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FILIPINAS PORT SERVICES, INC V. GO ....................

2
ANGELES V. SANTOS .................................................. 7
TAN V. SYCIP ............................................................. 12
BOARD OF LIQUIDATORS V. HEIRS OF KALAW ..... 18
MONTELIBANO V. BACOLOD-MURCIA MILLING CO.,
INC. ............................................................................25
PSE V. CA .................................................................. 28
ONG YONG V. TIU .................................................... 33
LIPAT V. PACIFIC BANKING CORP .......................... 41
FRANCISCO V. GSIS ................................................. 45
WOODCHILD V. ROXAS ELECTRIC ......................... 49
WESTMONT V. CA .................................................... 58
ASSOCIATED BANK V. PRONSTROLLER ................ 62

FILIPINAS PORT SERVICES, INC V. GO
D E C I S I O N
GARCIA, J.:
Assailed and sought to be set aside in this petition for review
on certiorari is the Decision
1
dated 19 January 2004 of the
Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an
earlier decision of the Regional Trial Court (RTC) of Davao City
and accordingly dismissing the derivative suit instituted by
petitioner Eliodoro C. Cruz for and in behalf of the
stockholders of co-petitioner Filipinas Port Services, Inc.
(Filport, hereafter).
The case is actually an intra-corporate dispute involving
Filport, a domestic corporation engaged in stevedoring services
with principal office in Davao City. It was initially instituted
with the Securities and Exchange Commission (SEC) where the
case hibernated and remained unresolved for several years
until it was overtaken by the enactment into law, on 19 July
2000, of Republic Act (R.A.) No. 8799, otherwise known as the
Securities Regulation Code. From the SEC and consistent with
R.A. No. 8799, the case was transferred to the RTC of Manila,
Branch 14, sitting as a corporate court. Subsequently, upon
respondents motion, the case eventually landed at the RTC of
Davao City where it was docketed as Civil Case No. 28,552-
2001. RTC-Davao City, Branch 10, ruled in favor of the
petitioners prompting respondents to go to the CA in CA-G.R.
CV No. 73827. This time, the respondents prevailed, hence, this
petition for review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports
president from 1968 until he lost his bid for reelection as
Filports president during the general stockholders meeting in
1991, wrote a letter
2
to the corporations Board of Directors
questioning the boards creation of the following positions with
a monthly remuneration of P13,050.00 each, and the election
thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C.
Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de
Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co
(Director)
Asst. Vice-President for Administration - Henry Chua
(Director)
Special Asst. to the Chairman - Arsenio Lopez Chua
(Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take
necessary action/actions to recover from those elected to the
aforementioned positions the salaries they have received.
On 15 September 1992, the board met and took up Cruzs letter.
The records do not show what specific action/actions the board
had taken on the letter. Evidently, whatever action/actions the
board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport
and its stockholders, among which is herein co-petitioner
Mindanao Terminal and Brokerage Services, Inc. (Minterbro),
filed with the SEC a petition
3
which he describes as a derivative
suit against the herein respondents who were then the
incumbent members of Filports Board of Directors, for alleged
acts of mismanagement detrimental to the interest of the
corporation and its shareholders at large, namely:
1. creation of an executive committee in 1991
composed of seven (7) members of the board with
compensation of P500.00 for each member per
meeting, an office which, to Cruz, is not provided for
in the by-laws of the corporation and whose function
merely duplicates those of the President and General
Manager;
2. increase in the emoluments of the Chairman, Vice-
President, Treasurer and Assistant General Manager
which increases are greatly disproportionate to the
volume and character of the work of the directors
holding said positions;
3. re-creation of the positions of Assistant Vice-
Presidents (AVPs) for Corporate Planning,
Operations, Finance and Administration, and the
election thereto of board members Edgar C. Trinidad,
Eliezer de Jesus, Mary Jean D. Co and Henry Chua,
respectively; and
4. creation of the additional positions of Special
Assistants to the President and the Board Chairman,
with Fortunato V. de Castro and Arsenio Lopez Chua
elected to the same, the directors elected/appointed
thereto not doing any work to deserve the monthly
remuneration of P13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491,
Cruz alleged that despite demands made upon the respondent
members of the board of directors to desist from creating the
positions in question and to account for the amounts incurred
in creating the same, the demands were unheeded. Cruz thus
prayed that the respondent members of the board of directors
be made to pay Filport, jointly and severally, the sums of
money variedly representing the damages incurred as a result
of the creation of the offices/positions complained of and the
aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim,
4
the respondents
denied the allegations of mismanagement and materially
averred as follows:
1. the creation of the executive committee and the
grant of per diems for the attendance of each member
are allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the
Chairman, Vice-President, Treasurer and Assistant
General Manager were well within the financial
capacity of the corporation and well-deserved by the
officers elected thereto; and
3. the positions of AVPs for Corporate Planning,
Operations, Finance and Administration were already
in existence during the tenure of Cruz as president of
the corporation, and were merely recreated by the
Board, adding that all those appointed to said
positions of Assistant Vice Presidents, as well as the
additional position of Special Assistants to the
Chairman and the President, rendered services to
deserve their compensation.
In the same Answer, respondents further averred that Cruz and
his co-petitioner Minterbro, while admittedly stockholders of
Filport, have no authority nor standing to bring the so-called
"derivative suit" for and in behalf of the corporation; that
respondent Mary Jean D. Co has already ceased to be a
corporate director and so with Fortunato V. de Castro, one of
those holding an assailed position; and that no demand to
cease and desist from further committing the acts complained
of was made upon the board. By way of affirmative defenses,
respondents asserted that (1) the petition is not duly verified by
petitioner Filport which is the real party-in-interest; (2)
Filport, as represented by Cruz and Minterbro, failed to
exhaust remedies for redress within the corporation before
bringing the suit; and (3) the petition does not show that the
stockholders bringing the suit are joined as nominal parties. In
support of their counterclaim, respondents averred that Cruz
filed the alleged derivative suit in bad faith and purely for
harassment purposes on account of his non-reelection to the
board in the 1991 general stockholders meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-
4491) hibernated with the SEC for a long period of time. With
the enactment of R.A. No. 8799, the case was first turned over
to the RTC of Manila, Branch 14, sitting as a corporate court.
Thereafter, on respondents motion, it was eventually
transferred to the RTC of Davao City whereat it was docketed
as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its
decision
5
in the case. Even as it found that (1) Filports Board of
Directors has the power to create positions not provided for in
the by-laws of the corporation since the board is the governing
body; and (2) the increases in the salaries of the board
chairman, vice-president, treasurer and assistant general
manager are reasonable, the trial court nonetheless rendered
judgment against the respondents by ordering the directors
holding the positions of Assistant Vice President for Corporate
Planning, Special Assistant to the President and Special
Assistant to the Board Chairman to refund to the corporation
the salaries they have received as such officers "considering
that Filipinas Port Services is not a big corporation requiring
multiple executive positions" and that said positions "were just
created for accommodation." We quote the fallo of the trial
courts decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action
to restore to the corporation the total amount of salaries he
received as assistant vice president for corporate planning; and
likewise ordering Fortunato V. de Castro and Arsenio Lopez
Chua under the fourth cause of action to restore to the
corporation the salaries they each received as special assistants
respectively to the president and board chairman. In case of
insolvency of any or all of them, the members of the board who
created their positions are subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein
respondents went on appeal to the CA in CA-G.R. CV No.
73827.
In its decision
6
of 19 January 2004, the CA, taking exceptions
to the findings of the trial court that the creation of the
positions of Assistant Vice President for Corporate Planning,
Special Assistant to the President and Special Assistant to the
Board Chairman was merely for accommodation purposes,
granted the respondents appeal, reversed and set aside the
appealed decision of the trial court and accordingly dismissed
the so-called derivative suit filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal
is GRANTED, the challenged decision is REVERSED andSET
ASIDE, and a new one entered DISMISSING Civil Case No.
28,552-2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its
decision, the CA, before proceeding to address the merits of the
appeal, prefaced its disposition with the statement reading
"[T]he appeal is bereft of merit,"
7
thereby contradicting the
very fallo of its own decision and the discussions made in the
body thereof, respondents filed with the appellate court a
Motion For Nunc Pro Tunc Order,
8
thereunder praying that the
phrase "[T]he appeal is bereft of merit," be corrected to read
"[T]he appeal is impressed with merit." In its resolution
9
of 23
April 2004, the CA granted the respondents motion and
accordingly effected the desired correction.
Hence, petitioners present recourse.
Petitioners assigned four (4) errors allegedly committed by the
CA. For clarity, we shall formulate the issues as follows:
1. Whether the CA erred in holding that Filports
Board of Directors acted within its powers in creating
the executive committee and the positions of AVPs for
Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to
the President and the Board Chairman, each with
corresponding remuneration, and in increasing the
salaries of the positions of Board Chairman, Vice-
President, Treasurer and Assistant General Manager;
and
2. Whether the CA erred in finding that no evidence
exists to prove that (a) the positions of AVP for
Corporate Planning, Special Assistant to the President
and Special Assistant to the Board Chairman were
created merely for accommodation, and (b) the
salaries/emoluments corresponding to said positions
were actually paid to and received by the directors
appointed thereto.
For their part, respondents, aside from questioning the
propriety of the instant petition as the same allegedly raises
only questions of fact and not of law, also put in issue the
purported derivative nature of the main suit initiated by
petitioner Eliodoro C. Cruz allegedly in representation of and
in behalf of Filport and its stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under
Rule 45 of the Rules of Court, only questions of law may be
raised and passed upon by the Court. Factual findings of the CA
are binding and conclusive and will not be reviewed or
disturbed on appeal.
10
Of course, the rule is not cast in stone; it
admits of certain exceptions, such as when the findings of fact
of the appellate court are at variance with those of the trial
court,
11
as here. For this reason, and for a proper and complete
resolution of the case, we shall delve into the records and
reexamine the same.
The governing body of a corporation is its board of directors.
Section 23 of the Corporation Code
12
explicitly provides that
unless otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be
controlled and held by a board of directors. Thus, with the
exception only of some powers expressly granted by law to
stockholders (or members, in case of non-stock corporations),
the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies,
enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law. Verily,
the authority of the board of directors is restricted to the
management of the regular business affairs of the corporation,
unless more extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers
on the board of directors is not lost on the Court. Indeed, the
concentration in the board of the powers of control of
corporate business and of appointment of corporate officers
and managers is necessary for efficiency in any large
organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is
for the stockholders to choose the directors who shall control
and supervise the conduct of corporate business.
13

In the present case, the boards creation of the positions of
Assistant Vice Presidents for Corporate Planning, Operations,
Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, was in
accordance with the regular business operations of Filport as it
is authorized to do so by the corporations by-laws, pursuant to
the Corporation Code.
The election of officers of a corporation is provided for under
Section 25 of the Code which reads:
Sec. 25. Corporate officers, quorum. Immediately after their
election, the directors of a corporation must formally organize
by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws. (Emphasis
supplied.)
In turn, the amended Bylaws of Filport
14
provides the
following:
Officers of the corporation, as provided for by the by-laws, shall
be elected by the board of directors at their first meeting after
the election of Directors. xxx
The officers of the corporation shall be a Chairman of the
Board, President, a Vice-President, a Secretary, a Treasurer, a
General Manager and such other officers as the Board of
Directors may from time to time provide, and these officers
shall be elected to hold office until their successors are elected
and qualified. (Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the
positions in question is provided for in the same by-laws of the
corporation, viz:
xxx The Board of Directors shall fix the compensation of the
officers and agents of the corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the
creation by its board of directors of an executive committee.
Under Section 35
15
of the Corporation Code, the creation of an
executive committee must be provided for in the bylaws of the
corporation.
Notwithstanding the silence of Filports bylaws on the matter,
we cannot rule that the creation of the executive committee by
the board of directors is illegal or unlawful. One reason is the
absence of a showing as to the true nature and functions of said
executive committee considering that the "executive
committee," referred to in Section 35 of the Corporation Code
which is as powerful as the board of directors and in effect
acting for the board itself, should be distinguished from other
committees which are within the competency of the board to
create at anytime and whose actions require ratification and
confirmation by the board.
16
Another reason is that,
ratiocinated by both the two (2) courts below, the Board of
Directors has the power to create positions not provided for in
Filports bylaws since the board is the corporations governing
body, clearly upholding the power of its board to exercise its
prerogatives in managing the business affairs of the
corporation.
As well, it may not be amiss to point out that, as testified to and
admitted by petitioner Cruz himself, it was during his
incumbency as Filport president that the executive committee
in question was created, and that he was even the one who
moved for the creation of the positions of the AVPs for
Operations, Finance and Administration. By his acquiescence
and/or ratification of the creation of the aforesaid offices, Cruz
is virtually precluded from suing to declare such acts of the
board as invalid or illegal. And it makes no difference that he
sues in behalf of himself and of the other stockholders. Indeed,
as his voice was not heard in protest when he was still Filports
president, raising a hue and cry only now leads to the inevitable
conclusion that he did so out of spite and resentment for his
non-reelection as president of the corporation.
With regard to the increased emoluments of the Board
Chairman, Vice-President, Treasurer and Assistant General
Manager which are supposedly disproportionate to the volume
and nature of their work, the Court, after a judicious scrutiny of
the increase vis--vis the value of the services rendered to the
corporation by the officers concerned, agrees with the findings
of both the trial and appellate courts as to the reasonableness
and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate
their evidence as to the alleged acts of mismanagement by the
then incumbent board. A perusal of the records, however,
reveals that petitioners merely relied on the testimony of Cruz
in support of their bold claim of mismanagement. To the mind
of the Court, Cruz testimony on the matter of mismanagement
is bereft of any foundation. As it were, his testimony consists
merely of insinuations of alleged wrongdoings on the part of
the board. Without more, petitioners posture of
mismanagement must fall and with it goes their prayer to hold
the respondents liable therefor.
But even assuming, in gratia argumenti, that there was
mismanagement resulting to corporate damages and/or
business losses, still the respondents may not be held liable in
the absence, as here, of a showing of bad faith in doing the acts
complained of.
If the cause of the losses is merely error in business judgment,
not amounting to bad faith or negligence, directors and/or
officers are not liable.
17
For them to be held accountable, the
mismanagement and the resulting losses on account thereof
are not the only matters to be proven; it is likewise necessary to
show that the directors and/or officers acted in bad faith and
with malice in doing the assailed acts. Bad faith does not
simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of a known duty through some
motive or interest or ill-will partaking of the nature of
fraud.
18
We have searched the records and nowhere do we find
a "dishonest purpose" or "some moral obliquity," or "conscious
doing of a wrong" on the part of the respondents that "partakes
of the nature of fraud."
We thus extend concurrence to the following findings of the
CA, affirmatory of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz,
as president and director, that the executive committee was
created. What is more, it was appellee himself who moved for
the creation of the positions of assistant vice presidents for
operations, for finance, and for administration. He should not
be heard to complain thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president,
treasurer, and assistant general manager are indeed reasonable
enough in view of the responsibilities assigned to them, and the
special knowledge required, to be able to effectively discharge
their respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed
by the CA, are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the
trial court parted ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the
creation of the positions of the three (3) AVPs for Corporate
Planning, Special Assistant to the President and Special
Assistant to the Board Chairman, each with a salary
of P13,050.00 a month, was merely for accommodation
purposes considering that Filport is not a big corporation
requiring multiple executive positions. Hence, the trial courts
order for said officers to return the amounts they received as
compensation.
On the other hand, the CA took issue with the trial court and
ruled that Cruzs accommodation theory is not based on facts
and without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside
from Cruzs bare and self-serving testimony, no other evidence
was presented to show the fact of "accommodation." By itself,
the testimony of Cruz is not enough to support his claim that
accommodation was the underlying factor behind the creation
of the aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not
constitute evidence adequate to support a conclusion. It is
basic in the rule of evidence that he who alleges a fact bears the
burden of proving it by the quantum of proof required. Bare
allegations, unsubstantiated by evidence, are not equivalent to
proof under the Rules of Court.
19
The party having the burden
of proof must establish his case by a preponderance of
evidence.
20

Besides, the determination of the necessity for additional
offices and/or positions in a corporation is a management
prerogative which courts are not wont to review in the absence
of any proof that such prerogative was exercised in bad faith or
with malice.1awphi1.nt
Indeed, it would be an improper judicial intrusion into the
internal affairs of Filport were the Court to determine the
propriety or impropriety of the creation of offices therein and
the grant of salary increases to officers thereof. Such are
corporate and/or business decisions which only the
corporations Board of Directors can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,
21
the
Court unequivocally held:
Questions of policy or of management are left solely to the
honest decision of the board as the business manager of the
corporation, and the court is without authority to substitute its
judgment for that of the board, and as long as it acts in good
faith and in the exercise of honest judgment in the interest of
the corporation, its orders are not reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert
that the CA went beyond the issues raised in the court of origin
when it ruled on the absence of receipt of actual payment of the
salaries/emoluments pertaining to the positions of Assistant
Vice-President for Corporate Planning, Special Assistant to the
Board Chairman and Special Assistant to the President.
Petitioners insist that the issue of nonpayment was never
raised by the respondents before the trial court, as in fact, the
latter allegedly admitted the same in their Answer With
Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the
directors appointed to the assailed positions are not doing
anything to deserve their compensation, petitioners are
saddled with the burden of proving that salaries were actually
paid. Since the trial court, in effect, found that the petitioners
successfully proved payment of the salaries when it directed
the reimbursements of the same, respondents necessarily have
to raise the issue on appeal. And the CA rightly resolved the
issue when it found that no evidence of actual payment of the
salaries in question was actually adduced. Respondents alleged
admission of the fact of payment cannot be inferred from a
reading of the pertinent portions of the parties respective
initiatory pleadings. Respondents allegations in their Answer
With Counterclaim that the officers corresponding to the
positions created "performed the work called for in their
positions" or "deserve their compensation," cannot be
interpreted to mean that they were "actually paid" such
compensation. Directly put, the averment that "one deserves
ones compensation" does not necessarily carry the implication
that "such compensation was actually remitted or received."
And because payment was not duly proven, there is no
evidentiary or factual basis for the trial court to direct
respondents to make reimbursements thereof to the
corporation.
This brings us to the respondents claim that the case filed by
the petitioners before the SEC, which eventually landed in
RTC-Davao City as Civil Case No. 28,552-2001, is not a
derivative suit, as maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured
party, its power to sue is lodged with its board of directors or
trustees. But an individual stockholder may be permitted to
institute a derivative suit in behalf of the corporation in order
to protect or vindicate corporate rights whenever the officials
of the corporation refuse to sue, or when a demand upon them
to file the necessary action would be futile because they are the
ones to be sued, or because they hold control of the
corporation.
22
In such actions, the corporation is the real party-
in-interest while the suing stockholder, in behalf of the
corporation, is only a nominal party.
23

Here, the action below is principally for damages resulting
from alleged mismanagement of the affairs of Filport by its
directors/officers, it being alleged that the acts of
mismanagement are detrimental to the interests of Filport.
Thus, the injury complained of primarily pertains to the
corporation so that the suit for relief should be by the
corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a "derivative suit" to
vindicate the alleged corporate injury, in which case Cruz is
only a nominal party while Filport is the real party-in-interest.
For sure, in the prayer portion of petitioners petition before
the SEC, the reliefs prayed were asked to be made in favor of
Filport.
Besides, the requisites before a derivative suit can be filed by a
stockholder are present in this case, to wit:
a) the party bringing suit should be a shareholder as
of the time of the act or transaction complained of, the
number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies,
i.e., has made a demand on the board of directors for
the appropriate relief but the latter has failed or
refused to heed his plea; and
c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the
particular stockholder bringing the suit.
24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2)
he sought without success to have its board of directors remedy
what he perceived as wrong when he wrote a letter requesting
the board to do the necessary action in his complaint; and (3)
the alleged wrong was in truth a wrong against the
stockholders of the corporation generally, and not against Cruz
or Minterbro, in particular. In the end, it is Filport, not Cruz
which directly stands to benefit from the suit. And while it is
true that the complaining stockholder must show to the
satisfaction of the court that he has exhausted all the means
within his reach to attain within the corporation itself the
redress for his grievances, or actions in conformity to his
wishes, nonetheless, where the corporation is under the
complete control of the principal defendants, as here, there is
no necessity of making a demand upon the directors. The
reason is obvious: a demand upon the board to institute an
action and prosecute the same effectively would have been
useless and an exercise in futility. In fine, we rule and so hold
that the petition filed with the SEC at the instance of Cruz,
which ultimately found its way to the RTC of Davao City as
Civil Case No. 28,552-2001, is a derivative suit of which Cruz
has the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged
decision of the CA is AFFIRMED in all respects.
No pronouncement as to costs.
SO ORDERED.

