordinarily ascribed to Labor Arbiters and the NLRC and the rationale for granting jurisdiction over such claims to these agencies disappears.Civil Case No. 92-2486 is a simple collection of a sum of money brought by petitioner, as creditor, against private respondent Romana Lanchinebre, as debtor. The fact that they were employer and employee at the time of the transaction does not negate the civil jurisdiction of the trial court. The case does not involve adjudication of a labor dispute but recovery of a sum of money based on our civil laws on obligation and contract.

Secondly, the trial court erred in holding that petitioner does not have capacity to sue in the Philippines. It is clear that petitioner is a foreign corporation doing business in the Philippines. Petitioner is covered by the Omnibus Investment Code of 1987. Said law defines "doing business," as follows:. . . shall include soliciting orders, purchases, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines, and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. 5

There is no general rule or governing principle as to what constitutes "doing" or "engaging in" or "transacting" business in the Philippines. Each case must be judged in the light of its peculiar circumstances. 6 In the case at bench, petitioner does not engage in commercial dealings or activities in the country because it is precluded from doing so by P.D. No. 218, under which it was established. 7 Nonetheless, it has been continuously, since 1983, acting as a supervision, communications and coordination center for its home office's affiliates in Singapore, and in the process has named its local agent and has employed Philippine nationals like private respondent Romana Lanchinebre. From this uninterrupted performance by petitioner of acts pursuant to its primary purposes and functions as a regional/area headquarters for its home office, it is clear that petitioner is doing business in the country. Moreover, private respondents are estopped from assailing the personality of petitioner. So we held in Merrill Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824, 837 (1992):The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the "doctrine of estoppel to

deny corporate existence applies to foreign as well as to domestic corporations;" "one who has dealth with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity." The principle "will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract, . . . (Citations omitted.)Finally, the trial court erred when it dismissed Civil Case No. 92-2486 on what it found to be the misjoinder of private respondent Teofilo Lanchinebre as party defendant. It is a basic rule that "(m)isjoinder or parties is not ground for dismissal of an action." 8 Moreover, the Order of the trial court is based on Section 4(h), Rule 3 of the Revised Rules of Court, which provides:A married woman may not . . . be sued alone without joining her husband, except . . . if the litigation is incidental to the profession, occupation or business in which she is engaged,Whether or not the subject loan was incurred by private respondent as an incident to her profession, occupation or business is a question of fact. In the absence of relevant evidence, the issue cannot be resolved in a motion to dismiss.IN VIEW WHEREOF, the instant Petition is GRANTED. The Orders, dated December 21, 1992 and March 8, 1993, in Civil Case No. 92-2486 are REVERSED AND SET ASIDE. The RTC of Makati, Br. 59, is hereby ordered to hear the reinstated case on its merits. No costs.SO ORDERED.