ANGELES V. SANTOS

D E C I S I O N
LAUREL, J.:
The plaintiffs and the defendants are all stockholders and
members of the board of directors of the "Paranaque Rice Mill,
Inc.," a corporation organized for the purpose of operating a
rice mill in the municipality of Paranaque, Province of Rizal.
On September 6, 1932, a complaint entitled "Higinio Angeles,
Jose de Lara, Aguedo Bernabe, as stockholders, for and in
behalf of the corporation, Paranaque Rice Mill, Inc., and other
stockholders of said corporation who may desire to join,
plaintiffs, vs. T'eodorico B. Santos, Estanislao Mayuga,
Apolonio Pascual, and Basilisa Rodriguez, defendants" was
filed with the Court of First Instance of Rizal. After formal
allegations relative to age and residence of the parties and the
due incorporation of the Paranaque Rice Mill, Inc., the
complaint avers substantially the following: (a) That the
plaintiffs are stockholders and constitute the minority and the
defendants are also stockholders and constitute the majority of
the board of directors of the Paranaque Rice Mill, Inc.; (b) that
at an extraordinary meeting held on February 21, 1932, the
stockholders appointed an investigation committee of which
the plaintiff Jose de Lara was chairman and the stockholders
Dionisio Tomas and Aguedo Bernabe were members, to
investigate and determine the properties, operations, and
losses of the corporation as shown in the auditor's report
corresponding to the year 1931, but the defendants, particularly
Teodorico B. Santos, who was the president of the corporation,
denied access to the properties, books and records of the
corporation which were in their possession ; (c) that the
defendant Teodorico B. Santos, in violation of the by-laws of
the corporation, had taken possession of the books, vouchers,
and corporate records as well as of the funds and income of the
Paranaque Rice Mill, Inc., all of which, according to the by-
laws, should be under the exclusive control and possession of
the secretary-treasurer, the plaintiff Aguedo Bernabe; (d) that
the said Teodorico B. Santos, had appropriated to his own
benefit properties, funds, and income of the corporation in the
sum of P10,000; (e) that Teodorico B. Santos, for the purpose
of illegally controlling the affairs of the corporation, refused to
sign and issue the corresponding certificate of stock for the 600
fully paid-up shares of the plaintiff, Higinio Angeles, of the
total value of P15,000; (f) that notwithstanding written
requests made in conformity with the by-laws of the
corporation of three members of the board of directors who are
holders of more than one-third of the subscribed capital stock
of the corporation, the defendant Teodorico B. Santos as
president of the corporation refused to call a meeting of the
board of directors and of the stockholders; (g) that in violation
of the by-laws of the corporation, the defendants who
constitute the majority of the board of directors refused to hold
ordinary monthly meetings of the board since March, 1932; (h)
that Teodorico B. Santos as president of the corporation, in
connivance with his co-defendants, was disposing of the
properties and records of the corporation without authority
from the board of directors or the stockholders of the
corporation and without making any report of his acts to the
said board of directors or to any other officer of the
corporation, and that, to prevent any interference with or
examination of his arbitrary, acts, he arbitrarily suspended
plaintiff Jose de Lara from the office of general manager to
which office the latter had been lawfully elected by the
stockholders; and (i) that the corporation had gained about
P4,000 during the first half of the year 1932, but that because
of the illegal and arbitrary acts of the defendants not only the
funds but also the books and records of the corporation are in
danger of disappearing.
The complaint prays: (a) That after the filing of the bond in an
amount to be fixed by the court, Melchor de Lara of Paranaque,
Rizal, be appointed receiver of the properties, funds, and
business of the Paranaque Rice Mill, Inc., as well as the books
and records thereof, with authority to continue the business of
the corporation; (b) that the defendant Teodorico B. Santos be
ordered to render a detailed accounting of the properties, funds
and income of the corporation from the year 1927 to date; (c)
that the said defendant be required to pay to the corporation
the amount of P10,000 and other amounts which may be found
due to the said corporation as damages or for any other cause;
(d) that said defendant be ordered to sign the certificate of
stock subscribed to and paid by the plaintiff Higinio Angeles;
and (e) that the members of the board of directors of the
Paranaque Rice Mill, Inc., be removed and an extraordinary
meeting of the stockholders called for the purpose of electing a
new board of directors.
On the date of the filing of the complaint, September 6, 1932,
the court issued an ex parte order of receivership appointing
Melchor de Lara as receiver of the corporation upon the filing
of a bond of P1,000 by the plaintiffs-appellees. The bond of the
receiver was fixed at P4,000.
Upon an urgent motion of the defendants-appellants setting
forth the reasons why Melchor de Lara should not have been
appointed receiver, and upon agreement of the parties, the trial
court, by order of September 13, 1932, appointed Benigno
Agco, as receiver, in lieu of Melchor de Lara. About a month
later, or on October 14, 1932, the court, after considering the
memoranda filed by both parties, revoked its order appointing
Agco as receiver.
On July 12, 1933, the defendants-appellants presented their
amended answer to the complaint, containing a general and
specific denial, and alleging as special defense that the
defendant Teodorico B. Santos refused to sign the certificate of
stock in favor of the plaintiff Higinio Angeles for 600 shares
valued at P15,000, because the board of directors decided to
give Higinio Angeles only 320 shares of stock worth P8,000.
The answer contains a counterclaim for P5,000 alleged to have
been suffered by the corporation due to the alleged illegal and
malicious procurement by the plaintiffs of an ex parte order of
receivership. . Damages in the amount of P2,000 are also
alleged to have been suffered by the defendants by reason of
the failure of theplaintiffs to present their grievances to the
board of directors before going to court. The amended answer
sets forth, furthermore, a cross-complaint against the plaintiffs,
and in behalf of the Paranaque Rice Mill, Inc., based on the
alleged failure of the plaintiff Higinio Angeles to render a
report of his administration of the corporation from February
14 to June 30, 1928, during which time the corporation is
alleged to have had accrued earnings of approximately P3,000.
In both the counterclaim and crosscomplaint Paranaque Rice
Mill, Inc. is joined as party defendant.
On July 24, 1934, the plaintiffs-appellees renewed their
petition for the appointment of a receiver pendente litealleging,
among other things, that defendant Teodorico B. Santos was
using the funds of the corporation for purely personal ends;
that said Teodorico B. Santos was managing the funds of the
corporation in a manner highly prejudicial to the interests of
the corporation and its stockholders; that said defendant did
not render any account of his management or of the condition
of the business of the corporation; that since 1932 said
defendant called no meeting of the board of directors or of the
stockholders thus enabling him to continue holding, without
any election, the position of president and, finally, that of
manager; and that, without the knowledge and consent of the
stockholders and of the board of directors, the said defendant
installed a small rice mill for converting rice husk into "tiqui-
tiqui", the income of which was never turned over or reported
to the treasurer of the corporation.
The defendants-appellants objected to the petition for the
appointment of a receiver on the ground, among others, that
the court had no jurisdiction over the Paranaque Rice Mill,
Inc., because it had not been included as party defendant in
this case and that, therefore, the court could not properly
appoint a receiver of the corporationpendente lite.
After hearing both parties, the trial court, by order of October
31, 1934, appointed Emilio Figueroa, as receiver of the
corporation, after giving a bond in the amount of P2,000. An
urgent motion for the reconsideration of this order, filed by
counsel for the defendants-appellants on November 3, 1934,
was denied by the court on November 7, 1934.
On November 8, 1934, the trial court, having heard the case on
its merits, rendered a decision, the dispositive part of which is
as follows:
"Por todo lo expuesto, el Juzgado falia este asunto:
"1. Ordenando al demandado Teodorico B. Santos a rendir
cuenta detallada de las propiedades, fondos e ingresos de la
corporation Paranaque Rice Mill, Inc., desde el ano 1931 hasta
la fecha;
"2. Condenando a dicho demandado a pagar a la corporation
Paranaque Rice Mill, Inc., cualesquiera cantidad o cantidades
que resultare en deber a dicha corporacidn; de acuerdo con
dicha rendition de cuentas;
"3. Declarando al demandante Higinio M. Angeles con derecho
a tener expedido a su nombre 600 acciones por valor par de
P15,000.
"4. Destituyendo a los demandados de su cargo como
directores de la corporaci6n hasta la nueva eleccion por los
accionistas que se convocara una vez firme esta sentencia; y
"5. Condenando a los demandados a pagar las costas."
On November 21, 1934, the defendants-appellants, moved for
reconsideration of the decision and at the same time prayed for
the dismissal of the case, because of defect of parties
defendant.
On December 6, 1934, the Paranaque Rice Mill, Inc., thru
counsel for the defendants, entered a special appearance for
the sole purpose of objecting to the order of the court of
October 31, 1934, appointing a receiver, on the ground that the
Paranaque Rice Mill, Inc., was not a party to the proceedings.
And on December 8, 1934, the defendants excepted to the
decision of the trial court and moved for a new trial on the
ground that the evidence presented was insufficient to justify
the decision and that said decision was contrary to law. The
motions for reconsideration and new trial and the special
appearance were, by separate orders bearing date of December
19, 1934, denied by the trial court. The case was finally elevated
to this court by bill of exceptions.
The defendants-appellants submit the following assignment of
errors:
"1. The lower court erred in holding that it has jurisdiction to
appoint a receiver of the corporation, Taranaque Rice Mill,
Inc., on October 31, 1934.
"2. The lower court erred in overruling the motion of the
defendants to include the defendant corporation as party
defendant and in holding that it is not a necessary party.
"3. The lower court erred in not granting a motion for a new
trial because there is a defect of party defendant.
"4. The lower court erred in not dismissing the case because a
necessary defendant was not made a party in the case.
"5. The lower court erred in ordering the defendant Teodorico
B. Santos to render a detailed accounting of the properties,
funds and income of the corporation Taranaque Rice Mill, Inc.,
from the year 1931 to this date.
"6. The lower court erred in condemning the defendant
Teodorico B. Santos to pay the corporation whatever sum or
sums which may be found owing to said corporation, in
accordance with the said accounting to be done by him.
"7. The lower court erred in ordering the destitution of the
defendants from their office as members of the board of
directors of the corporation, until the new election of the
stockholders which shall be held once the decision has become
final.
"8. The lower court erred in declaring that Higinio Angeles is
entitled to have in his name 600 shares of stock of the par
value of P15,000.
"9. The lower court erred in overruling and denying appellants'
motion for the reconsideration and the dismissal of the case
dated November 21, 1934.
"10. The lower court erred in denying the motion of these
appellants for new trial."
In their discussion of the first, second, third, and fourth
assignments of error, the defendants-appellants vigorously
assert that the' Paranaque Rice Mill, Inc., is a necessary party
in this case, and that not having been made a party, the trial
court was without jurisdiction to appoint a receiver and should
have dismissed the case.
There is ample evidence in the present case to show that the
defendants have been guilty of breach of trust as directors of
the corporation and the lower court so found. The board of
directors of a corporation is a creation of the stockholders and
controls and directs the affairs of the corporation by delegation
of the stockholders. But the board of directors, or the majority
thereof, in drawing to themselves the powers of the
corporation, occupies a position of trusteeship in relation to the
minority of the stock in the sense that the board should
exercise good faith, care and diligence in the administration of
the affairs of the corporation and should protect not only the
interests of the majority but also those of the minority of the
stock. Where a majority of the board of directors wastes or
dissipates the funds of the corporation or fraudulently disposes
of its properties, or performs ultra viresacts, the court, in the
exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed
by the minority members of the board of directors, for and in
behalf of the corporation, to prevent waste and dissipation and
the commission of illegal acts and otherwise redress the
injuries of the minority stockholders against the wrongdoing of
the majority. The action in such a case is said to be brought
derivatively in behalf of the corporation to protect the rights of
the minority stockholders thereof (7 R. C. L., pars. 293 and
294, and authorities therein cited; 13 Fletcher, Cyc. of Corp.,
pars. 593, et seq., and authorities therein cited).
It is well settled in this jurisdiction that where corporate
directors are guilty of a breach of trustnot of mere error of
judgment or abuse of discretionand intracorporate remedy is
futile or useless, a stockholder may institute a suit in behalf of
himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted
directly upon the corporation and indirectly upon the
stockholders. An illustration of a suit of this kind is found in
the case of Pascual vs. Del Saz Orozco (19 Phil., 82), decided by
this court as early as 1911. In that case, the Banco Espanol-
Filipino suffered heavy losses due to fraudulent connivance
between a depositor and an employee of the bank, which
losses, it was contended, could have been avoided if the
president and directors had been more vigilant in the
administration of the affairs of the bank. The stockholders
constituting the minority brought a suit in behalf of the bank
against the directors to recover damages, and this over the
objection of the majority of the stockholders and the directors.
This court held that the suit could properly be maintained.
The contention of the defendants in the case at bar that the
Paranaque Rice Mill, Inc., should have been brought in as a
necessary party and the action maintained in its name and in
its behalf directly states the general rule, but not the exception
recognized by this court in the case of Everett vs. Asia Banking
Corporation (49 Phil, 512, 527). In that case, upon invocation
of the general" rule by the appellees there, this court said:
"Invoking the well-known rule that shareholders cannot
ordinarily sue in equity to redress wrongs done to the
corporation, but that the action must be brought by the board
of directors, the appellees argueand the court below held
that the corporation Teal & Company is a necessary party
plaintiff and that the plaintiff stockholders, not having made
any demand on the board to bring the action, are not the
proper parties plaintiff. But, like most rules, the rule in
question has its exceptions. It is alleged in the complaint and,
consequently, admitted through the demurrer that the
corporation Teal & Company is under the complete control of
the principal defendants in the case, and, in these
circumstances it is 6bvious that a demand upon the board of
directors to institute action and prosecute the same effectively
would have been useless, and the law does not require litigants
to perform useless acts. (Exchange Bank of Wewoka vs. Bailey,
29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper
Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal,, 329;
Glenn vs. Kittanning Brewing Co., 259 Pa., 510;
Hawesvs. Contra Costa Water Company, 104 U. S., 450.)"
The action having been properly brought and by the lower
court entertained it was within its power, upon proper
showing, to appoint a receiver of the corporation pendente
lite (sees. 173, 174, et seq. Code of Civil Procedure): The
appointment of a receiver upon application of the minority
stockholders is a power to be exercised with great caution. But
this does not mean that the rights of the minority stockholders
may be entirely disregarded, and where the necessity has
arisen, the appointment of a receiver for a corporation is a
matter resting largely in the sound discretion of the trial court.
Counsel for appellants argue that the appointment of a
receiver pendente lite in the present case has deprived the
corporation, Paranaque Rice Mill, Inc., of its property without
due process of law. But it is too plain to require argument that
the receiver was precisely appointed to preserve the properties
of the corporation. The receivership in this case shall continue
until a new board of directors shall have been elected and
constituted in accordance with law and the by-laws of the
corporation.
The first, second, third, and fourth assignments of error are,
therefore, overruled.
The appellants contend in their fifth and sixth assignments of
error that the lower court erred in ordering the defendant,
Teodorico B. Santos, to render a detailed accounting of the
properties, funds and income of the corporation, Paranaque
Rice Mill, Inc., from the year 1931 and in condemning him to
pay "the corporation whatever sum or sums which may be
found owing to said corporation, in accordance with the said
accounting to be done by him." We note that the lower court in
its decision not only orders the defendant Santos to account for
the properties and funds of the corporation, but it also and at
the same time adjudges him to pay an undetermined amount
which is made to depend upon the result of such accounting.
The accounting order was probably intended by the lower court
to be filed with it in this proceeding. This requirement will
delay the final disposition of the case and we are of the, opinion
that this accounting should better be filed with the new board
of directors whose election has been ordered by the lower
court. The decision of the lower court in this respect is
therefore modified so that the defendant Santos shall render a
complete accounting of all the corporate properties and funds
that may have come to his possession during the period
mentioned in the judgment of the lower court to the new board
of directors to be elected by the stockholders.
In the seventh assignment of error, the appellants contend that
the lower court erred in ordering the removal of the defendants
from their offices as members of the board of directors of the
corporation. The Corporation Law, as amended, in sections 29
to 34, provide for the election and removal of the directors of a
corporation. Our Corporation Law (Act No. 1459, as amended),
does not confer expressly upon the courts the power to remove
a director of a corporation. In some jurisdictions, statutes
expressly provide a more or less summary method for the
confirmation of the election and for the a motion of the
directors of a corporation. This is true in New York, New
Jersey, Virginia and other states of the American Union. There
are abundant authorities, however, which hold that if the court
has acquired jurisdiction to appoint a receiver because of the
mismanagement of directors these may thereafter be removed
and others appointed in their place by the court in the exercise
of its equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358,
pp. 118 and 119). In the present case, however, the properties
arid assets of the corporation being amply protected by the
appointment of a receiver and in view of the statutory
provisions above referred to, we are of the opinion that the
removal of the directors is, under the circumstances,
unnecessary and unwarranted. The seventh assignment of
error is, therefore, sustained.
Under the eighth assignment of error, the appellants argue that
the lower court erred in deciding that the plaintiff Higinio
Angeles is entitled to the issuance in his name of a certificate
covering 600 shares of stock of the total par value of P15,000.
A review of the evidence, oral and documentary, relative to the
number of shares of stock to which Higinio Angeles is entitled,
shows that Higinio Angeles brought in P15,000 partly in
money and partly in property, for 600 shares of stock. The very
articles of incorporation signed by all the incorporators, among
whom are the defendants, show that Higinio Angeles paid
P5,600 on account of his subscription amounting to P10,000,
The amount of P5,600 is the value of Angeles' cinematograph
building in Bacoor, Cavite, which he transferred to the
municipality of Paranaque where the same was reconstructed
for the use of the corporation. The receipts signed by the
Philippine Engineering Company and the testimony of Higinio
Angeles and Aguedo Bernabe (secretary-treasurer of the
corporation) show that Higinio Angeles paid with his own
funds the sum of P2,750 to the Philippine Engineering Co. as
part of the purchase price of the rice mill bought for the
corporation. Angeles' paid a further sum of P2,397.99 to the
Philippine Engineering Company. It also appears that for the
installation of the rice mill, the construction of a camarin, and
the cement paving (cementacion) of the whole area of two
camarines, and for the excavation of a well for the use of the
rice mill, the plaintiff Higinio Angeles paid with his own funds
the amount of P7,431.47. Adding all these sums together we
have a total of P18,179.46. At a meeting of the board of
directors on December 27, 1931, which meeting was convoked
by Angeles, it seemed to have been agreed that Angeles was to
be given shares of stock of the total par value of P15,000.
Angeles wanted to have P16,000 worth of stock to hiscredit for
having made the disbursements mentioned above, but he
finally agreed to accept 600 shares worth only P15,000. The
certificate of stock, however, was not issued as disagreement
arose between him and the defendant Santos. We, therefore,
find no error in the decision of the lower court ordering the
issuance of a certificate for 600 shares of stock of the total par
value of P15,000 to Higinio Angeles.
It is unnecessary to consider the ninth and tenth assignments
of error.
In view of the foregoing, we hold:
(1) That the action in the present case was properly instituted
by the plaintiffs as stockholders for and in behalf of the
corporation Paranaque Rice Mill, Inc., and other stockholders
of the said corporation;
(2) That the lower court committed no reviewable error in
appointing a receiver of the corporation pendente lite;
(3) That the lower court committed no error in ordering an
election of the new board of directors, which election shall be
held within thirty days fromthe date this decision becomes
final;
(4) That Teodorico B. Santos shall render an accounting of all
the properties, funds and income of the corporation which may
have come into his possession to the new board of directors;
(5) That the receiver, Emilio Figueroa, shall continue in office
until the election and qualification of the members of the new
board of directors;
(6) That upon the constitution of the new board of directors,
the said receiver shall turn over all the properties of the
corporation in his possession to the corporation, or such
person or persons as may be duly authorized by it; and
(7) That Higinio Angeles, or his successor in interest, is entitled
to 600 shares of stock at the par value of P15,000 and the lower
court committed no error in ordering the issuance of the
corresponding certificate of stock.
On June 10,1937, counsel for the plaintiffs-appellees filed a
motion making it appear of record that Higinio Angeles, one of
the plaintiffs and appellees, died on May 4, 1937 and that one
of his daughters, Maura Angeles y Reyes, had been granted
letters of administration as evidenced by the document
attached to the motion as Exhibit A, and praying that said
Maura Angeles y Reyes be substituted as one of the plaintiffs
and appellees in lieu of Higinio Angeles, deceased. This motion
is hereby granted.
Defendants-appellants shall pay the costs in both instances. So
ordered.
Avancena, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and
Conception, JJ., concur.

TAN V. SYCIP


DECISION

PANGANIBAN, CJ.:

For stock corporations, the quorum referred to in Section 52 of
the Corporation Code is based on the number of outstanding
voting stocks. For nonstock corporations, only those who
are actual, living members with voting rights shall be counted in
determining the existence of a quorum during members
meetings. Dead members shall not be counted.
The Case
The present Petition for Review on Certiorari
[1]
under
Rule 45 of the Rules of Court seeks the reversal of the January
23
[2]
and May 7, 2002,
[3]
Resolutions of the Court of Appeals
(CA) in CA-GR SP No. 68202. The first assailed Resolution
dismissed the appeal filed by petitioners with the
CA. Allegedly, without the proper authorization of the other
petitioners, the Verification and Certification of Non-Forum
Shopping were signed by only one of them -- Atty. Sabino
Padilla Jr. The second Resolution denied reconsideration.

The Facts

Petitioner Grace Christian High School (GCHS) is a
nonstock, non-profit educational corporation with fifteen (15)
regular members, who also constitute the board of
trustees.
[4]
During the annual members meeting held on April
6, 1998, there were only eleven (11)
[5]
living member-trustees,
as four (4) had already died. Out of the eleven, seven
(7)
[6]
attended the meeting through their respective
proxies. The meeting was convened and chaired by Atty.
Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis,
who argued that there was no quorum.
[7]
In the meeting,
Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
Judith Tan were voted to replace the four deceased member-
trustees.

When the controversy reached the Securities and
Exchange Commission (SEC), petitioners maintained that the
deceased member-trustees should not be counted in the
computation of the quorum because, upon their death,
members automatically lost all their rights (including the right
to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April
6, 1998 meeting null and void for lack of quorum. She held
that the basis for determining the quorum in a meeting of
members should be their number as specified in the articles of
incorporation, not simply the number
of living members.
[8]
She explained that the qualifying phrase
entitled to vote in Section 24
[9]
of the Corporation Code,
which provided the basis for determining a quorum for the
election of directors or trustees, should be read together with
Section 89.
[10]
The hearing officer also opined that Article III
(2)
[11]
of the By-Laws of GCHS, insofar as it prescribed the
mode of filling vacancies in the board of trustees, must be
interpreted in conjunction with Section 29
[12]
of the
Corporation Code. The SEC en banc denied the appeal of
petitioners and affirmed the Decision of the hearing officer in
toto.
[13]
It found to be untenable their contention that the word
members, as used in Section 52
[14]
of the Corporation Code,
referred only to the living members of a nonstock
corporation.
[15]
As earlier stated, the CA dismissed the appeal of
petitioners, because the Verification and Certification of Non-
Forum Shopping had been signed only by Atty. Sabino Padilla
Jr. No Special Power of Attorney had been attached to show
his authority to sign for the rest of the petitioners.

Hence, this Petition.
[16]
Issues
Petitioners state the issues as follows:

Petitioners principally pray for the
resolution of the legal question of whether or
not in NON-STOCK corporations, dead
members should still be counted in
determination of quorum for purposed of
conducting the Annual Members Meeting.

Petitioners have maintained before
the courts below that the DEAD members
should no longer be counted in computing
quorum primarily on the ground that
members rights are personal and non-
transferable as provided in Sections 90 and
91 of the Corporation Code of the
Philippines.

The SEC ruled against the petitioners
solely on the basis of a 1989 SEC Opinion
that did not even involve a non-stock
corporation as petitioner GCHS.

The Honorable Court of Appeals
on the other hand simply refused to resolve
this question and instead dismissed the
petition for review on a technicality the
failure to timely submit an SPA from the
petitioners authorizing theirco-
petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to
sign the petition on behalf of the rest of the
petitioners.

Petitioners humbly submit that the
action of both the SEC and the Court of
Appeals are not in accord with law
particularly the pronouncements of this
Honorable Court in Escorpizo v. University
of Baguio (306 SCRA 497), Robern
Development Corporation v. Quitain (315
SCRA 150,) and MC Engineering, Inc. v.
NLRC, (360 SCRA 183). Due course should
have been given the petition below and the
merits of the case decided in petitioners
favor.
[17]
In sum, the issues may be stated simply in
this wise: 1) whether the CA erred in denying the
Petition below, on the basis of a defective Verification
and Certification; and 2) whether dead members
should still be counted in the determination of the
quorum, for purposes of conducting the annual
members meeting.

The Courts Ruling
The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification
of Non-Forum Shopping

The Petition before the CA was initially flawed,
because the Verification and Certification of Non-Forum
Shopping were signed by only one, not by all, of the
petitioners; further, it failed to show proof that the signatory
was authorized to sign on behalf of all of them. Subsequently,
however, petitioners submitted a Special Power of Attorney,
attesting that Atty. Padilla was authorized to file the action on
their behalf.
[18]


In the interest of substantial justice, this initial
procedural lapse may be excused.
[19]
There appears to be no
intention to circumvent the need for proper verification and
certification, which are aimed at assuring the truthfulness and
correctness of the allegations in the Petition for Review and at
discouraging forum shopping.
[20]
More important, the
substantial merits of petitioners case and the purely legal
question involved in the Petition should be considered special
circumstances
[21]
or compelling reasons that justify an
exception to the strict requirements of the verification and the
certification of non-forum shopping.
[22]



Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called
for the purpose of electing directors or trustees
[23]
and
transacting some other business calling for or requiring the
action or consent of the shareholders or members,
[24]
such as
the amendment of the articles of incorporation and bylaws, sale
or disposition of all or substantially all corporate assets,
consolidation and merger and the like, or any other business
that may properly come before the meeting.
Under the Corporation Code, stockholders or members
periodically elect the board of directors or trustees, who are
charged with the management of the corporation.
[25]
The
board, in turn, periodically elects officers to carry out
management functions on a day-to-day basis. As owners,
though, the stockholders or members have residual powers
over fundamental and major corporate changes.
While stockholders and members (in some instances) are
entitled to receive profits, the management and direction of the
corporation are lodged with their representatives and agents --
the board of directors or trustees.
[26]
In other words, acts of
management pertain to the board; and those of ownership, to
the stockholders or members. In the latter case, the board
cannot act alone, but must seek approval of the stockholders or
members.
[27]

Conformably with the foregoing principles, one of the
most important rights of a qualified shareholder or member is
the right to vote -- either personally or by proxy -- for the
directors or trustees who are to manage the corporate
affairs.
[28]
The right to choose the persons who will direct,
manage and operate the corporation is significant, because it is
the main way in which a stockholder can have a voice in the
management of corporate affairs, or in which a member in a
nonstock corporation can have a say on how the purposes and
goals of the corporation may be achieved.
[29]
Once the
directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board in accordance with
law.
In the absence of an express charter or statutory
provision to the contrary, the general rule is that every member
of a nonstock corporation, and every legal owner of shares in a
stock corporation, has a right to be present and to vote in all
corporate meetings. Conversely, those who are not
stockholders or members have no right to vote.
[30]
Voting may
be expressed personally, or through proxies who vote in their
representative capacities.
[31]
Generally, the right to be present
and to vote in a meeting is determined by the time in which the
meeting is held.
[32]

Section 52 of the Corporation Code states:

Section 52. Quorum in Meetings. Unless
otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock
corporations.
In stock corporations, the presence of a quorum is
ascertained and counted on the basis of the outstanding
capital stock, as defined by the Code thus:

SECTION 137. Outstanding capital
stock defined. The term outstanding
capital stock as used in this Code, means the
total shares of stock issued under binding
subscription agreements to subscribers or
stockholders, whether or not fully or partially
paid, except treasury shares. (Underscoring
supplied)


The Right to Vote in
Stock Corporations

The right to vote is inherent in and incidental to the
ownership of corporate stocks.
[33]
It is settled that unissued
stocks may not be voted or considered in determining whether
a quorum is present in a stockholders meeting, or whether a
requisite proportion of the stock of the corporation is voted to
adopt a certain measure or act. Only stock actually issued and
outstanding may be voted.
[34]
Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless
otherwise provided in the articles of incorporation or declared
delinquent
[35]
under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or
represent shares that have never passed to the ownership of
stockholders; or, having so passed, have again been purchased
by the corporation.
[36]
These shares are not to be taken into
consideration in determining majorities. When the law speaks
of a given proportion of the stock, it must be construed to mean
the shares that have passed from the corporation, and that
may be voted.
[37]

Section 6 of the Corporation Code, in part, provides:

Section 6. Classification of shares.
The shares of stock of stock corporations
may be divided into classes or series of
shares, or both, any of which classes or series
of shares may have such rights, privileges or
restrictions as may be stated in the articles of
incorporation: Provided, That no share may
be deprived of voting rights except those
classified and issued as preferred or
redeemable shares, unless otherwise
provided in this Code: Provided, further,
that there shall always be a class or series of
shares which have complete voting rights.

x x x x x
x x x x

Where the articles of incorporation
provide for non-voting shares in the cases
allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote
on the following matters:

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

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

Taken in conjunction with Section 137, the last
paragraph of Section 6 shows that the intention of the
lawmakers was to base the quorum mentioned in Section 52 on
the number of outstanding voting stocks.
[38]


The Right to Vote in
Nonstock Corporations

In nonstock corporations, the voting rights attach to
membership.
[39]
Members vote as persons, in accordance with
the law and the bylaws of the corporation. Each member shall
be entitled to one vote unless so limited, broadened, or denied
in the articles of incorporation or bylaws.
[40]
We hold that
when the principle for determining the quorum for stock
corporations is applied by analogy to nonstock corporations,
only those who are actual members with voting rights should
be counted.
Under Section 52 of the Corporation Code, the
majority of the members representing the actual number of
voting rights, not the number or numerical constant that may
originally be specified in the articles of incorporation,
constitutes the quorum.
[41]

The March 3, 1986 SEC Opinion
[42]
cited by the
hearing officer uses the phrase majority vote of the members;
likewise Section 48 of the Corporation Code refers to 50
percent of 94 (the number of registeredmembers of the
association mentioned therein) plus one. The best evidence of
who are the present members of the corporation is the
membership book; in the case of stock corporations, it is the
stock and transfer book.
[43]

Section 25 of the Code specifically provides that a
majority of the directors or trustees, as fixed in the articles of
incorporation, shall constitute a quorum for the transaction of
corporate business (unless the articles of incorporation or the
bylaws provide for a greater majority). If the intention of the
lawmakers was to base the quorum in the meetings of
stockholders or members on their absolute number as fixed in
the articles of incorporation, it would have expressly specified
so. Otherwise, the only logical conclusion is that the legislature
did not have that intention.


Effect of the Death
of a Member or Shareholder

Having thus determined that the quorum in a
members meeting is to be reckoned as the actual number of
members of the corporation, the next question to resolve is
what happens in the event of the death of one of them.
In stock corporations, shareholders may generally
transfer their shares. Thus, on the death of a shareholder, the
executor or administrator duly appointed by the Court is vested
with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of
the decedent are held by the administrator or executor.
[44]

On the other hand, membership in and all rights arising
from a nonstock corporation are personal and non-
transferable, unless the articles of incorporation or the bylaws
of the corporation provide otherwise.
[45]
In other words, the
determination of whether or not dead members are entitled
to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or
bylaws.
Under the By-Laws of GCHS, membership in the
corporation shall, among others, be terminated by the death of
the member.
[46]
Section 91 of the Corporation Code further
provides that termination extinguishes all the rights of a
member of the corporation, unless otherwise provided in the
articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead
members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS
are not to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the annual
members meeting. With 11 remaining members, the quorum
in the present case should be 6. Therefore, there being a
quorum, the annual members meeting, conducted with
six
[47]
members present, was valid.

Vacancy in the
Board of Trustees


As regards the filling of vacancies in the board of trustees,
Section 29 of the Corporation Code provides:

SECTION 29. Vacancies in the
office of director or trustee. -- Any vacancy
occurring in the board of directors or
trustees other than by removal by the
stockholders or members or by expiration of
term, may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by
the stockholders in a regular or special
meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his
predecessor in office.

Undoubtedly, trustees may fill vacancies in the board,
provided that those remaining still constitute a quorum. The
phrase may be filled in Section 29 shows that the filling of
vacancies in the board by the remaining directors or trustees
constituting a quorum is merely permissive, not
mandatory.
[48]
Corporations, therefore, may choose how
vacancies in their respective boards may be filled up -- either
by the remaining directors constituting a quorum, or by the
stockholders or members in a regular or special meeting called
for the purpose.
[49]
The By-Laws of GCHS prescribed the specific mode of
filling up existing vacancies in its board of directors; that is, by
a majority vote of the remaining members of the board.
[50]




While a majority of the remaining corporate members
were present, however, the election of the four trustees
cannot be legally upheld for the obvious reason that it was held
in an annual meeting of the members, not of the board of
trustees. We are not unmindful of the fact that the members of
GCHS themselves also constitute the trustees, but we cannot
ignore the GCHS bylaw provision, which specifically prescribes
that vacancies in the board must be filled up by the remaining
trustees. In other words, these remaining member-
trustees must sit as a board in order to validly elect the new
ones.

Indeed, there is a well-defined distinction between a
corporate act to be done by the board and that by the
constituent members of the corporation. The board of trustees
must act, not individually or separately, but as a body in a
lawful meeting. On the other hand, in their annual meeting,
the members may be represented by their respective proxies, as
in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The
assailed Resolutions of the Court of Appeals are
hereby REVERSED AND SET ASIDE. The remaining
members of the board of trustees of Grace Christian High
School (GCHS) may convene and fill up the vacancies in the
board, in accordance with this Decision. No pronouncement as
to costs in this instance.


BOARD OF LIQUIDATORS V. HEIRS OF KALAW
Simeon M. Gopengco and Solicitor General for plaintiff-
appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and
Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and
Belo for defendants-appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was
chartered as a non-profit governmental organization on May 7,
1940 by Commonwealth Act 518 avowedly for the protection,
preservation and development of the coconut industry in the
Philippines. On August 1, 1946, NACOCO's charter was
amended [Republic Act 5] to grant that corporation the express
power "to buy, sell, barter, export, and in any other manner
deal in, coconut, copra, and dessicated coconut, as well as their
by-products, and to act as agent, broker or commission
merchant of the producers, dealers or merchants" thereof. The
charter amendment was enacted to stabilize copra prices, to
serve coconut producers by securing advantageous prices for
them, to cut down to a minimum, if not altogether eliminate,
the margin of middlemen, mostly aliens.
4

General manager and board chairman was Maximo M. Kalaw;
defendants Juan Bocar and Casimiro Garcia were members of
the Board; defendant Leonor Moll became director only on
December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on
copra trading activities. Amongst the scores of contracts
executed by general manager Kalaw are the disputed contracts,
for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for
2,000 long tons, $167.00: per ton, f. o. b., delivery:
August and September, 1947. This contract was later
assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for
2,000 long tons $145.00 per long ton, f.o.b.,
Philippine ports, to be shipped: September-October,
1947. This contract was also assigned to Louis Dreyfus
& Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000
tons, $137.50 per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for
1,000 long tons, $160.00 per ton, c.i.f., Los Angeles,
California, delivery: November, 1947.
(e) September 9, 1947: Franklin Baker Division of
General Foods Corporation, for 1,500 long tons,
$164,00 per ton, c.i.f., New York, to be shipped in
November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co.
(Overseas) Ltd., for 3,000 long tons, $154.00 per ton,
f.o.b., 3 Philippine ports, delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000
tons, $175.00 per ton, delivery: November and
December, 1947. This contract was assigned to Pacific
Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons,
$210.00 per short ton, c.i.f., Pacific ports, delivery:
December, 1947 and January, 1948. This contract was
assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons,
$210.00 per short ton, c.i.f., Pacific ports, delivery:
January, 1948. This contract was assigned to Pacific
Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from
fulfilling these contracts. Nature supervened. Four devastating
typhoons visited the Philippines: the first in October, the
second and third in November, and the fourth in December,
1947. Coconut trees throughout the country suffered extensive
damage. Copra production decreased. Prices spiralled.
Warehouses were destroyed. Cash requirements doubled.
Deprivation of export facilities increased the time necessary to
accumulate shiploads of copra. Quick turnovers became
impossible, financing a problem.
When it became clear that the contracts would be unprofitable,
Kalaw submitted them to the board for approval. It was not
until December 22, 1947 when the membership was completed.
Defendant Moll took her oath on that date. A meeting was then
held. Kalaw made a full disclosure of the situation, apprised the
board of the impending heavy losses. No action was taken on
the contracts. Neither did the board vote thereon at the
meeting of January 7, 1948 following. Then, on January 11,
1948, President Roxas made a statement that the NACOCO
head did his best to avert the losses, emphasized that
government concerns faced the same risks that confronted
private companies, that NACOCO was recouping its losses, and
that Kalaw was to remain in his post. Not long thereafter, that
is, on January 30, 1948, the board met again with Kalaw,
Bocar, Garcia and Moll in attendance. They unanimously
approved the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the
contracts, as follows:
Buyers
Tons
Delivered
Undelivered
Pacific Vegetable Oil 2,386.45 4,613.55
Spencer Kellog None 1,000
Franklin Baker 1,000 500
Louis Dreyfus 800 2,200
Louis Dreyfus (Adamson
contract of July 30, 1947)
1,150 850
Louis Dreyfus (Adamson
Contract of August 14,
1947)
1,755 245
T O T A L S

7,091.45

9,408.55
The buyers threatened damage suits. Some of the claims were
settled, viz: Pacific Vegetable Oil Co., in copra delivered by
NACOCO, P539,000.00; Franklin Baker Corporation,
P78,210.00; Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact
sue before the Court of First Instance of Manila, upon claims as
follows: For the undelivered copra under the July 30 contract
(Civil Case 4459); P287,028.00; for the balance on the August
14 contract (Civil Case 4398), P75,098.63; for that per the
September 12 contract reduced to judgment (Civil Case 4322,
appealed to this Court in L-2829), P447,908.40. These cases
culminated in an out-of-court amicable settlement when the
Kalaw management was already out. The corporation
thereunder paid Dreyfus P567,024.52 representing 70% of the
total claims. With particular reference to the Dreyfus claims,
NACOCO put up the defenses that: (1) the contracts were void
because Louis Dreyfus & Co. (Overseas) Ltd. did not have
license to do business here; and (2) failure to deliver was due
to force majeure, the typhoons. To project the utter
unreasonableness of this compromise, we reproduce in haec
verba this finding below:
x x x However, in similar cases brought by the same
claimant [Louis Dreyfus & Co. (Overseas) Ltd.]
against Santiago Syjuco for non-delivery of copra also
involving a claim of P345,654.68 wherein defendant
set upsame defenses as above, plaintiff accepted
a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.)
Following the same proportion, the claim of Dreyfus
against NACOCO should have been compromised for
only P10,000.00, if at all. Now, why should
defendants be held liable for the large sum paid as
compromise by the Board of Liquidators? This is just
a sample to show how unjust it would be to hold
defendants liable for the readiness with which the
Board of Liquidators disposed of the NACOCO funds,
although there was much possibility of successfully
resisting the claims, or at least settlement for
nominal sums like what happened in the Syjuco
case.
5

All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to
recover the above sum of P1,343,274.52 from general manager
and board chairman Maximo M. Kalaw, and directors Juan
Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with
negligence under Article 1902 of the old Civil Code (now Article
2176, new Civil Code); and defendant board members,
including Kalaw, with bad faith and/or breach of trust for
having approved the contracts. The fifth amended complaint,
on which this case was tried, was filed on July 2, 1959.
Defendants resisted the action upon defenses hereinafter in
this opinion to be discussed.
The lower court came out with a judgment dismissing the
complaint without costs as well as defendants' counterclaims,
except that plaintiff was ordered to pay the heirs of Maximo
Kalaw the sum of P2,601.94 for unpaid salaries and cash
deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's
counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before,
but adversely decided by, the court below, arrest our attention.
On appeal, defendants renew their bid. And this, upon
established jurisprudence that an appellate court may base its
decision of affirmance of the judgment below on a point or
points ignored by the trial court or in which said court was in
error.
6

1. First of the threshold questions is that advanced by
defendants that plaintiff Board of Liquidators has lost its legal
personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a
corporation may wind up its affairs: (1) under Section 3, Rule
104, of the Rules of Court [which superseded Section 66 of the
Corporation Law]
7
whereby, upon voluntary dissolution of a
corporation, the court may direct "such disposition of its assets
as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation;" (2) under Section
77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time
when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling
it gradually to settle and close its affairs, to dispose of and
convey its property and to divide its capital stock, but not for
the purpose of continuing the business for which it was
established;" and (3) under Section 78 of the Corporation Law,
by virtue of which the corporation, within the three year period
just mentioned, "is authorized and empowered to convey all of
its property to trustees for the benefit of members,
stockholders, creditors, and others interested."
8

It is defendants' pose that their case comes within the coverage
of the second method. They reason out that suit was
commenced in February, 1949; that by Executive Order 372,
dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board
of Liquidators was entrusted with the function of settling and
closing its affairs; and that, since the three year period has
elapsed, the Board of Liquidators may not now continue with,
and prosecute, the present case to its conclusion, because
Executive Order 372 provides in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers
Corporation, the National Coconut Corporation, the
National Tobacco Corporation, the National Food
Producer Corporation and the former enemy-owned
or controlled corporations or associations, . . . are
hereby abolished. The said corporations shall be
liquidated in accordance with law, the provisions of
this Order, and/or in such manner as the President of
the Philippines may direct; Provided, however, That
each of the said corporations shall nevertheless be
continued as a body corporate for a period of three (3)
years from the effective date of this Executive Order
for the purpose of prosecuting and defending suits by
or against it and of enabling the Board of Liquidators
gradually to settle and close its affairs, to dispose of
and, convey its property in the manner hereinafter
provided.
Citing Mr. Justice Fisher, defendants proceed to argue that
even where it may be found impossible within the 3 year period
to reduce disputed claims to judgment, nonetheless, "suits by
or against a corporation abate when it ceases to be an entity
capable of suing or being sued" (Fisher, The Philippine Law of
Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement that "[t]he
dissolution of a corporation ends its existence so that there
must be statutory authority for prolongation of its life even for
purposes of pending litigation"
9
and that suit "cannot be
continued or revived; nor can a valid judgment be rendered
therein, and a judgment, if rendered, is not only erroneous, but
void and subject to collateral attack."
10
So it is, that abatement
of pending actions follows as a matter of course upon the
expiration of the legal period for liquidation,
11
unless the
statute merely requires a commencement of suit within the
added time.
12
For, the court cannot extend the time alloted by
statute.
13

We, however, express the view that the executive order
abolishing NACOCO and creating the Board of Liquidators
should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of
NACOCO was continued for a period of three years from the
effectivity of the order for "the purpose of prosecuting and
defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose
of and convey its property in the manner hereinafter provided",
is to be read not as an isolated provision but in conjunction
with the whole. So reading, it will be readily observed that no
time limit has been tacked to the existence of the Board of
Liquidators and its function of closing the affairs of the various
government owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of
directors of the various corporations were abolished, their
powers and functions and duties under existing laws were to be
assumed and exercised by the Board of Liquidators. The
President thought it best to do away with the boards of
directors of the defunct corporations; at the same time,
however, the President had chosen to see to it that the Board of
Liquidators step into the vacuum. And nowhere in the
executive order was there any mention of the lifespan of the
Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusion. Thus, liquidation by
the Board of Liquidators may, under section 1, proceed in
accordance with law, the provisions of the executive order,
"and/or in such manner as the President of the Philippines
may direct." By Section 4, when any property, fund, or project
is transferred to any governmental instrumentality "for
administration or continuance of any project," the necessary
funds therefor shall be taken from the corresponding special
fund created in Section 5. Section 5, in turn, talks of special
funds established from the "net proceeds of the liquidation" of
the various corporations abolished. And by Section, 7, fifty per
centum of the fees collected from the copra standardization
and inspection service shall accrue "to the special fund created
in section 5 hereof for the rehabilitation and development of
the coconut industry." Implicit in all these, is that the term of
life of the Board of Liquidators is without time limit.
Contemporary history gives us the fact that the Board of
Liquidators still exists as an office with officials and numerous
employees continuing the job of liquidation and prosecution of
several court actions.
Not that our views on the power of the Board of Liquidators to
proceed to the final determination of the present case is
without jurisprudential support. The first judicial test before
this Court is National Abaca and Other Fibers Corporation vs.
Pore, L-16779, August 16, 1961. In that case, the corporation,
already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of
money advanced to defendant for the purchase of hemp in
behalf of the corporation. She failed to account for that money.
Defendant moved to dismiss, questioned the corporation's
capacity to sue. The lower court ordered plaintiff to include as
co-party plaintiff, The Board of Liquidators, to which the
corporation's liquidation was entrusted by Executive
Order 372. Plaintiff failed to effect inclusion. The lower court
dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended
complaint, as directed, and instructed the board's incoming
and outgoing correspondence clerk, Mrs. Receda Vda. de
Ocampo, to mail the original thereof to the court and a copy of
the same to defendant's counsel. She mailed the copy to the
latter but failed to send the original to the court. This motion
was rejected below. Plaintiff came to this Court on appeal. We
there said that "the rule appears to be well settled that, in the
absence of statutory provision to the contrary, pending actions
by or against a corporation are abated upon expiration of the
period allowed by law for the liquidation of its affairs." We
there said that "[o]ur Corporation Law contains no provision
authorizing a corporation, after three (3) years from the
expiration of its lifetime, to continue in its corporate name
actions instituted by it within said period of three (3)
years."
14
However, these precepts notwithstanding, we, in
effect, held in that case that the Board of Liquidators escapes
from the operation thereof for the reason that "[o]bviously, the
complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement of
its affairs is what impelled the President to create a Board of
Liquidators, to continue the management of such matters as
may then be pending."
15
We accordingly directed the record of
said case to be returned to the lower court, with instructions to
admit plaintiff's amended complaint to include, as party
plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another
direction.
By Executive Order 372, the government, the sole stockholder,
abolished NACOCO, and placed its assets in the hands of the
Board of Liquidators. The Board of Liquidators thus became
the trustee on behalf of the government. It was an express
trust. The legal interest became vested in the trustee the
Board of Liquidators. The beneficial interest remained with the
sole stockholder the government. At no time had the
government withdrawn the property, or the authority to
continue the present suit, from the Board of Liquidators. If for
this reason alone, we cannot stay the hand of the Board of
Liquidators from prosecuting this case to its final
conclusion.
16
The provisions of Section 78 of the Corporation
Law the third method of winding up corporate affairs find
application.
We, accordingly, rule that the Board of Liquidators has
personality to proceed as: party-plaintiff in this case.
2. Defendants' second poser is that the action is unenforceable
against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to
dismiss,
17
which was overruled, and in their nineteenth special
defense, that plaintiff's action is personal to the deceased
Maximo M. Kalaw, and may not be deemed to have survived
after his death.
18
They say that the controlling statute is Section
5, Rule 87, of the 1940 Rules of Court.
19
which provides that
"[a]ll claims for money against the decedent, arising from
contract, express or implied", must be filed in the estate
proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of
Kalaw for having entered into the questioned contracts without
prior approval of the board of directors, to the damage and
prejudice of plaintiff; and is against Kalaw and the other
directors for having subsequently approved the said contracts
in bad faith and/or breach of trust." Clearly then, the present
case is not a mere action for the recovery of money nor a claim
for money arising from contract. The suit involves alleged
tortious acts. And the action is embraced in suits filed "to
recover damages for an injury to person or property, real or
personal", which survive.
20

The leading expositor of the law on this point is Aguas vs.
Llemos, L-18107, August 30, 1962. There, plaintiffs sought to
recover damages from defendant Llemos. The complaint
averred that Llemos had served plaintiff by registered mail
with a copy of a petition for a writ of possession in Civil Case
4824 of the Court of First Instance at Catbalogan, Samar, with
notice that the same would be submitted to the Samar court on
February 23, 1960 at 8:00 a.m.; that in view of the copy and
notice served, plaintiffs proceeded to the said court of Samar
from their residence in Manila accompanied by their lawyers,
only to discover that no such petition had been filed; and that
defendant Llemos maliciously failed to appear in court, so that
plaintiffs' expenditure and trouble turned out to be in vain,
causing them mental anguish and undue embarrassment.
Defendant died before he could answer the complaint. Upon
leave of court, plaintiffs amended their complaint to include
the heirs of the deceased. The heirs moved to dismiss. The
court dismissed the complaint on the ground that the legal
representative, and not the heirs, should have been made the
party defendant; and that, anyway, the action being for
recovery of money, testate or intestate proceedings should be
initiated and the claim filed therein. This Court, thru Mr.
Justice Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that
contrasting the correlated provisions of the Rules of
Court, those concerning claims that are barred if not
filed in the estate settlement proceedings (Rule 87,
sec. 5) and those defining actions that survive and
may be prosecuted against the executor or
administrator (Rule 88, sec. 1), it is apparent that
actions for damages caused by tortious conduct of a
defendant (as in the case at bar) survive the death of
the latter. Under Rule 87, section 5, the actions that
are abated by death are: (1) claims for funeral
expenses and those for the last sickness of the
decedent; (2) judgments for money; and (3) "all
claims for money against the decedent, arising from
contract express or implied." None of these includes
that of the plaintiffs-appellants; for it is not enough
that the claim against the deceased party be for
money, but it must arise from "contract express or
implied", and these words (also used by the Rules in
connection with attachments and derived from the
common law) were construed in Leung Ben vs.
O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal
obligations other than those which have their
source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates
actions that survive against a decedent's executors or
administrators, and they are: (1) actions to recover
real and personal property from the estate; (2) actions
to enforce a lien thereon; and (3) actions to recover
damages for an injury to person or property. The
present suit is one for damages under the last class, it
having been held that "injury to property" is not
limited to injuries to specific property, but extends to
other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also
171 A.L.R., 1395). To maliciously cause a party to incur
unnecessary expenses, as charged in this case, is
certainly injury to that party's property (Javier vs.
Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts
comparable to those of the present. No cogent reason exists
why we should break away from the views just expressed. And,
the conclusion remains: Action against the Kalaw heirs and, for
the matter, against the Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the
controversy.
3. Plaintiff levelled a major attack on the lower court's holding
that Kalaw justifiedly entered into the controverted contracts
without the prior approval of the corporation's directorate.
Plaintiff leans heavily on NACOCO's corporate by-laws. Article
IV (b), Chapter III thereof, recites, as amongst the duties of the
general manager, the obligation: "(b) To perform or execute on
behalf of the Corporation upon prior approval of the Board, all
contracts necessary and essential to the proper
accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the
problem at hand, is the nature of a general manager's position
in the corporate structure. A rule that has gained acceptance
through the years is that a corporate officer "intrusted with the
general management and control of its business, has implied
authority to make any contract or do any other act which is
necessary or appropriate to the conduct of the ordinary
business of the corporation.
21
As such officer, "he may, without
any special authority from the Board of Directors perform all
acts of an ordinary nature, which by usage or necessity are
incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business.
22

The problem, therefore, is whether the case at bar is to be taken
out of the general concept of the powers of a general manager,
given the cited provision of the NACOCO by-laws requiring
prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves
express articulation. Ordinary in this enterprise are copra sales
for future delivery. The movement of the market requires that
sales agreements be entered into, even though the goods are
not yet in the hands of the seller. Known in business parlance
as forward sales, it is concededly the practice of the trade. A
certain amount of speculation is inherent in the undertaking.
NACOCO was much more conservative than the exporters with
big capital. This short-selling was inevitable at the time in the
light of other factors such as availability of vessels, the quantity
required before being accepted for loading, the labor needed to
prepare and sack the copra for market. To NACOCO, forward
sales were a necessity. Copra could not stay long in its hands; it
would lose weight, its value decrease. Above all, NACOCO's
limited funds necessitated a quick turnover. Copra contracts
then had to be executed on short notice at times within
twenty-four hours. To be appreciated then is the difficulty of
calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went
into copra trading.
Long before the disputed contracts came into being, Kalaw
contracted by himself alone as general manager for
forward sales of copra. For the fiscal year ending June 30,
1947, Kalaw signed some 60 such contracts for the sale of copra
to divers parties. During that period, from those copra sales,
NACOCO reaped a gross profit of P3,631,181.48. So pleased
was NACOCO's board of directors that, on December 5, 1946,
in Kalaw's absence, it voted to grant him a special bonus "in
recognition of the signal achievement rendered by him in
putting the Corporation's business on a self-sufficient basis
within a few months after assuming office, despite numerous
handicaps and difficulties."
These previous contract it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts
were known all along to the board members. Nothing was said
by them. The aforesaid contracts stand to prove one thing:
Obviously, NACOCO board met the difficulties attendant to
forward sales by leaving the adoption of means to end, to the
sound discretion of NACOCO's general manager Maximo M.
Kalaw.
Liberally spread on the record are instances of contracts
executed by NACOCO's general manager and submitted to the
board after their consummation, not before. These agreements
were not Kalaw's alone. One at least was executed by a
predecessor way back in 1940, soon after NACOCO was
chartered. It was a contract of lease executed on November 16,
1940 by the then general manager and board chairman,
Maximo Rodriguez, and A. Soriano y Cia., for the lease of a
space in Soriano Building On November 14, 1946, NACOCO,
thru its general manager Kalaw, sold 3,000 tons of copra to the
Food Ministry, London, thru Sebastian Palanca. On December
22, 1947, when the controversy over the present contract
cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and
Ulpiana Isberto covering a warehouse of the latter. On the
same date, the board gave its nod to a contract for renewal of
the services of Dr. Manuel L. Roxas. In fact, also on that date,
the board requested Kalaw to report for action all copra
contracts signed by him "at the meeting immediately
following the signing of the contracts." This practice was
observed in a later instance when, on January 7, 1948, the
board approved two previous contracts for the sale of 1,000
tons of copra each to a certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify
the brokerage commission of 2% of Smith, Bell and Co., Ltd., in
the sale of 4,300 long tons of copra to the French Government.
Such ratification was necessary because, as stated by Kalaw in
that same meeting, "under an existing resolution he is
authorized to give a brokerage fee of only 1% on sales of copra
made through brokers." On January 15, 1947, the brokerage fee
agreements of 1-1/2% on three export contracts, and 2% on
three others, for the sale of copra were approved by the board
with a proviso authorizing the general manager to pay a
commission up to the amount of 1-1/2% "without further
action by the Board." On February 5, 1947, the brokerage fee of
2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was
favorably acted upon by the board. On March 19, 1947, a 2%
brokerage commission was similarly approved by the board for
Pacific Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage
fee agreements were passed upon by the board,not the sales
contracts themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling
fixed by the board.
Knowledge by the board is also discernible from other recorded
instances.1wph1.t
When the board met on May 10, 1947, the directors discussed
the copra situation: There was a slow downward trend but
belief was entertained that the nadir might have already been
reached and an improvement in prices was expected. In view
thereof, Kalaw informed the board that "he intends to wait
until he has signed contracts to sell before starting to buy
copra."
23

In the board meeting of July 29, 1947, Kalaw reported on the
copra price conditions then current: The copra market
appeared to have become fairly steady; it was not expected that
copra prices would again rise very high as in the unprecedented
boom during January-April, 1947; the prices seemed to
oscillate between $140 to $150 per ton; a radical rise or
decrease was not indicated by the trends. Kalaw continued to
say that "the Corporation has been closing contracts for the
sale of copra generally with a margin of P5.00 to P7.00 per
hundred kilos."
24

We now lift the following excerpts from the minutes of that
same board meeting of July 29, 1947:
521. In connection with the buying and selling of
copra the Board inquired whether it is the practice of
the management to close contracts of sale first before
buying. The General Manager replied that this
practice is generally followed but that it is not always
possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of
copra requires that it should not cease buying even
when it does not have actual contracts of sale since the
suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary
inactivity of the Corporation to lower the prices to the
detriment of the producers.
(2) The movement of the market is such that it may
not be practical always to wait for the consummation
of contracts of sale before beginning to buy copra.
The General Manager explained that in this
connection a certain amount of speculation is
unavoidable. However, he said that the Nacoco is
much more conservative than the other big exporters
in this respect.
25

Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice,
custom, and policy, the general manager may bind the
company without formal authorization of the board of
directors.
26
In varying language, existence of such authority is
established, by proof of the course of business, the usage and
practices of the company and by the knowledge which the
board of directors has, or must bepresumed to have, of acts and
doings of its subordinates in and about the affairs of the
corporation.
27
So also,
x x x authority to act for and bind a corporation may
be presumed from acts of recognition in other
instances where the power was in fact exercised.
28

x x x Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to
represent the corporation may be implied from the
manner in which he has been permitted by the
directors to manage its business.
29

In the case at bar, the practice of the corporation has been to
allow its general manager to negotiate and execute contracts in
its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be
literally followed, the board should give its stamp of prior
approval on all corporate contracts. But that board itself, by its
acts and through acquiescence, practically laid aside the by-law
requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
4. But if more were required, we need but turn to the board's
ratification of the contracts in dispute on January 30, 1948,
though it is our (and the lower court's) belief that ratification
here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that
"ratification by a corporation of an unauthorized act or contract
by its officers or others relates back to the time of the act or
contract ratified, and is equivalent to original authority;" and
that " [t]he corporation and the other party to the transaction
are in precisely the same position as if the act or contract had
been authorized at the time."
30
The language of one case is
expressive: "The adoption or ratification of a contract by a
corporation is nothing more or less than the making of an
original contract. The theory of corporate ratification
is predicated on the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior
authority."
31

Indeed, our law pronounces that "[r]atification cleanses the
contract from all its defects from the moment it was
constituted."
32
By corporate confirmation, the contracts
executed by Kalaw are thus purged of whatever vice or defect
they may have.
33

In sum, a case is here presented whereunder, even in the face
of an express by-law requirement of prior approval, the law on
corporations is not to be held so rigid and inflexible as to fail to
recognize equitable considerations. And, the conclusion
inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the
record in terms of "bad faith and/or breach of trust" in the
board's ratification of the contracts without prior approval of
the board. For, in reality, all that we have on the government's
side of the scale is that the board knew that the contracts so
confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute
the contracts without need of prior approval. Everybody,
including Kalaw himself, thought so, and for a long time.
Doubts were first thrown on the way only when the contracts
turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply
connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud.
34
Applying
this precept to the given facts herein, we find that there was no
"dishonest purpose," or "some moral obliquity," or "conscious
doing of wrong," or "breach of a known duty," or "Some motive
or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors
acted for personal reasons, or to serve their own private
interests, or to pocket money at the expense of the
corporation.
35
We have had occasion to affirm that bad faith
contemplates a "state of mind affirmatively operating with
furtive design or with some motive of self-interest or ill will or
for ulterior purposes."
36
Briggs vs. Spaulding, 141 U.S. 132,
148-149, 35 L. ed. 662, 669, quotes with approval from Judge
Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a
close examination of all the reported cases, although there are
many dicta not easily reconcilable, yet I have found no
judgment or decree which has held directors to account, except
when they have themselves been personally guilty of some
fraud on the corporation, or have known and connived at some
fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties. . .
." Plaintiff did not even dare charge its defendant-directors
with any of these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts
would contravene basic dictates of fairness. They did not think
of raising their voice in protest against past contracts which
brought in enormous profits to the corporation. By the same
token, fair dealing disagrees with the idea that similar
contracts, when unprofitable, should not merit the same
treatment. Profit or loss resulting from business ventures is no
justification for turning one's back on contracts entered into.
The truth, then, of the matter is that in the words of the trial
court the ratification of the contracts was "an act of simple
justice and fairness to the general manager and the best
interest of the corporation whose prestige would have been
seriously impaired by a rejection by the board of those
contracts which proved disadvantageous."
37

The directors are not liable."
38

6. To what then may we trace the damage suffered by
NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then
on our copra-producing regions. Result: Copra production was
impaired, prices spiralled, warehouses destroyed. Quick
turnovers could not be expected. NACOCO was not alone in
this misfortune. The record discloses that private traders, old,
experienced, with bigger facilities, were not spared; also
suffered tremendous losses. Roughly estimated, eleven
principal trading concerns did run losses to about
P10,300,000.00. Plaintiff's witness Sisenando Barretto, head
of the copra marketing department of NACOCO, observed that
from late 1947 to early 1948 "there were many who lost money
in the trade."
39
NACOCO was not immune from such usual
business risk.
The typhoons were known to plaintiff. In fact, NACOCO
resisted the suits filed by Louis Dreyfus & Co. by pleading in its
answers force majeure as an affirmative defense and there
vehemently asserted that "as a result of the said typhoons,
extensive damage was caused to the coconut trees in the copra
producing regions of the Philippines and according to
estimates of competent authorities, it will take about one year
until the coconut producing regions will be able to produce
their normal coconut yield and it will take some time until the
price of copra will reach normal levels;" and that "it had never
been the intention of the contracting parties in entering into
the contract in question that, in the event of a sharp rise in the
price of copra in the Philippine market produce by force
majeureor by caused beyond defendant's control, the
defendant should buy the copra contracted for at exorbitant
prices far beyond the buying price of the plaintiff under the
contract."
40

A high regard for formal judicial admissions made in court
pleadings would suffice to deter us from permitting plaintiff to
stray away therefrom, to charge now that the damage suffered
was because of Kalaw's negligence, or for that matter, by
reason of the board's ratification of the contracts.
41

Indeed, were it not for the typhoons,
42
NACOCO could have,
with ease, met its contractual obligations. Stock accessibility
was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a
day. The various contracts involved delivery of but 16,500 tons
over a five-month period. Despite the typhoons, NACOCO was
still able to deliver a little short of 50% of the tonnage required
under the contracts.
As the trial court correctly observed, this is a case of damnum
absque injuria. Conjunction of damage and wrong is here
absent. There cannot be an actionable wrong if either one or
the other is wanting.
43

7. On top of all these, is that no assertion is made and no proof
is presented which would link Kalaw's acts ratified by the
board to a matrix for defraudation of the government. Kalaw
is clear of the stigma of bad faith. Plaintiff's corporate
counsel
44
concedes that Kalaw all along thought that he had
authority to enter into the contracts, that he did so in the best
interests of the corporation; that he entered into the contracts
in pursuance of an overall policy to stabilize prices, to free the
producers from the clutches of the middlemen. The prices for
which NACOCO contracted in the disputed agreements, were at
a level calculated to produce profits and higher than those
prevailing in the local market. Plaintiff's witness, Barretto,
categorically stated that "it would be foolish to think that one
would sign (a) contract when you are going to lose money" and
that no contract was executed "at a price unsafe for the
Nacoco."
45
Really, on the basis of prices then prevailing,
NACOCO envisioned a profit of around P752,440.00.
46

Kalaw's acts were not the result of haphazard decisions either.
Kalaw invariably consulted with NACOCO's Chief Buyer,
Sisenando Barretto, or the Assistant General Manager. The
dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He
could not be expected to predict the coming of unpredictable
typhoons. And even as typhoons supervened Kalaw was not
remissed in his duty. He exerted efforts to stave off losses. He
asked the Philippine National Bank to implement its
commitment to extend a P400,000.00 loan. The bank did not
release the loan, not even the sum of P200,000.00, which, in
October, 1947, was approved by the bank's board of directors.
In frustration, on December 12, 1947, Kalaw turned to the
President, complained about the bank's short-sighted policy. In
the end, nothing came out of the negotiations with the bank.
NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as
much as simple negligence, would seem to be supported by the
fact that even as the contracts were being questioned in
Congress and in the NACOCO board itself, President Roxas
defended the actuations of Kalaw. On December 27, 1947,
President Roxas expressed his desire "that the Board of
Directors should reelect Hon. Maximo M. Kalaw as General
Manager of the National Coconut Corporation."
47
And, on
January 7, 1948, at a time when the contracts had already been
openly disputed, the board, at its regular meeting, appointed
Maximo M. Kalaw as acting general manager of the
corporation.
Well may we profit from the following passage
from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-
15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to
act for the corporation according to their best judgment, and in
so doing they cannot be controlled in the reasonable exercise
and performance of such duty. Whether the business of a
corporation should be operated at a loss during a business
depression, or closed down at a smaller loss, is a purely
business and economic problem to be determined by the
directors of the corporation, and not by the court. It is a well
known rule of law that questions of policy of management are
left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its
judgment for the judgment of the board of directors; the board
is the business manager of the corporation, and solong as it
acts in good faith its orders are not reviewable by the courts."
(Fletcher on Corporations, Vol. 2, p. 390.)
48

Kalaw's good faith, and that of the other directors, clinch the
case for defendants.
49

Viewed in the light of the entire record, the judgment under
review must be, as it is hereby, affirmed.
Without costs. So ordered.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and
Angeles, JJ., concur.
Fernando, J., took no part.
Concepcion, C.J. and Dizon, J., are on leave.
Footnotes

MONTELIBANO V. BACOLOD-MURCIA MILLING CO.,
INC.
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First
Instance of Occidental Negros, in its Civil Case No. 2603,
dismissing plaintiff's complaint that sought to compel the
defendant Milling Company to increase plaintiff's share in the
sugar produced from their cane, from 60% to 62.33%, starting
from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo
Montelibano, Alejandro Montelibano, and the Limited co-
partnership Gonzaga and Company, had been and are sugar
planters adhered to the defendant-appellee's sugar central mill
under identical milling contracts. Originally executed in 1919,
said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting
product should be divided in the ratio of 45% for the mill and
55% for the planters. Sometime in 1936, it was proposed to
execute amended milling contracts, increasing the planters'
share to 60% of the manufactured sugar and resulting
molasses, besides other concessions, but extending the
operation of the milling contract from the original 30 years to
45 years. To this effect, a printed Amended Milling Contract
form was drawn up. On August 20, 1936, the Board of
Directors of the appellee Bacolod-Murcia Milling Co., Inc.,
adopted a resolution (Acts No. 11, Acuerdo No. 1) granting
further concessions to the planters over and above those
contained in the printed Amended Milling Contract. The bone
of contention is paragraph 9 of this resolution, that reads as
follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
x x x x x x x x x
Acuerdo No. 1. Previa mocion
debidamente secundada, la Junta en
consideracion a una peticion de los
plantadores hecha por un comite nombrado
por los mismos, acuerda enmendar el
contrato de molienda enmendado
medientelas siguentes:
x x x x x x x x x
9.a Que si durante la vigencia de este
contrato de Molienda Enmendado,
lascentrales azucareras, de Negros
Occidental, cuya produccion anual de azucar
centrifugado sea mas de una tercera parte de
la produccion total de todas lascentrales
azucareras de Negros Occidental,
concedieren a sus plantadores mejores
condiciones que la estipuladas en el presente
contrato, entonces esas mejores condiciones
se concederan y por el presente se
entenderan concedidas a los platadores que
hayan otorgado este Contrato de Molienda
Enmendado.
Appellants signed and executed the printed Amended Milling
Contract on September 10, 1936, but a copy of the resolution of
August 10, 1936, signed by the Central's General Manager, was
not attached to the printed contract until April 17, 1937; with
the notation
Las enmiendas arriba transcritas forman parte del
contrato de molienda enmendado, otorgado por y la
Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending
that three Negros sugar centrals (La Carlota, Binalbagan-
Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central
mills in the province, had already granted increased
participation (of 62.5%) to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, heretofore
quoted, the appellee had become obligated to grant similar
concessions to the plaintiffs (appellants herein). The appellee
Bacolod-Murcia Milling Co., inc., resisted the claim, and
defended by urging that the stipulations contained in the
resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio,
being in effect a donation that was ultra vires and beyond the
powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the
stand of the defendant Milling company, and dismissed the
complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not
stand. It must be remembered that the controverted resolution
was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that
it was approved on August 20, 1936, twenty-one days prior to
the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was
executed, the concessions granted by the disputed resolution
had been already incorporated into its terms. No reason
appears of record why, in the face of such concessions, the
appellants should reject them or consider them as separate and
apart from the main amended milling contract, specially taking
into account that appellant Alfredo Montelibano was, at the
time, the President of the Planters Association (Exhibit 4, p. 11)
that had agitated for the concessions embodied in the
resolution of August 20, 1936. That the resolution formed an
integral part of the amended milling contract, signed on
September 10, and not a separate bargain, is further shown by
the fact that a copy of the resolution was simply attached to the
printed contract without special negotiations or agreement
between the parties.
It follows from the foregoing that the terms embodied in the
resolution of August 20, 1936 were supported by the
same causa or consideration underlying the main amended
milling contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of
its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the
conclusion of the court below that the resolution constituted
gratuitous concessions not supported by any consideration is
legally untenable.
All disquisition concerning donations and the lack of power of
the directors of the respondent sugar milling company to make
a gift to the planters would be relevant if the resolution in
question had embodied a separate agreement after the
appellants had already bound themselves to the terms of the
printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were
made by the company, the appellants were not yet obligated by
the terms of the printed contract, since they admittedly did not
sign it until twenty-one days later, on September 10, 1936.
Before that date, the printed form was no more than a proposal
that either party could modify at its pleasure, and the appellee
actually modified it by adopting the resolution in question. So
that by September 10, 1936 defendant corporation already
understood that the printed terms were not controlling, save as
modified by its resolution of August 20, 1936; and we are
satisfied that such was also the understanding of appellants
herein, and that the minds of the parties met upon that basis.
Otherwise there would have been no consent or "meeting of the
minds", and no binding contract at all. But the conduct of the
parties indicates that they assumed, and they do not now deny,
that the signing of the contract on September 10, 1936, did give
rise to a binding agreement. That agreement had to exist on the
basis of the printed terms as modified by the resolution of
August 20, 1936, or not at all. Since there is no rational
explanation for the company's assenting to the further
concessions asked by the planters before the contracts were
signed, except as further inducement for the planters to agree
to the extension of the contract period, to allow the company
now to retract such concessions would be to sanction a fraud
upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory
of appellees. There can be no novation unless two distinct and
successive binding contracts take place, with the later designed
to replace the preceding convention. Modifications introduced
before a bargain becomes obligatory can in no sense constitute
novation in law.
Stress is placed on the fact that the text of the Resolution of
August 20, 1936 was not attached to the printed contract until
April 17, 1937. But, except in the case of statutory forms or
solemn agreements (and it is not claimed that this is one), it is
the assent and concurrence (the "meeting of the minds") of the
parties, and not the setting down of its terms, that constitutes a
binding contract. And the fact that the addendum is only
signed by the General Manager of the milling company
emphasizes that the addition was made solely in order that the
memorial of the terms of the agreement should be full and
complete.
Much is made of the circumstance that the report submitted by
the Board of Directors of the appellee company in November
19, 1936 (Exhibit 4) only made mention of 90%, the planters
having agreed to the 60-40 sharing of the sugar set forth in the
printed "amended milling contracts", and did not make any
reference at all to the terms of the resolution of August 20,
1936. But a reading of this report shows that it was not
intended to inventory all the details of the amended contract;
numerous provisions of the printed terms are alao glossed
over. The Directors of the appellee Milling Company had no
reason at the time to call attention to the provisions of the
resolution in question, since it contained mostly modifications
in detail of the printed terms, and the only major change was
paragraph 9 heretofore quoted; but when the report was made,
that paragraph was not yet in effect, since it was conditioned
on other centrals granting better concessions to their planters,
and that did not happen until after 1950. There was no reason
in 1936 to emphasize a concession that was not yet, and might
never be, in effective operation.
There can be no doubt that the directors of the appellee
company had authority to modify the proposed terms of the
Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is
that
It is a question, therefore, in each case of the logical
relation of the act to the corporate purpose expressed
in the charter. If that act is one which is lawful in
itself, and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful sense, it
may fairly be considered within charter powers. The
test to be applied is whether the act in question is in
direct and immediate furtherance of the corporation's
business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not.
(Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-
268)
As the resolution in question was passed in good faith by the
board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the court
has no authority to review them.
They hold such office charged with the duty to act for
the corporation according to their best judgment, and
in so doing they cannot be controlled in the
reasonable exercise and performance of such duty.
Whether the business of a corporation should be
operated at a loss during depression, or close down at
a smaller loss, is a purely business and economic
problem to be determined by the directors of the
corporation and not by the court. It is a well-known
rule of law that questions of policy or of management
are left solely to the honest decision of officers and
directors of a corporation, and the court is without
authority to substitute its judgment of the board of
directors; the board is the business manager of the
corporation, and so long as it acts in good faith its
orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals
of La Carlota, Hawaiian Philippines, San Carlos and
Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted
progressively increasing participations to their adhered planter
at an average rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the
terms of its Resolution of August 20, 1936, duty bound to grant
similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set
aside; and judgment is decreed sentencing the defendant-
appellee to pay plaintiffs-appellants the differential or increase
of participation in the milled sugar in accordance with
paragraph 9 of the appellee Resolution of August 20, 1936, over
and in addition to the 60% expressed in the printed Amended
Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952
crop year, said appellants having received an
additional 2% corresponding to said year in October,
1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952
crop year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential
during the time they were withheld; and the right is reserved to
plaintiffs-appellants to sue for such additional increases as they
may be entitled to for the crop years subsequent to those herein
adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
Padilla, Bautista Angelo, Labrador, Concepcion, Barrera,
Paredes and Dizon, JJ., concur.

PSE V. CA
D E C I S I O N
TORRES, JR., J.:
The Securities and Exchange Commission is the
government agency, under the direct general supervision of the
Office of the President,
[1]
with the immense task of enforcing
the Revised Securities Act, and all other duties assigned to it by
pertinent laws. Among its inumerable functions, and one of
the most important, is the supervision of all corporations,
partnerships or associations, who are grantees or primary
franchise and/or a license or permit issued by the government
to operate in the Philippines.
[2]
Just how far this regulatory
authority extends, particularly, with regard to the Petitioner
Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review of Certiorari, petitioner assails
the resolution of the respondent Court of Appeals, dated June
27, 1996, which affirmed the decision of the Securities and
Exchange Commission ordering the petitioner Philippine Stock
Exchange, Inc. to allow the private respondent Puerto Azul
Land, Inc. to be listed in its stock market, thus paving the way
for the public offering of PALIs shares.
The facts of the case are undisputed, and are hereby
restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public in order
to raise funds allegedly to develop its properties and pay its
loans with several banking institutions. In January, 1995, PALI
was issued a Permit to Sell its shares to the public by the
Securities and Exchange Commission (SEC). To facilitate the
trading of its shares among investors, PALI sought to course
the trading of its shares through the Philippine Stock
Exchange, Inc. (PSE), for which purpose it filed with the said
stock exchange an application to list its shares, with supporting
documents attached.
On February 8, 1996, the Listing Committee of the PSE,
upon a perusal of PALIs application, recommended to the
PSEs Board of Governors the approval of PALIs listing
application.
On February 14, 1996, before it could act upon PALIs
application, the Board of Governors of PSE received a letter
from the heirs of Ferdinand E. Marcos, claiming that the late
President Marcos was the legal and beneficial owner of certain
properties forming part of the Puerto Azul Beach Hotel and
Resort Complex which PALI claims to be among its assets and
that the Ternate Development Corporation, which is among the
stockholders of PALI, likewise appears to have been held and
continue to be held in trust by one Rebecco Panlilio for then
President Marcos and now, effectively for his estate, and
requested PALIs application to be deferred. PALI was
requested to comment upon the said letter.
PALIs answer stated that the properties forming part of
Puerto Azul Beach Hotel and Resort Complex were not claimed
by PALI as its assets. On the contrary, the resort is actually
owned by Fantasia Filipina Resort, Inc. and the Puerto Azul
Country Club, entities distinct from PALI. Furthermore, the
Ternate Development Corporation owns only 1.20% of
PALI. The Marcoses responded that their claim is not confined
to the facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also asserting
legal and beneficial ownership of other properties titled under
the name of PALI.
On February 20, 1996, the PSE wrote Chairman
Magtanggol Gunigundo of the Presidential Commission on
Good Government (PCGG) requesting for comments on the
letter of the PALI and the Marcoses. On March 4, 1996, the
PSE was informed that the Marcoses received a Temporary
Restraining Order on the same date, enjoining the Marcoses
from, among others, further impeding, obstructing, delaying
or interfering in any manner by or any means with the
consideration, processing and approval by the PSE of the initial
public offering of PALI. The TRO was issued by Judge Martin
S. Villarama, Executive Judge of the RTC of Pasig City in Civil
Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board
of Governors of the PSE reached its decision to reject PALIs
application, citing the existence of serious claims, issues and
circumstances surrounding PALIs ownership over its assets
that adversely affect the suitability of listing PALIs shares in
the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC
addressed to the then Acting Chairman, Perfecto R. Yasay, Jr.,
bringing to the SECs attention the action taken by the PSE in
the application of PALI for the listing of its shares with the
PSE, and requesting that the SEC, in the exercise of its
supervisory and regulatory powers over stock exchanges under
Section 6(j) of P.D. No. 902-A, review the PSEs action on
PALIs listing application and institute such measures as are
just and proper and under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to
the PSE, attaching thereto the letter of PALI and directing the
PSE to file its comments thereto within five days from its
receipt and for its authorized representative to appear for an
inquiry on the matter. On April 22, 1996, the PSE submitted
a letter to the SEC containing its comments to the April 11,
1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing
the PSEs decision. The dispositive portion of the said order
reads:
WHEREFORE, premises considered, and invoking the
Commissioners authority and jurisdiction under Section 3 of
the Revised Securities Act, in conjunction with Section 3, 6(j)
and 6(m) of the Presidential Decree No. 902-A, the decision of
the Board of Governors of the Philippine Stock Exchange
denying the listing of shares of Puerto Azul Land, Inc., is
hereby set aside, and the PSE is hereby ordered to immediately
cause the listing of the PALI shares in the Exchange, without
prejudice to its authority to require PALI to disclose such other
material information it deems necessary for the protection of
the investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order
on April 29, 1996, which was, however denied by the
Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to consider its order dated April 24, 1996,
and in the light of recent developments on the adverse claim
against the PALI properties, PSE should require PALI to
submit full disclosure of material facts and information to
protect the investing public. In this regard, PALI is hereby
ordered to amend its registration statements filed with the
Commission to incorporate the full disclosure of these material
facts and information.
Dissatisfied with this ruling, the PSE filed with the Court
of Appeals on May 17, 1996 a Petition for Review (with
application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of
the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN ISSUING
THE ASSAILED ORDERS WITHOUT POWER,
JURISDICTION, OR AUTHORITY; SEC HAS
NO POWER TO ORDER THE LISTING AND
SALE OF SHARES OF PALI WHOSE ASSETS
ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN FINDING
THAT PSE ACTED IN AN ARBITRARY AND
ABUSIVE MANNER IN DISAPPROVING
PALIS LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE
ILLEGAL AND VOID FOR ALLOWING
FURTHER DISPOSITION OF PROPERTIES
IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY RESERVATION;
AND
IV. THE FULL DISCLOSURE OF THE SEC WAS
NOT PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN
THIS CASE VIOLATES THE DUE PROCESS
CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition
for Review and subsequently, a Comment and Motion to
Dismiss. On June 10, 1996, PSE filed its Reply to Comment
and Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its
Resolution dismissing the PSEs Petition for Review. Hence,
this Petition by the PSE.
The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the decision of the
petitioner PSE, pursuant to Section 3
[3]
of the Revised
Securities Act in relation to Section 6(j) and 6(m)
[4]
of P.D. No.
902-A, and Section 38(b)
[5]
of the Revised Securities Act, and
for the purpose of ensuring fair administration of the exchange.
Both as a corporation and as a stock exchange, the petitioner is
subject to public respondents jurisdiction, regulation and
control. Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would amount to
serious consequences, considering that the petitioner is a stock
exchange whose business is impressed with public
interest. Abuse is not remote if the public respondent is left
without any system of control. If the securities act vested the
public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and
the power to alter and supplement rules of the exchange in the
listing or delisting of securities, then the law certainly granted
to the public respondent the plenary authority over the
petitioner; and the power of review necessarily comes within its
authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SECs ruling to
the effect that:
x x x the Philippine Stock Exchange has acted in an arbitrary
and abusive manner in disapproving the application of PALI
for listing of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied with the
Listing Rules and full disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as compared to the
IPOs of other companies similarly that were allowed listing in
the Exchange;
3. It appears that the claims and issues on the title to
PALIs properties were even less serious than the claims
against the assets of the other companies in that, the assertions
of the Marcoses that they are owners of the disputed properties
were not substantiated enough to overcome the strength of a
title to properties issued under the Torrens System as evidence
of ownership thereof;
4. No action has been filed in any court of competent
jurisdiction seeking to nullify PALIs ownership over the
disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import
of PSEs decision in denying PALIs application is that it would
be PALI, not the Marcoses, that must go to court to prove the
legality of its ownership on these properties before its shares
can be listed.
In addition, the argument that the PALI properties belong
to the Military/Naval Reservation does not inspire belief. The
point is, the PALI properties are now titled. A property losses
its public character the moment it is covered by a title. As a
matter of fact, the titles have long been settled by a final
judgment; and the final decree having been registered, they can
no longer be re-opened considering that the one year period
has already passed. Lastly, the determination of what standard
to apply in allowing PALIs application for listing, whether the
discretion method or the system of public disclosure adhered to
by the SEC, should be addressed to the Securities Commission,
it being the government agency that exercises both supervisory
and regulatory authority over all corporations.
On August 15, 1996, the PSE, after it was granted an
extension, filed an instant Petition for Review on Certiorari,
taking exception to the rulings of the SEC and the Court of
Appeals. Respondent PALI filed its Comment to the petition on
October 17, 1996. On the same date, the PCGG filed a Motion
for Leave to file a Petition for Intervention. This was followed
up by the PCGGs Petition for Intervention on October 21,
1996. A supplemental Comment was filed by PALI on October
25, 1997. The Office of the Solicitor General, representing the
SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGGs motion for leave
to file petition for intervention, PALI filed its Comment thereto
on January 17, 1997, whereas the PSE filed its own Comment
on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated
Reply to the comments of respondent PALI (October 17, 1996)
and the Solicitor General (December 26, 1996). On may 16,
1997, PALI filed its Rejoinder to the said consolidated reply of
PSE.
PSE submits that the Court of Appeals erred in ruling that
the SEC had authority to order the PSE to list the shares of
PALI in the stock exchange. Under presidential decree No.
902-A, the powers of the SEC over stock exchanges are more
limited as compared to its authority over ordinary
corporations. In connection with this, the powers of the SEC
over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to
reverse the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the countrys
security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges,
which in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock to the
public through the stock exchange. This is in accord with the
business judgment rule whereby the SEC and the courts are
barred from intruding into business judgments of corporations,
when the same are made in good faith. The said rule precludes
the reversal of the decision of the PSE to deny PALIs listing
application, absent a showing a bad faith on the part of the
PSE. Under the listing rule of the PSE, to which PALI had
previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer
has complied with the PSE listing rules and requirements, PSE
retains the discretion to accept or reject the issuers listing
application if the PSE determines that the listing shall not serve
the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction
over sequestered corporations, nor with corporations whose
properties are under sequestration. A reading of Republic of
the Philippines vs. Sandiganbayan, G.R. No. 105205, 240 SCRA
376, would reveal that the properties of PALI, which were
derived from the Ternate Development Corporation (TDC) and
the Monte del Sol Development Corporation (MSDC), are
under sequestration by the PCGG, and the subject of forfeiture
proceedings in the Sandiganbayan. This ruling of the Court is
the law of the case between the Republic and the TDC and
MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986
and April 4, 1988.
It is, likewise, intimidated that the Court of Appeals
sanction that PALIs ownership over its properties can no
longer be questioned, since certificates of title have been issued
to PALI and more than one year has since lapsed, is erroneous
and ignores well settled jurisprudence on land titles. That a
certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and
admits certain exceptions. It is fundamental that forest lands
or military reservations are non-alienable. Thus, when a title
covers a forest reserve or a government reservation, such title
is void.
PSE, likewise, assails the SECs and the Court of Appeals
reliance on the alleged policy of full disclosure to uphold the
listing of the PALIs shares with the PSE, in the absence of a
clear mandate for the effectivity of such policy. As it is, the case
records reveal the truth that PALI did not comply with the
listing rules and disclosure requirements. In fact, PALIs
documents supporting its application contained
misrepresentations and misleading statements, and concealed
material information. The matter of sequestration of PALIs
properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALIs
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the marking of a
corporate entity, its functions as the primary channel through
which the vessels of capital trade ply. The PSEs relevance to
the continued operation and filtration of the securities
transactions in the country gives it a distinct color of
importance such that government intervention in its affairs
becomes justified, if not necessary. Indeed, as the only
operational stock exchange in the country today, the PSE
enjoys a monopoly of securities transactions, and as such, it
yields an immense influence upon the countrys economy.
Due to this special nature of stock exchanges, the
countrys lawmakers has seen it wise to give special treatment
to the administration and regulation of stock exchanges.
[6]

These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the affairs
of stock exchanges so that the interests of the investing public
may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is
enough authority to uphold the SECs challenged control
authority over the petitioner PSE even as it provides that the
Commission shall have absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations, who
are the grantees of primary franchises and/or a license or
permit issued by the government to operate in the
Philippines The SECs regulatory authority over private
corporations encompasses a wide margin of areas, touching
nearly all of a corporations concerns. This authority springs
from the fact that a corporation owes its existence to the
concession of its corporate franchise from the state.
The SECs power to look into the subject ruling of the
PSE, therefore, may be implied from or be considered as
necessary or incidental to the carrying out of the SECs express
power to insure fair dealing in securities traded upon a stock
exchange or to ensure the fair administration of such
exchange.
[7]
It is, likewise, observed that the principal function
of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that
investment in these entities may be encouraged and protected,
and their activities pursued for the promotion of economic
development.
[8]

Thus, it was in the alleged exercise of this authority that
the SEC reversed the decision of the PSE to deny the
application for listing in the stock exchange of the private
respondent PALI. The SECs action was affirmed by the Court
of Appeals.
We affirm that the SEC is the entity with the primary say
as to whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange. This
is in line with the SECs mission to ensure proper compliance
with the laws, such as the Revised Securities Act and to
regulate the sale and disposition of securities in the
country.
[9]
As the appellate court explains:
Paramount policy also supports the authority of the public
respondent to review petitioners denial of the listing. Being a
stock exchange, the petitioner performs a function that is vital
to the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the
economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can
dictate which and how many users are allowed to sell securities
thru the facilities of a stock exchange, if allowed to interpret its
own rules liberally as it may please. Petitioner can either allow
or deny the entry to the market of securities. To repeat, the
monopoly, unless accompanied by control, becomes subject to
abuse; hence, considering public interest, then it should be
subject to government regulation.
The role of the SEC in our national economy cannot be
minimized. The legislature, through the Revised Securities Act,
Presidential Decree No. 902-A, and other pertinent laws, has
entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not
otherwise vested in some other government office.
[10]

This is not to say, however, that the PSEs management
prerogatives are under the absolute control of the SEC. The
PSE is, after all, a corporation authorized by its corporate
franchise to engage in its proposed and duly approved
business. One of the PSEs main concerns, as such, is still the
generation of profit for its stockholders. Moreover, the PSE
has all the rights pertaining to corporations, including the right
to sue and be sued, to hold property in its own name, to enter
(or not to enter) into contracts with third persons, and to
perform all other legal acts within its allocated express or
implied powers.
A corporation is but an association of individuals, allowed
to transact under an assumed corporate name, and with a
distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites
appropriate to such body.
[11]
As to its corporate and
management decisions, therefore, the state will generally not
interfere with the same. Questions of policy and of
management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority
to substitute their judgment for the judgment of the board of
directors. The board is the business manager of the
corporation, and so long as it acts in good faith, its orders are
not reviewable by the courts.
[12]

Thus, notwithstanding the regulatory power of the SEC
over the PSE, and the resultant authority to reverse the PSEs
decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSEs judgment is
attended by bad faith. In board of Liquidators vs. Kalaw,
[13]
it
was held that bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or some moral
obliquity and conscious doing of wrong. It means a breach of a
known duty through some motive or interest of ill will,
partaking of the nature of fraud.
In reaching its decision to deny the application for listing
of PALI, the PSE considered important facts, which in the
general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock
exchange. During the time for receiving objections to the
application, the PSE heard from the representative of the late
President Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the Marcos
estate. In time, the PCGG confirmed this claim. In fact, an
order of sequestration has been issued covering the properties
of PALI, and suit for reconveyance to the state has been filed in
the Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and
MSDC to Rebecco Panlilio, and to the private respondent PALI,
in only a short span of time, are not yet explained to the Court,
but it is clear that such circumstances give rise to serious doubt
as to the integrity of PALI as a stock issuer. The petitioner was
in the right when it refused application of PALI, for a contrary
ruling was not to the best interest of the general public. The
purpose of the Revised Securities Act, after all, is to give
adequate and effective protection to the investing public
against fraudulent representations, or false promises, and the
imposition of worthless ventures.
[14]

It is to be observed that the U.S. Securities Act
emphasized its avowed protection to acts detrimental to
legitimate business, thus:
The Securities Act, often referred to as the truth in securities
Act, was designed not only to provide investors with adequate
information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to
obtain capital through honest presentation against competition
form crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities and Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly
(1) prevention of excesses and fraudulent transactions, merely
by requirement of that details be revealed; (2) placing the
market during the early stages of the offering of a security a
body of information, which operating indirectly through
investment services and expert investors, will tend to produce a
more accurate appraisal of a security. x x x. Thus, the
Commission may refuse to permit a registration statement to
become effective if it appears on its face to be incomplete or
inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the effectiveness
of any registration statement which is found to include any
untrue statement of a material fact or to omit to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has
established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard of
propriety in the entities who choose to transact through its
facilities. It was reasonable for PSE, therefore, to exercise its
judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public
welfare is safeguarded.
In this connection, it is proper to observe that the concept
of government absolutism in a thing of the past, and should
remain so.
The observation that the title of PALI over its properties
is absolute and can no longer be assailed is of no moment. At
this juncture, there is the claim that the properties were owned
by the TDC and MSDC and were transferred in violation of
sequestration orders, to Rebecco Panlilio and later on to PALI,
besides the claim of the Marcoses that such properties belong
to Marcos estate, and were held only in trust by Rebecco
Panlilio. It is also alleged by the petitioner that these
properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established
to be true, the certificates of title over the subject properties
now held by PALI may be disregarded, as it is an established
rule that a registration of a certificate of title does not confer
ownership over the properties described therein to the person
named as owner. The inscription in the registry, to be effective,
must be made in good faith. The defense of indefeasibility of a
Torrens Title does not extend to a transferee who takes the
certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE
acted correctly in refusing the application of PALI, the true
ownership of the properties of PALI need not be determined as
an absolute fact. What is material is that the uncertainty of the
properties ownership and alienability exists, and this puts to
question the qualification of PALIs public offering. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating
unto itself the discretion of approving the application for listing
in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a
corporate entity, whose business judgments are respected in
the absence of bad faith.
The question as to what policy is, or should be relied upon
in approving the registration and sale of securities in the SEC is
not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In
mandating the SEC to administer the Revised Securities Act,
and in performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives the SEC
the power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement
of the said laws. The second paragraph of Section 4 of the said
law, on the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold, transferred or in
any other manner conveyed to the public, unless registered in
accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A,
on the other hand, provides that the SEC, as regulatory agency,
has supervision and control over all corporations and over the
securities market as a whole, and as such, is given ample
authority in determining appropriate policies. Pursuant to this
regulatory authority, the SEC has manifested that it has
adopted the policy of full material disclosure where all
companies, listed or applying for listing, are required to divulge
truthfully and accurately, all material information about
themselves and the securities they sell, for the protection of the
investing public, and under pain of administrative, criminal
and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or
purchase of its securities.
[15]
While the employment of this
policy is recognized and sanctioned by laws, nonetheless, the
Revised Securities Act sets substantial and procedural
standards which a proposed issuer of securities must
satisfy.
[16]
Pertinently, Section 9 of the Revised Securities Act
sets forth the possible Grounds for the Rejection of the
registration of a security:
- - The Commission may reject a registration statement and
refuse to issue a permit to sell the securities included in such
registration statement if it finds that - -
(1) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material facts
required to be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant - -
(i) is not solvent or not is sound financial condition;
(ii) has violated or has not complied with the provisions of
this Act, or the rules promulgated pursuant thereto, or any
order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in the
public interest and for the protection of investors, impose
before the security can be registered;
(iv) had been engaged or is engaged or is about to engaged in
fraudulent transactions;
(v) is in any was dishonest of is not of good repute; or
(vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary or government
rules and regulations.
(3) The enterprise or the business of the issuer is not
shown to be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or
principal stockholder of the issuer is disqualified to such
officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the
satisfaction of the Commission that the sale of its security
would not work to the prejudice to the public interest or as a
fraud upon the purchaser or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention
of the lawmakers to make the registration and issuance of
securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by
the Securities and Exchange Commission. This measure was
meant to protect the interest of the investing public against
fraudulent and worthless securities, and the SEC is mandated
by law to safeguard these interests, following the policies and
rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore,
untenable. At it is, the Court finds that the private respondent
PALI, on at least two points (nos. 1 and 5) has failed to support
the propriety of the issue of its shares with unfailing clarity,
thereby lending support to the conclusion that the PSE acted
correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever
method the SEC, in the exercise of its vested authority, chooses
in setting the standard for public offerings of corporations
wishing to do so. However, the SEC must recognize and
implement the mandate of the law, particularly the Revised
Securities Act, the provisions of which cannot be amended or
supplanted my mere administrative issuance.
In resum, the Court finds that the PSE has acted with
justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on its
part. Its action in refusing to allow the listing of PALI in the
stock exchange is justified by the law and by the circumstances
attendant to this case.
ACCORDINGLY, in view of the foregoing
considerations, the Court hereby GRANTS the Petition for
Review on Certiorari. The decisions of the Court of Appeals
and the Securities and Exchage Commission dated July 27,
1996 and April 24, 1996, respectively, are hereby REVERSED
and SET ASIDE, and a new Judgment is hereby ENTERED,
affirming the decision of the Philippine Stock Exchange to deny
the application for listing of the private respondent Puerto Azul
Land, Inc.
SO ORDERED.

ONG YONG V. TIU
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March
15, 2002, of petitioner movants Ong Yong, Juanita Tan Ong,
Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong
Alonzo (the Ongs); (2) motion for partial reconsideration,
dated March 15, 2002, of petitioner movant Willie Ong seeking
a reversal of this Courts Decision,[1] dated February 1, 2002,
in G.R. Nos. 144476 and 144629 affirming with modification
the decision[2] of the Court of Appeals, dated October 5, 1999,
which in turn upheld, likewise with modification, the decision
of the SEC en banc, dated September 11, 1998; and (3) motion
for issuance of writ of execution of petitioners David S. Tiu,
Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu,
John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002
Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay
City was threatened with stoppage and incompletion when its
owner, the First Landlink Asia Development Corporation
(FLADC), which was owned by the Tius, encountered dire
financial difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off foreclosure
of the mortgage on the two lots where the mall was being built,
the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong,
Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs),
to invest in FLADC. Under the Pre-Subscription Agreement
they entered into, the Ongs and the Tius agreed to maintain
equal shareholdings in FLADC: the Ongs were to subscribe to
1,000,000 shares at a par value of P100.00 each while the Tius
were to subscribe to an additional 549,800 shares at P100.00
each in addition to their already existing subscription of
450,200 shares. Furthermore, they agreed that the Tius were
entitled to nominate the Vice-President and the Treasurer plus
five directors while the Ongs were entitled to nominate the
President, the Secretary and six directors (including the
chairman) to the board of directors of FLADC. Moreover, the
Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their
subscription to 1,000,000 shares of stock while the Tius
committed to contribute to FLADC a four-storey building and
two parcels of land respectively valued at P20 million (for
200,000 shares), P30 million (for 300,000 shares) and P49.8
million (for 49,800 shares) to cover their additional 549,800
stock subscription therein. The Ongs paid in another P70
million[3] to FLADC and P20 million to the Tius over and
above their P100 million investment, the total sum of which
(P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in
FLADC, however, was shortlived because the Tius, on February
23, 1996, rescinded the Pre-Subscription Agreement. The Tius
accused the Ongs of (1) refusing to credit to them the FLADC
shares covering their real property contributions; (2)
preventing David S. Tiu and Cely Y. Tiu from assuming the
positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office
spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and
Cely S. Tiu to assume the positions and perform the duties of
Vice-President and Treasurer, respectively, but the Ongs
prevented them from doing so. Furthermore, the Ongs refused
to provide them the space for their executive offices as Vice-
President and Treasurer. Finally, and most serious of all, the
Ongs refused to give them the shares corresponding to their
property contributions of a four-story building, a 1,902.30
square-meter lot and a 151 square-meter lot. Hence, they felt
they were justified in setting aside their Pre-Subscription
Agreement with the Ongs who allegedly refused to comply with
their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y.
Tiu had in fact assumed the positions of Vice-President and
Treasurer of FLADC but that it was they who refused to comply
with the corporate duties assigned to them. It was the
contention of the Ongs that they wanted the Tius to sign the
checks of the corporation and undertake their management
duties but that the Tius shied away from helping them manage
the corporation. On the issue of office space, the Ongs pointed
out that the Tius did in fact already have existing executive
offices in the mall since they owned it 100% before the Ongs
came in. What the Tius really wanted were new offices which
were anyway subsequently provided to them. On the most
important issue of their alleged failure to credit the Tius with
the FLADC shares commensurate to the Tius property
contributions, the Ongs asserted that, although the Tius
executed a deed of assignment for the 1,902.30 square-meter
lot in favor of FLADC, they (the Tius) refused to pay P 570,690
for capital gains tax and documentary stamp tax. Without the
payment thereof, the SEC would not approve the valuation of
the Tius property contribution (as opposed to cash
contribution). This, in turn, would make it impossible to secure
a new Transfer Certificate of Title (TCT) over the property in
FLADCs name. In any event, it was easy for the Tius to simply
pay the said transfer taxes and, after the new TCT was issued in
FLADCs name, they could then be given the corresponding
shares of stocks. On the 151 square-meter property, the Tius
never executed a deed of assignment in favor of FLADC. The
Tius initially claimed that they could not as yet surrender the
TCT because it was still being reconstituted by the Lichaucos
from whom the Tius bought it. The Ongs later on discovered
that FLADC had in reality owned the property all along, even
before their Pre-Subscription Agreement was executed in
1994. This meant that the 151 square-meter property was at
that time already the corporate property of FLADC for which
the Tius were not entitled to the issuance of new shares of
stock.
The controversy finally came to a head when this case was
commenced[4] by the Tius on February 27, 1996 at the
Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription
Agreement. After hearing, the SEC, through then Hearing
Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the
rescission of the Pre-Subscription Agreement, and
consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the
individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and
Exchange Commission amended articles of incorporation of
FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos.
132493, 132494, 134066 (formerly 15587), 135325 and 134204
and any other title or deed in the name of FLADC, failing in
which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in
favor of the plaintiffs and to cancel the annotation of the Pre-
Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587);
(f) The individual defendants, individually and collectively,
their agents and representatives, to desist from exercising or
performing any and all acts pertaining to stockholder, director
or officer of FLADC or in any manner intervene in the
management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00 and
all interest payments as well as any payments on principal
received from the P70,000,000.00 inexistent loan, plus the
legal rate of interest thereon from the date of their receipt of
such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the
sum of P20,000,000.00 representing his loan from said
defendants plus legal interest from the date of receipt of such
amount.
SO ORDERED.[5]
On motion of both parties, the above decision was partially
reconsidered but only insofar as the Ongs P70 million was
declared not as a premium on capital stock but an advance
(loan) by the Ongs to FLADC and that the imposition of
interest on it was correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a
decision on September 11, 1998, affirming the May 19, 1997
decision of the Hearing Officer. The SEC en banc confirmed the
rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on
capital and not as a loan or advance to FLADC, hence, not
entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on
October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by
the Securities and Exchange Commission En Banc in SEC AC
CASE NOS. 598 and 601 confirming the rescission of the Pre-
Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First
Landlink Asia Development Corporation in accordance with
the following cash and property contributions of the parties
therein.
(a) Ong Group P100,000,000.00 cash contribution for one
(1) million shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200
shares in First Landlink Asia Development Corporation at a par
value of P100.00 per share;
2) A four-storey building described in Transfer Certificate of
Title No. 15587 in the name of Intraland Resources and
Development Corporation valued at P20,000,000.00 for
200,000 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer
Certificate of Title No. 15587 in the name of Masagana
Telamart, Inc. valued at P30,000,000.00 for 300,000 shares
in First Landlink Asia Development Corporation at a par value
of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof is (sic)
hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby
ordered to pay the amount of P70,000,000.00 that was
advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of
P20,000,000.00 loaned them by the Ongs upon the finality of
this decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.
SO ORDERED.[9]
An interesting sidelight of the CA decision was its description
of the rescission made by the Tius as the height of ingratitude
and as pulling a fast one on the Ongs. The CA moreover
found the Tius guilty of withholding FLADC funds from the
Ongs and diverting corporate income to their own MATTERCO
account.[10] These were findings later on affirmed in our own
February 1, 2002 Decision which is the subject of the instant
motion for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA
concluded that both the Ongs and the Tius were in pari
delicto (which would not have legally entitled them to
rescission) but, for practical considerations, that is, their
inability to work together, it was best to separate the two
groups by rescinding the Pre-Subscription Agreement,
returning the original investment of the Ongs and awarding
practically everything else to the Tius.
Their motions for reconsideration having been denied, both
parties filed separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu
et al., the Ongs argued that the Tius may not properly avail of
rescission under Article 1191 of the Civil Code considering that
the Pre-Subscription Agreement did not provide for reciprocity
of obligations; that the rights over the subject matter of the
rescission (capital assets and properties) had been acquired by
a third party (FLADC); that they did not commit a substantial
and fundamental breach of their agreement since they did not
prevent the Tius from assuming the positions of Vice-President
and Treasurer of FLADC, and that the failure to credit the
300,000 shares corresponding to the 1,902.30 square-meter
property covered by TCT No. 134066 (formerly 15587) was due
to the refusal of the Tius to pay the required transfer taxes to
secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADCs name. They
also argued that the liquidation of FLADC may not legally be
ordered by the appellate court even for so called practical
considerations or even to prevent further squabbles and
numerous litigations, since the same are not valid grounds
under the Corporation Code. Moreover, the Ongs bewailed the
failure of the CA to grant interest on their P70 million and P20
million advances to FLADC and David S. Tiu, respectively, and
to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs.
Ong et al., the Tius, on the other hand, contended that the
rescission should have been limited to the restitution of the
parties respective investments and not the liquidation of
FLADC based on the erroneous perception by the court
that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the
Tius invited the Ongs to invest in FLADC to settle its P190
million loan from PNB; that they violated the Pre-Subscription
Agreement when it was the Lichaucos and not the Tius who
executed the deed of assignment over the 151 square-meter
property commensurate to 49,800 shares in FLADC thereby
failing to pay the price for the said shares; that they did not
turn over to the Ongs the entire amount of FLADC funds; that
they were diverting rentals from lease contracts due to FLADC
to their own MATTERCO account; that the P70 million paid by
the Ongs was an advance and not a premium on capital; and
that, by rescinding the Pre-Subscription Agreement, they
wanted to wrestle away the management of the mall and
prevent the Ongs from enjoying the profits of their P190
million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the
subject of the instant motions), affirming the assailed decision
of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall
earn interest at twelve percent (12%) per annum to be
computed from the time of judicial demand which is from April
23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall
earn interest at ten percent (10%) per annum to be computed
from the date of the FLADC Board Resolution which is June 19,
1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for
their property contribution, specifically, the 151 sq. m. parcel of
land.
This Court affirmed the fact that both the Ongs and the Tius
violated their respective obligations under the Pre-Subscription
Agreement. The Ongs prevented the Tius from assuming the
positions of Vice-President and Treasurer of the
corporation. On the other hand, the Decision established that
the Tius failed to turn over FLADC funds to the Ongs and that
the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible
since both parties were in pari delicto. However, this Court
agreed with the Court of Appeals that the remedy of specific
performance, as espoused by the Ongs, was not practical and
sound either and would only lead to further squabbles and
numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion
for Issuance of a Writ of Execution on the grounds that: (a) the
SEC order had become executory as early as September 11,
1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of
Court; (b) any further delay would be injurious to the rights of
the Tius since the case had been pending for more than six
years; and (c) the SEC no longer had quasi-judicial jurisdiction
under RA 8799 (Securities Regulation Code). The Ongs filed
their opposition, contending that the Decision dated February
1, 2002 was not yet final and executory; that no good reason
existed to issue a warrant of execution; and that, pursuant to
Section 5.2 of RA 8799, the SEC retained jurisdiction over
pending cases involving intra-corporate disputes already
submitted for final resolution upon the effectivity of the said
law.
Aside from their opposition to the Tius Motion for Issuance of
Writ of Execution, the Ongs filed their own Motion for
Reconsideration; Alternatively, Motion for Modification (of the
February 1, 2002 Decision) on March 15, 2002, raising two
main points: (a) that specific performance and not rescission
was the proper remedy under the premises; and (b) that,
assuming rescission to be proper, the subject decision of this
Court should be modified to entitle movants to their
proportionate share in the mall.
On their first point (specific performance and not rescission
was the proper remedy), movants Ong argue that their alleged
breach of the Pre-Subscription Agreement was, at most, casual
which did not justify the rescission of the contract. They stress
that providing appropriate offices for David S. Tiu and Cely Y.
Tiu as Vice-President and Treasurer, respectively, had no
bearing on their obligations under the Pre-Subscription
Agreement since the said obligation (to provide executive
offices) pertained to FLADC itself. Such obligation arose from
the relations between the said officers and the corporation and
not any of the individual parties such as the Ongs. Likewise, the
alleged failure of the Ongs to credit shares of stock in favor of
the Tius for their property contributions also pertained to the
corporation and not to the Ongs. Just the same, it could not be
done in view of the Tius refusal to pay the necessary transfer
taxes which in turn resulted in the inability to secure SEC
approval for the property contributions and the issuance of a
new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both
parties in entering into the Pre-Subscription Agreement in
1994 was to raise the P190 million desperately needed for the
payment of FLADCs loan to PNB. Hence, in this light, the
alleged failure to provide office space for the two corporate
officers was no more than an inconsequential
infringement. For rescission to be justified, the law requires
that the breach of contract should be so substantial or
fundamental as to defeat the primary objective of the parties
in making the agreement. At any rate, the Ongs claim that it
was the Tius who were guilty of fundamental violations in
failing to remit funds due to FLADC and diverting the same to
their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court
that both parties were guilty of violating the Pre-Subscription
Agreement, neither of them could resort to rescission under the
principle of pari delicto. In addition, since the cash and other
contributions now sought to be returned already belong to
FLADC, an innocent third party, said remedy may no longer be
availed of under the law.
On their second point (assuming rescission to be proper, the
Ongs should be given their proportionate share of the mall),
movants Ong vehemently take exception to the second item in
the dispositive portion of the questioned Decision insofar as it
decreed that whatever remains of the assets of FLADC and the
management thereof (after liquidation) shall be transferred to
the Tius. They point out that the mall itself, which would have
been foreclosed by PNB if not for their timely investment
of P190 million in 1994 and which is now worth about P1
billion mainly because of their efforts, should be included in
any partition and distribution. They (the Ongs) should not
merely be given interest on their capital investments. The said
portion of our Decision, according to them, amounted to the
unjust enrichment of the Tius and ran contrary to our own
pronouncement that the act of the Tius in unilaterally
rescinding the agreement was the height of ingratitude and
an attempt to pull a fast one as it would prevent the Ongs
from enjoying the fruits of their P190 million investment in
FLADC. It also contravenes this Courts assurance in the
questioned Decision that the Ongs and Tius will have a
bountiful return of their respective investments derived from
the profits of the corporation.
Willie Ong filed a separate Motion for Partial
Reconsideration dated March 8, 2002, pointing out that there
was no violation of the Pre-Subscription Agreement on the part
of the Ongs; that, after more than seven years since the mall
began its operations, rescission had become not only
impractical but would also adversely affect the rights of
innocent parties; and that it would be highly inequitable and
unfair to simply return the P100 million investment of the
Ongs and give the remaining assets now amounting to
about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for
reconsideration, counter that the arguments therein are a mere
re-hash of the contentions in the Ongs petition for review and
previous motion for reconsideration of the Court of Appeals
decision. The Tius compare the arguments in said pleadings to
prove that the Ongs do not raise new issues, and, based on
well-settled jurisprudence,[12] the Ongs present motion is
therefore pro-forma and did not prevent the Decision of this
Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court
held oral arguments on the respective positions of the parties.
On February 27, 2003, Dr. Willie Ong and the rest of the
movants Ong filed their respective memoranda. On February
28, 2003, the Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a
motion for reconsideration. In Philippine Consumers
Foundation, Inc. vs. National Telecommunications
Commission,[13] this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their
minds, after a re-study of the facts and the law, illuminated by
a mutual exchange of views.[14] After a thorough re-
examination of the case, we find that our Decision of February
1, 2002 overlooked certain aspects which, if not corrected, will
cause extreme and irreparable damage and prejudice to the
Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the
Tius should not be blindly applied to meritorious motions for
reconsideration. As long as the same adequately raises a valid
ground[15] (i.e., the decision or final order is contrary to law),
this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security
Bank and Trust Company vs. Cuenca,[16] we ruled that a
motion for reconsideration is not pro-forma for the reason
alone that it reiterates the arguments earlier passed upon and
rejected by the appellate court. We explained there that a
movant may raise the same arguments, if only to convince this
Court that its ruling was erroneous. Moreover, the rule (that a
motion is pro-forma if it only repeats the arguments in the
previous pleadings) will not apply if said arguments were not
squarely passed upon and answered in the decision sought to
be reconsidered. In the case at bar, no ruling was made on
some of the petitioner Ongs arguments. For instance, no clear
ruling was made on why an order distributing corporate assets
and property to the stockholders would not violate the
statutory preconditions for corporate dissolution or decrease of
authorized capital stock. Thus, it would serve the ends of
justice to entertain the subject motion for reconsideration since
some important issues therein, although mere repetitions, were
not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could
legally rescind the Pre-Subscription Agreement. We rule that
they could not.
FLADC was originally incorporated with an authorized capital
stock of 500,000 shares with the Tius owning 450,200 shares
representing the paid-up capital. When the Tius invited the
Ongs to invest in FLADC as stockholders, an increase of the
authorized capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement. The authorized capital stock was thus
increased from 500,000 shares to 2,000,000 shares with a par
value of P100 each, with the Ongs subscribing to 1,000,000
shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the
subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the
Ongs. Since these were unissued shares, the parties Pre-
Subscription Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed
a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as
a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as
one of the contracting parties since the subject matter of the
transaction is property owned by the corporation its shares of
stock. Thus, the subscription contract (denominated by the
parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from
the viewpoint of the law, one between the Ongs and FLADC,
not between the Ongs and the Tius. Otherwise stated, the Tius
did not contract in their personal capacities with the Ongs
since they were not selling any of their own shares to them. It
was FLADC that did.
Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a
civil case for rescission on the ground of breach of contract
filed by the Tius in their personal capacities will not
prosper. Assuming it had valid reasons to do so, only FLADC
(and certainly not the Tius) had the legal personality to file suit
rescinding the subscription agreement with the Ongs inasmuch
as it was the real party in interest therein. Article 1311 of the
Civil Code provides that contracts take effect only between the
parties, their assigns and heirs Therefore, a party who has
not taken part in the transaction cannot sue or be sued for
performance or for cancellation thereof, unless he shows that
he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that
there are two contracts embodied in the Pre-Subscription
Agreement: a shareholders agreement between the Tius and
the Ongs defining and governing their relationship and a
subscription contract between the Tius, the Ongs and FLADC
regarding the subscription of the parties to the corporation.
They point out that these two component parts form one whole
agreement and that their terms and conditions are intrinsically
related and dependent on each other. Thus, the breach of the
shareholders agreement, which was allegedly the
consideration for the subscription contract, was also a breach
of the latter.
Aside from the fact that this is an entirely new angle never
raised in any of their previous pleadings until after the oral
arguments on January 29, 2003, we find this argument too
strained for comfort. It is obviously intended to remedy and
cover up the Tius lack of legal personality to rescind an
agreement in which they were personally not parties-in-
interest. Assuming arguendo that there were two sub-
agreements embodied in the Pre-Subscription Agreement, this
Court fails to see how the shareholders agreement between the
Ongs and Tius can, within the bounds of reason, be interpreted
as the consideration of the subscription contract between
FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are
nevertheless not the proper parties to raise this point because
they were not parties to the subscription contract between
FLADC and the Ongs. Thus, they are not in a position to claim
that the shareholders agreement between them and the Ongs
was what induced FLADC and the Ongs to enter into the
subscription contract. It is the Ongs alone who can say
that. Though FLADC was represented by the Tius in the
subscription contract, FLADC had a separate juridical
personality from the Tius. The case before us does not warrant
piercing the veil of corporate fiction since there is no proof that
the corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This
must also fail because such an argument disregards the
separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in
the management of the corporation. There is evidence that the
Ongs did prevent the rightfully elected Treasurer, Cely Tiu,
from exercising her function as such. The records show that the
President, Wilson Ong, supervised the collection and receipt of
rentals in the Masagana Citimall;[19] that he ordered the same
to be deposited in the bank;[20] and that he held on to the cash
and properties of the corporation.[21] Section 25 of the
Corporation Code prohibits the President from acting
concurrently as Treasurer of the corporation. The rationale
behind the provision is to ensure the effective monitoring of
each officers separate functions.
However, although the Tius were adversely affected by the
Ongs unwillingness to let them assume their positions,
rescission due to breach of contract is definitely the wrong
remedy for their personal grievances. The Corporation Code,
SEC rules and even the Rules of Court provide for appropriate
and adequate intra-corporate remedies, other than rescission,
in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do
so and the requirements of the law therefor have not been
met. A contrary doctrine will tread on extremely dangerous
ground because it will allow just any stockholder, for just about
any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the
corporate assets to him without complying with the
requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject
agreement based on a less than substantial breach of
subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also
have other available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the
Tius possess the legal standing to sue for rescission based on
breach of contract, said action will nevertheless still not
prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and
property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. vs. Rivera,[22] provides that
subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the
satisfaction of their claims.[23] This doctrine is the underlying
principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1)
amendment of the Articles of Incorporation to reduce the
authorized capital stock,[24] (2) purchase of redeemable
shares by the corporation, regardless of the existence of
unrestricted retained earnings,[25] and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the
doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares[26] and in Section 122 on
the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are
complied with.[27]
The distribution of corporate assets and property cannot be
made to depend on the whims and caprices of the stockholders,
officers or directors of the corporation, or even, for that matter,
on the earnest desire of the court a quo to prevent further
squabbles and future litigations unless the indispensable
conditions and procedures for the protection of corporate
creditors are followed. Otherwise, the corporate peace
laudably hoped for by the court will remain nothing but a
dream because this time, it will be the creditors turn to engage
in squabbles and litigations should the court order an
unlawful distribution in blatant disregard of the Trust Fund
Doctrine.
In the instant case, the rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement
is not one of the instances when distribution of capital assets
and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final
analysis, result in the premature liquidation of the corporation
without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corporation Code.[28] The
Tius maintain that rescinding the subscription contract is not
synonymous to corporate liquidation because all rescission will
entail would be the simple restoration of the status quo
ante and a return to the two groups of their cash and property
contributions. We wish it were that simple. Very noticeable is
the fact that the Tius do not explain why rescission in the
instant case will not effectively result in liquidation. The Tius
merely refer in cavalier fashion to the end-result of rescission
(which incidentally is 100% favorable to them) but turn a blind
eye to its unfair, inequitable and disastrous effect on the
corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim
that rescission of the agreement will not result in an
unauthorized liquidation of the corporation because their case
is actually a petition to decrease capital stock pursuant to
Section 38 of the Corporation Code. Section 122 of the law
provides that (e)xcept by decrease of capital stock, no
corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its
debts and liabilities. The Tius claim that their case for
rescission, being a petition to decrease capital stock, does not
violate the liquidation procedures under our laws. All that
needs to be done, according to them, is for this Court to order
(1) FLADC to file with the SEC a petition to issue a certificate of
decrease of capital stock and (2) the SEC to approve said
decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a
petition to decrease capital stock because such action never
complied with the formal requirements for decrease of capital
stock under Section 33 of the Corporation Code. No majority
vote of the board of directors was ever taken. Neither was
there any stockholders meeting at which the approval of
stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurers
affidavit and no proof that said decrease will not prejudice the
creditors rights. On the contrary, all their pleadings contained
were alleged acts of violations by the Ongs to justify an order of
rescission.
Furthermore, it is an improper judicial intrusion into the
internal affairs of the corporation to compel FLADC to file at
the SEC a petition for the issuance of a certificate of decrease of
stock. Decreasing a corporations authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision
that only the stockholders and the directors can make,
considering that they are the contracting parties thereto. In
this case, the Tius are actually not just asking for a review of
the legality and fairness of a corporate decision. They want
this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not
voluntarily agreed upon by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without
the assent of FLADCs directors and stockholders is a violation
of the business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of
the minority, as when plaintiffs aver that the defendants
(members of the board), have concluded a transaction among
themselves as will result in serious injury to the plaintiffs
stockholders.[29]
The reason behind the rule is aptly explained by Dean Cesar L.
Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business
judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free
enterprise system prevailing in our social and economic set-up
dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are ill-
equipped to make business decisions. More importantly, the
social contract in the corporate family to decide the course of
the corporate business has been vested in the board and not
with courts.[30]
Apparently, the Tius do not realize the illegal consequences of
seeking rescission and control of the corporation to the
exclusion of the Ongs. Such an act infringes on the law on
reduction of capital stock. Ordering the return and distribution
of the Ongs capital contribution without dissolving the
corporation or decreasing its authorized capital stock is not
only against the law but is also prejudicial to corporate
creditors who enjoy absolute priority of payment over and
above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this
case is not difficult to understand. If rescission is denied, will
injustice be inflicted on any of the parties? The answer is no
because the financial interests of both the Tius and the Ongs
will remain intact and safe within FLADC. On the other hand,
if rescission is granted, will any of the parties suffer an
injustice? Definitely yes because the Ongs will find themselves
out in the streets with nothing but the money they had in 1994
while the Tius will not only enjoy a windfall estimated to be
anywhere from P450 million to P900 million[31] but will also
take over an extremely profitable business without much effort
at all.
Another very important point follows. The Court of Appeals
and, later on, our Decision dated February 1, 2002, stated that
both groups were in pari delicto, meaning, that both the Tius
and the Ongs committed breaches of the Pre-Subscription
Agreement. This may be true to a certain extent but, judging
from the comparative gravity of the acts separately committed
by each group, we find that the Ongs acts were relatively tame
vis--vis those committed by the Tius in not surrendering
FLADC funds to the corporation and diverting corporate
income to their own MATTERCO account. The Ongs were
right in not issuing to the Tius the shares corresponding to the
four-story building and the 1,902.30 square-meter lot because
no title for it could be issued in FLADCs name, owing to the
Tius refusal to pay the transfer taxes. And as far as the 151
square-meter lot was concerned, why should FLADC issue
additional shares to the Tius for property already owned by the
corporation and which, in the final analysis, was already
factored into the shareholdings of the Tius before the Ongs
came in?
We are appalled by the attempt by the Tius, in the words of the
Court of Appeals, to pull a fast one on the Ongs because that
was where the problem precisely started. It is clear that, when
the finances of FLADC improved considerably after the equity
infusion of the Ongs, the Tius started planning to take over the
corporation again and exclude the Ongs from it. It appears
that the Tius refusal to pay transfer taxes might not have really
been at all unintentional because, by failing to pay that
relatively small amount which they could easily afford, the Tius
should have expected that they were not going to be given the
corresponding shares. It was, from every angle, the perfect
excuse for blackballing the Ongs. In other words, the Tius
created a problem then used that same problem as their pretext
for showing their partners the door. In the process, they stood
to be rewarded with a bonanza of anywhere between P450
million to P900 million in assets (from an investment of only
P45 million which was nearly foreclosed by PNB), to the
extreme and irreparable damage of the Ongs, FLADC and its
creditors.
After all is said and done, no one can close his eyes to the fact
that the Masagana Citimall would not be what it has become
today were it not for the timely infusion of P190 million by the
Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they
originally invested in said mall. If only for this and the fact that
this Resolution can truly pave the way for both groups to enjoy
the fruits of their investments assuming good faith and
honest intentions we cannot allow the rescission of the
subject subscription agreement. The Ongs shortcomings were
far from serious and certainly less than substantial; they were
in fact remediable and correctable under the law. It would be
totally against all rules of justice, fairness and equity to deprive
the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March
15, 2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson
Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo
and the motion for partial reconsideration, dated March 15,
2002, of petitioner Willie Ong are hereby GRANTED. The
Petition for Confirmation of the Rescission of the Pre-
Subscription Agreement docketed as SEC Case No. 02-96-5269
is hereby DISMISSED for lack of merit. The unilateral
rescission by the Tius of the subject Pre-Subscription
Agreement, dated August 15, 1994, is hereby declared as null
and void.
The motion for the issuance of a writ of execution, dated March
15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow,
Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is
hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1,
2002, affirming with modification the decision of the Court of
Appeals, dated October 5, 1999, and the SEC en banc, dated
September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, and Callejo, Sr.,
JJ., concur.


LIPAT V. PACIFIC BANKING CORP
D E C I S I O N
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of
the Decision
[1]
dated October 21, 1999 of the Court of Appeals
in CA-G.R. CV No. 41536 which dismissed herein petitioners
appeal from the Decision
[2]
dated February 10, 1993 of the
Regional Trial Court (RTC) of Quezon City, Branch 84, in Civil
Case No. Q-89-4152. The trial court had dismissed petitioners
complaint for annulment of real estate mortgage and the extra-
judicial foreclosure thereof. Likewise brought for our review is
the Resolution
[3]
dated February 23, 2000 of the Court of
Appeals which denied petitioners motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos
Lipat, owned Belas Export Trading (BET), a single
proprietorship with principal office at No. 814 Aurora
Boulevard, Cubao, Quezon City. BET was engaged in the
manufacture of garments for domestic and foreign
consumption. The Lipats also owned the Mystical Fashions
in the United States, which sells goods imported from the
Philippines through BET. Mrs. Lipat designated her daughter,
Teresita B. Lipat, to manage BET in the Philippines while she
was managing Mystical Fashions in the United States.
In order to facilitate the convenient operation of BET,
Estelita Lipat executed on December 14, 1978, a special power
of attorney appointing Teresita Lipat as her attorney-in-fact to
obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She
likewise authorized Teresita to execute mortgage contracts on
properties owned or co-owned by her as security for the
obligations to be extended by Pacific Bank including any
extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special
power of attorney, was able to secure for and in behalf of her
mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured
by BET and exported to Mystical Fashions in the United
States. As security therefor, the Lipat spouses, as represented
by Teresita, executed a Real Estate Mortgage over their
property located at No. 814 Aurora Blvd., Cubao, Quezon
City. Said property was likewise made to secure other
additional or new loans, discounting lines, overdrafts and
credit accommodations, of whatever amount, which the
Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the
Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other
credit accommodations, including interest and expenses or
other obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly, principal or
secondary, as appears in the accounts, books and records of the
Mortgagee.
[4]

On September 5, 1979, BET was incorporated into a
family corporation named Belas Export Corporation (BEC) in
order to facilitate the management of the business. BEC was
engaged in the business of manufacturing and exportation of
all kinds of garments of whatever kind and description
[5]
and
utilized the same machineries and equipment previously used
by BET. Its incorporators and directors included the Lipat
spouses who owned a combined 300 shares out of the 420
shares subscribed, Teresita Lipat who owned 20 shares, and
other close relatives and friends of the Lipats.
[6]
Estelita Lipat
was named president of BEC, while Teresita became the vice-
president and general manager.
Eventually, the loan was later restructured in the name of
BEC and subsequent loans were obtained by BEC with the
corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by
Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc.,
upon the request of BEC after BEC executed the corresponding
trust receipt therefor. Export bills were also executed in favor
of Pacific Bank for additional finances. These transactions
were all secured by the real estate mortgage over the Lipats
property.
The promissory notes, export bills, and trust receipt
eventually became due and demandable. Unfortunately, BEC
defaulted in its payments. After receipt of Pacific Banks
demand letters, Estelita Lipat went to the office of the banks
liquidator and asked for additional time to enable her to
personally settle BECs obligations. The bank acceded to her
request but Estelita failed to fulfill her promise.
Consequently, the real estate mortgage was foreclosed
and after compliance with the requirements of the law the
mortgaged property was sold at public auction. On January 31,
1989, a certificate of sale was issued to respondent Eugenio D.
Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the
Quezon City RTC a complaint for annulment of the real estate
mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D.
Trinidad. The complaint, which was docketed as Civil Case No.
Q-89-4152, alleged, among others, that the promissory notes,
trust receipt, and export bills were all ultra vires acts of
Teresita as they were executed without the requisite board
resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on
BEC, the same were the corporations sole obligation, it having
a personality distinct and separate from spouses Lipat. It was
likewise pointed out that Teresitas authority to secure a loan
from Pacific Bank was specifically limited to Mrs. Lipats sole
use and benefit and that the real estate mortgage was executed
to secure the Lipats and BETs P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad
alleged in common that petitioners Lipat cannot evade
payments of the value of the promissory notes, trust receipt,
and export bills with their property because they and the BEC
are one and the same, the latter being a family
corporation. Respondent Trinidad further claimed that he was
a buyer in good faith and for value and that petitioners are
estopped from denying BECs existence after holding
themselves out as a corporation.
After trial on the merits, the RTC dismissed the
complaint, thus:
WHEREFORE, this Court holds that in view of the facts
contained in the record, the complaint filed in this case must
be, as is hereby, dismissed. Plaintiffs however has five (5)
months and seventeen (17) days reckoned from the finality of
this decision within which to exercise their right of
redemption. The writ of injunction issued is automatically
dissolved if no redemption is effected within that period.
The counterclaims and cross-claim are likewise dismissed for
lack of legal and factual basis.
No costs.
IT IS SO ORDERED.
[7]

The trial court ruled that there was convincing and
conclusive evidence proving that BEC was a family corporation
of the Lipats. As such, it was a mere extension of petitioners
personality and business and a mere alter ego or business
conduit of the Lipats established for their own benefit. Hence,
to allow petitioners to invoke the theory of separate corporate
personality would sanction its use as a shield to further an end
subversive of justice.
[8]
Thus, the trial court pierced the veil of
corporate fiction and held that Belas Export Corporation and
petitioners (Lipats) are one and the same. Pacific Bank had
transacted business with both BET and BEC on the supposition
that both are one and the same. Hence, the Lipats were
estopped from disclaiming any obligations on the theory of
separate personality of corporations, which is contrary to
principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court
of Appeals in CA-G.R. CV No. 41536. Said appeal, however,
was dismissed by the appellate court for lack of merit. The
Court of Appeals found that there was ample evidence on
record to support the application of the doctrine of piercing the
veil of corporate fiction. In affirming the findings of the RTC,
the appellate court noted that Mrs. Lipat had full control over
the activities of the corporation and used the same to further
her business interests.
[9]
In fact, she had benefited from the
loans obtained by the corporation to finance her business. It
also found unnecessary a board resolution authorizing Teresita
Lipat to secure loans from Pacific Bank on behalf of BEC
because the corporations by-laws allowed such conduct even
without a board resolution. Finally, the Court of Appeals ruled
that the mortgage property was not only liable for the original
loan of P583,854.00 but likewise for the value of the
promissory notes, trust receipt, and export bills as the
mortgage contract equally applies to additional or new loans,
discounting lines, overdrafts, and credit accommodations
which petitioners subsequently obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was
denied by the appellate court in its Resolution of February 23,
2000.
[10]

Hence, this petition, with petitioners submitting that the
court a quo erred
1) .IN HOLDING THAT THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE
FICTION APPLIES IN THIS CASE.
2) .IN HOLDING THAT PETITIONERS
PROPERTY CAN BE HELD LIABLE UNDER
THE REAL ESTATE MORTGAGE NOT ONLY
FOR THE AMOUNT OF P583,854.00 BUT
ALSO FOR THE FULL VALUE OF
PROMISSORY NOTES, TRUST RECEIPTS AND
EXPORT BILLS OF BELAS EXPORT
CORPORATION.
3) .IN HOLDING THAT THE IMPOSITION OF
15% ATTORNEYS FEES IN THE EXTRA-
JUDICIAL FORECLOSURE IS BEYOND THIS
COURTS JURISDICTION FOR IT IS BEING
RAISED FOR THE FIRST TIME IN THIS
APPEAL.
4) .IN HOLDING PETITIONER ALFREDO LIPAT
LIABLE TO PAY THE DISPUTED
PROMISSORY NOTES, THE DOLLAR
ACCOMMODATIONS AND TRUST RECEIPTS
DESPITE THE EVIDENT FACT THAT THEY
WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT
BINDING TO HIM.
5) .IN DENYING PETITIONERS MOTION FOR
RECONSIDERATION AND IN HOLDING THAT
SAID MOTION FOR RECONSIDERATION IS
AN UNAUTHORIZED MOTION, A MERE
SCRAP OF PAPER WHICH CAN NEITHER
BIND NOR BE OF ANY CONSEQUENCE TO
APPELLANTS.
[11]

In sum, the following are the relevant issues for our
resolution:
1. Whether or not the doctrine of piercing the veil of
corporate fiction is applicable in this case;
2. Whether or not petitioners' property under the real
estate mortgage is liable not only for the amount
of P583,854.00 but also for the value of the promissory notes,
trust receipt, and export bills subsequently incurred by BEC;
and
3. Whether or not petitioners are liable to pay the 15%
attorneys fees stipulated in the deed of real estate mortgage.
On the first issue, petitioners contend that both the
appellate and trial courts erred in holding them liable for the
obligations incurred by BEC through the application of the
doctrine of piercing the veil of corporate fiction absent any
clear showing of fraud on their part.
Respondents counter that there is clear and convincing
evidence to show fraud on part of petitioners given the findings
of the trial court, as affirmed by the Court of Appeals, that BEC
was organized as a business conduit for the benefit of
petitioners.
Petitioners contentions fail to persuade this Court. A
careful reading of the judgment of the RTC and the resolution
of the appellate court show that in finding petitioners
mortgaged property liable for the obligations of BEC, both
courts below relied upon the alter ego doctrine or
instrumentality rule, rather than fraud in piercing the veil of
corporate fiction. When the corporation is the mere alter
ego or business conduit of a person, the separate personality of
the corporation may be disregarded.
[12]
This is commonly
referred to as the instrumentality rule or the alter
ego doctrine, which the courts have applied in disregarding the
separate juridical personality of corporations. As held in one
case,
Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation
has, so to speak, no separate mind, will or existence of its own,
and is but a conduit for its principal. xxx
[13]

We find that the evidence on record demolishes, rather
than buttresses, petitioners contention that BET and BEC are
separate business entities. Note that Estelita Lipat admitted
that she and her husband, Alfredo, were the owners of
BET
[14]
and were two of the incorporators and majority
stockholders of BEC.
[15]
It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her daughter,
Teresita, to obtain loans and credit lines from Pacific Bank on
her behalf.
[16]
Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and
BEC, respectively.
[17]
We note further that: (1) Estelita and
Alfredo Lipat are the owners and majority shareholders of BET
and BEC, respectively;
[18]
(2) both firms were managed by their
daughter, Teresita;
[19]
(3) both firms were engaged in the
garment business, supplying products to Mystical Fashion, a
U.S. firm established by Estelita Lipat; (4) both firms held
office in the same building owned by the Lipats;
[20]
(5) BEC is a
family corporation with the Lipats as its majority stockholders;
(6) the business operations of the BEC were so merged with
those of Mrs. Lipat such that they were practically
indistinguishable; (7) the corporate funds were held by Estelita
Lipat and the corporation itself had no visible assets; (8) the
board of directors of BEC was composed of the Burgos and
Lipat family members;
[21]
(9) Estelita had full control over the
activities of and decided business matters of the
corporation;
[22]
and that (10) Estelita Lipat had benefited from
the loans secured from Pacific Bank to finance her business
abroad
[23]
and from the export bills secured by BEC for the
account of Mystical Fashion.
[24]
It could not have been
coincidental that BET and BEC are so intertwined with each
other in terms of ownership, business purpose, and
management. Apparently, BET and BEC are one and the same
and the latter is a conduit of and merely succeeded the
former. Petitioners attempt to isolate themselves from and
hide behind the corporate personality of BEC so as to evade
their liabilities to Pacific Bank is precisely what the classical
doctrine of piercing the veil of corporate entity seeks to prevent
and remedy. In our view, BEC is a mere continuation and
successor of BET, and petitioners cannot evade their
obligations in the mortgage contract secured under the name of
BEC on the pretext that it was signed for the benefit and under
the name of BET. We are thus constrained to rule that the
Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their
mortgaged property should not be made liable for the
subsequent credit lines and loans incurred by BEC because,
first, it was not covered by the mortgage contract of BET which
only covered the loan of P583,854.00 and which allegedly had
already been paid; and, second, it was secured by Teresita Lipat
without any authorization or board resolution of BEC.
We find petitioners contention untenable. As found by
the Court of Appeals, the mortgaged property is not limited to
answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats property can be held
liable under the real estate mortgage is not limited to
P583,854.00. It can be held liable for the value of the
promissory notes, trust receipt and export bills as well. For the
mortgage was executed not only for the purpose of securing the
Belas Export Tradings original loan of P583,854.00, but also
for other additional or new loans, discounting lines, overdrafts
and credit accommodations, of whatever amount, which the
Mortgagor and/or Debtor may subsequently obtain from the
mortgagee as well as any renewal or extension by the
Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other
credit accommodations, including interest and expenses or
other obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly principal or
secondary, as appears in the accounts, books and records of the
mortgagee.
[25]

As a general rule, findings of fact of the Court of Appeals
are final and conclusive, and cannot be reviewed on appeal by
the Supreme Court, provided they are borne out by the record
or based on substantial evidence.
[26]
As noted earlier, BEC
merely succeeded BET as petitioners alter ego; hence,
petitioners mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.
Further, petitioners contention that the original loan had
already been paid, hence, the mortgaged property should not
be made liable to the loans of BEC, is unsupported by any
substantial evidence other than Estelita Lipats self-serving
testimony. Two disputable presumptions under the rules on
evidence weigh against petitioners, namely: (a) that a person
takes ordinary care of his concerns;
[27]
and (b) that things have
happened according to the ordinary course of nature and the
ordinary habits of life.
[28]
Here, if the original loan had indeed
been paid, then logically, petitioners would have asked from
Pacific Bank for the required documents evidencing receipt and
payment of the loans and, as owners of the mortgaged
property, would have immediately asked for the cancellation of
the mortgage in the ordinary course of things. However, the
records are bereft of any evidence contradicting or overcoming
said disputable presumptions.
Petitioners contend further that the mortgaged property
should not bind the loans and credit lines obtained by BEC as
they were secured without any proper authorization or board
resolution. They also blame the bank for its laxity and
complacency in not requiring a board resolution as a requisite
for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release
a board resolution since per admissions by both petitioner
Estelita Lipat and Alice Burgos, petitioners rebuttal witness,
no business or stockholders meetings were conducted nor
were there election of officers held since its incorporation. In
fact, not a single board resolution was passed by the corporate
board
[29]
and it was Estelita Lipat and/or Teresita Lipat who
decided business matters.
[30]

Secondly, the principle of estoppel precludes petitioners
from denying the validity of the transactions entered into by
Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of
petitioner Estelita Lipat and both BET and BEC. While the
power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is
lodged in its board of directors, subject to the articles of
incorporation, by-laws, or relevant provisions of law, yet, just
as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate
some of its functions and powers to officers, committees, or
agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate by-laws,
or authorization from the board, either expressly or impliedly
by habit, custom, or acquiescence in the general course of
business.
[31]
Apparent authority, is derived not merely from
practice. Its existence may be ascertained through (1) the
general manner in which the corporation holds out an officer
or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him;
or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.
[32]

In this case, Teresita Lipat had dealt with Pacific Bank on
the mortgage contract by virtue of a special power of attorney
executed by Estelita Lipat. Recall that Teresita Lipat acted as
the manager of both BEC and BET and had been deciding
business matters in the absence of Estelita Lipat. Further, the
export bills secured by BEC were for the benefit of Mystical
Fashion owned by Estelita Lipat.
[33]
Hence, Pacific Bank
cannot be faulted for relying on the same authority granted to
Teresita Lipat by Estelita Lipat by virtue of a special power of
attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the
agents authority.
[34]

We find no necessity to extensively deal with the liability
of Alfredo Lipat for the subsequent credit lines of BEC. Suffice
it to state that Alfredo Lipat never disputed the validity of the
real estate mortgage of the original loan; hence, he cannot now
dispute the subsequent loans obtained using the same
mortgage contract since it is, by its very terms, a continuing
mortgage contract.
On the third and final issue, petitioners assail the
decision of the Court of Appeals for not taking cognizance of
the issue on attorneys fees on the ground that it was raised for
the first time on appeal. We find the conclusion of the Court of
Appeals to be in accord with settled jurisprudence. Basic is the
rule that matters not raised in the complaint cannot be raised
for the first time on appeal.
[35]
A close perusal of the complaint
yields no allegations disputing the attorneys fees imposed
under the real estate mortgage and petitioners cannot now
allege that they have impliedly disputed the same when they
sought the annulment of the contract.
In sum, we find no reversible error of law committed by
the Court of Appeals in rendering the decision and resolution
herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision
dated October 21, 1999 and the Resolution dated February 23,
2000 of the Court of Appeals in CA-G.R. CV No. 41536 are
AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Austria-Martinez, and Callejo,
Sr., JJ., concur.


FRANCISCO V. GSIS
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the
decision of the Court of First Instance of Rizal (Hon. Angel H.
Mojica, presiding), in its Civil Case No. 2088-P, entitled
"Trinidad J. Francisco, plaintiff, vs. Government Service
Insurance System, defendant", the dispositive part of which
reads as follows:
WHEREFORE, judgment is hereby rendered: (a)
Declaring null and void the consolidation in the name
of the defendant, Government Service Insurance
System, of the title of the VIC-MARI Compound; said
title shall be restored to the plaintiff; and all payments
made by the plaintiff, after her offer had been
accepted by the defendant, must be credited as
amortizations on her loan; and (b) Ordering the
defendant to abide by the terms of the contract
created by plaintiff's offer and it's unconditional
acceptance, with costs against the defendant.
The plaintiff, Trinidad J. Francisco, likewise appealed
separately (L-18155), because the trial court did not award the
P535,000.00 damages and attorney's fees she claimed. Both
appeals are, therefore, jointly treated in this decision.
The following facts are admitted by the parties: On 10 October
1956, the plaintiff, Trinidad J. Francisco, in consideration of a
loan in the amount of P400,000.00, out of which the sum of
P336,100.00 was released to her, mortgaged in favor of the
defendant, Government Service Insurance System (hereinafter
referred to as the System) a parcel of land containing an area of
18,232 square meters, with twenty-one (21) bungalows, known
as Vic-Mari Compound, located at Baesa, Quezon City, payable
within ten (10) years in monthly installments of P3,902.41, and
with interest of 7% per annum compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the
mortgage on the ground that up to that date the plaintiff-
mortgagor was in arrears on her monthly installments in the
amount of P52,000.00. Payments made by the plaintiff at the
time of foreclosure amounted to P130,000.00. The System
itself was the buyer of the property in the foreclosure sale.
On 20 February 1959, the plaintiff's father, Atty. Vicente J.
Francisco, sent a letter to the general manager of the defendant
corporation, Mr. Rodolfo P. Andal, the material portion of
which recited as follows:
Yesterday, I was finally able to collect what the
Government owed me and I now propose to pay said
amount of P30,000 to the GSIS if it would agree that
after such payment the foreclosure of my daughter's
mortgage would be set aside. I am aware that the
amount of P30,000 which I offer to pay will not cover
the total arrearage of P52,000 but as regards the
balance, I propose this arrangement: for the GSIS to
take over the administration of the mortgaged
property and to collect the monthly installments,
amounting to about P5,000, due on the unpaid
purchase price of more than 31 lots and houses
therein and the monthly installments collected shall
be applied to the payment of Miss Francisco's
arrearage until the same is fully covered. It is
requested, however, that from the amount of the
monthly installments collected, the sum of P350.00
be deducted for necessary expenses, such as to pay the
security guard, the street-caretaker, the Meralco Bill
for the street lights and sundry items.
It will be noted that the collectible income each month
from the mortgaged property, which as I said consists
of installments amounting to about P5,000, is more
than enough to cover the monthly amortization on
Miss Francisco's loan. Indeed, had she not
encountered difficulties, due to unforeseen
circumstances, in collecting the said installments, she
could have paid the amortizations as they fell due and
there would have been really no need for the GSIS to
resort to foreclosure.
The proposed administration by the GSIS of the
mortgaged property will continue even after Miss
Francisco's account shall have been kept up to date.
However, once the arrears shall have been paid,
whatever amount of the monthly installments
collected in excess of the amortization due on the loan
will be turned over to Miss Francisco.
I make the foregoing proposal to show Francisco's
sincere desire to work out any fair arrangement for
the settlement of her obligation. I trust that the GSIS,
under the broadminded policies of your
administration, would give it serious consideration.
Sincerely,.
s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO
On the same date, 20 February 1959, Atty. Francisco
received the following telegram:.
VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.
GSIS BOARD APPROVED YOUR REQUEST
RE REDEMPTION OF FORECLOSED
PROPERTY OF YOUR DAUGHTER
ANDAL"
On 28 February 1959, Atty. Francisco remitted to the System,
through Andal, a check for P30,000.00, with an accompanying
letter, which reads:
I am sending you herewith BPI Check No. B-299484
for Thirty Thousand Pesos (P30,000.00) in
accordance with my letter of February 20th and your
reply thereto of the same date, which reads:
GSIS BOARD APPROVED YOUR REQUEST RE
REDEMPTION OF FORECLOSED PROPERTY OF
YOUR DAUGHTER
x x x x x x x x x
The defendant received the amount of P30,000.00, and issued
therefor its official receipt No. 1209874, dated 4 March 1959. It
did not, however, take over the administration of the
compound. In the meantime, the plaintiff received the monthly
payments of some of the occupants thereat; then on 4 March
1960, she remitted, through her father, the amount of
P44,121.29, representing the total monthly installments that
she received from the occupants for the period from March to
December 1959 and January to February 1960, minus expenses
and real estate taxes. The defendant also received this amount,
and issued the corresponding official receipt.
Remittances, all accompanied by letters, corresponding to the
months of March, April, May, and June, 1960 and totalling
P24,604.81 were also sent by the plaintiff to the defendant
from time to time, all of which were received and duly
receipted for.
Then the System sent three (3) letters, one dated 29 January
1960, which was signed by its assistant general manager, and
the other two letters, dated 19 and 26 February 1960,
respectively, which were signed by Andal, asking the plaintiff
for a proposal for the payment of her indebtedness, since
according to the System the one-year period for redemption
had expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960,
protesting against the System's request for proposal of
payment and inviting its attention to the concluded contract
generated by his offer of 20 February 1959, and its acceptance
by telegram of the same date, the compliance of the terms of
the offer already commenced by the plaintiff, and the
misapplication by the System of the remittances she had made,
and requesting the proper corrections.
By letter, dated 31 May 1960, the defendant countered the
preceding protest that, by all means, the plaintiff should pay
attorney's fees of P35,644.14, publication expenses, filing fee of
P301.00, and surcharge of P23.64 for the foreclosure work
done; that the telegram should be disregarded in view of its
failure to express the contents of the board resolution due to
the error of its minor employees in couching the correct
wording of the telegram. A copy of the excerpts of the
resolution of the Board of Directors (No. 380, February 20,
1959) was attached to the letter, showing the approval of
Francisco's offer
... subject to the condition that Mr. Vicente J.
Francisco shall pay all expenses incurred by the GSIS
in the foreclosure of the mortgage.
Inasmuch as, according to the defendant, the remittances
previously made by Atty. Francisco were allegedly not
sufficient to pay off her daughter's arrears, including attorney's
fees incurred by the defendant in foreclosing the mortgage, and
the one-year period for redemption has expired, said
defendant, on 5 July 1960, consolidated the title to the
compound in its name, and gave notice thereof to the plaintiff
on 26 July 1960 and to each occupant of the compound.
Hence, the plaintiff instituted the present suit, for specific
performance and damages. The defendant answered, pleading
that the binding acceptance of Francisco's offer was the
resolution of the Board, and that Andal's telegram, being
erroneous, should be disregarded. After trial, the court below
found that the offer of Atty. Francisco, dated 20 February 1959,
made on behalf of his daughter, had been unqualifiedly
accepted, and was binding, and rendered judgment as noted at
the start of this opinion.
The defendant-appellant corporation assigns six (6) errors
allegedly committed by the lower court, all of which, however,
are resolvable on the single issue as to whether or not the
telegram generated a contract that is valid and binding upon
the parties.
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. 1wph1.t
We find no reason for altering the conclusion reached by the
court below that the offer of compromise made by plaintiff in
the letter, Exhibit "A", had been validly accepted, and was
binding on the defendant. The terms of the offer were clear,
and over the signature of defendant's general manager, Rodolfo
Andal, plaintiff was informed telegraphically that her proposal
had been accepted. There was nothing in the telegram that
hinted at any anomaly, or gave ground to suspect its veracity,
and the plaintiff, therefore, can not be blamed for relying upon
it. There is no denying that the telegram was within Andal's
apparent authority, but the defense is that he did not sign it,
but that it was sent by the Board Secretary in his name and
without his knowledge. Assuming this to be true, how was
appellee to know it? Corporate transactions would speedily
come to a standstill were every person dealing with a
corporation held duty-bound to disbelieve every act of its
responsible officers, no matter how regular they should appear
on their face. This Court has observed in Ramirez vs.
Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases
of this kind it is always well to keep in mind the
situation as it presents itself to the third party with
whom the contract is made. Naturally he can have
little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the
external manifestations of corporate consent. The
integrity of commercial transactions can only be
maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with
law; and we would be sorry to announce a doctrine
which would permit the property of a man in the city
of Paris to be whisked out of his hands and carried
into a remote quarter of the earth without recourse
against the corporation whose name and authority
had been used in the manner disclosed in this case. As
already observed, it is familiar doctrine that if a
corporation knowingly permits one of its officers, or
any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the
public as possessing power to do those acts, the
corporation will, as against any one who has in good
faith dealt with the corporation through such agent,
be estopped from denying his authority; and where it
is said "if the corporation permits" this means the
same as "if the thing is permitted by the directing
power of the corporation."
It has also been decided that
A very large part of the business of the country is
carried on by corporations. It certainly is not the
practice of persons dealing with officers or agents who
assume to act for such entities to insist on being
shown the resolution of the board of directors
authorizing the particular officer or agent to transact
the particular business which he assumes to conduct.
A person who knows that the officer or agent of the
corporation habitually transacts certain kinds of
business for such corporation under circumstances
which necessarily show knowledge on the part of
those charged with the conduct of the corporate
business assumes, as he has the right to assume, that
such agent or officer is acting within the scope of his
authority. (Curtis Land & Loan Co. vs. Interior Land
Co., 137 Wis. 341, 118 N.W. 853, 129 Am. St. Rep.
1068; as cited in 2 Fletcher's Encyclopedia, Priv. Corp.
263, perm. Ed.)
Indeed, it is well-settled that
If a private corporation intentionally or negligently
clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to
deny that such apparent authority is real, as to
innocent third persons dealing in good faith with such
officers or agents. (2 Fletcher's Encyclopedia, Priv.
Corp. 255, Perm. Ed.)
Hence, even if it were the board secretary who sent the
telegram, the corporation could not evade the binding effect
produced by the telegram..
The defendant-appellant does not disown the telegram, and
even asserts that it came from its offices, as may be gleaned
from the letter, dated 31 May 1960, to Atty. Francisco, and
signed "R. P. Andal, general manager by Leovigildo
Monasterial, legal counsel", wherein these phrases occur: "the
telegram sent ... by this office" and "the telegram we sent your"
(emphasis supplied), but it alleges mistake in couching the
correct wording. This alleged mistake cannot be taken
seriously, because while the telegram is dated 20 February
1959, the defendant informed Atty. Francisco of the alleged
mistake only on 31 May 1960, and all the while it accepted the
various other remittances, starting on 28 February 1959, sent
by the plaintiff to it in compliance with her performance of her
part of the new contract.
The inequity of permitting the System to deny its acceptance
become more patent when account is taken of the fact that in
remitting the payment of P30,000 advanced by her father,
plaintiff's letter to Mr. Andal quoted verbatim the telegram of
acceptance. This was in itself notice to the corporation of the
terms of the allegedly unauthorized telegram, for as Ballentine
says:
Knowledge of facts acquired or possessed by an officer
or agent of a corporation in the course of his
employment, and in relation to matters within the
scope of his authority, is notice to the corporation,
whether he communicates such knowledge or not.
(Ballentine, Law on Corporations, section 112.)
since a corporation cannot see, or know, anything except
through its officers.
Yet, notwithstanding this notice, the defendant System
pocketed the amount, and kept silent about the telegram not
being in accordance with the true facts, as it now alleges. This
silence, taken together with the unconditional acceptance of
three other subsequent remittances from plaintiff, constitutes
in itself a binding ratification of the original agreement (Civil
Code, Art. 1393).
ART. 1393. Ratification may be effected expressly or
tacitly. It is understood that there is a tacit ratification
if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an
act which necessarily implies an intention to waive his
right.
Nowhere else do the circumstances call more insistently for the
application of the equitable maxim that between two innocent
parties, the one who made it possible for the wrong to be done
should be the one to bear the resulting loss..
The defendant's assertion that the telegram came from it but
that it was incorrectly worded renders unnecessary to resolve
the other point on controversy as to whether the said telegram
constitutes an actionable document..
Since the terms offered by the plaintiff in the letter of 20
February 1959 (Exhibit "A") provided for the setting aside of
the foreclosure effected by the defendant System, the
acceptance of the offer left the account of plaintiff in the same
condition as if no foreclosure had taken place. It follows, as the
lower court has correctly held, that the right of the System to
collect attorneys' fees equivalent to 10% of the due
(P35,694.14) and the expenses and charges of P3,300.00 may
no longer be enforced, since by the express terms of the
mortgage contract, these sums were collectible only "in the
event of foreclosure."
The court a quo also called attention to the unconscionability
of defendant's charging the attorney's fees, totalling over
P35,000.00; and this point appears well-taken, considering
that the foreclosure was merely extra-judicial, and the
attorneys' work was limited to requiring the sheriff to
effectuate the foreclosure. However, in view of the parties'
agreement to set the same aside, with the consequential
elimination of such incidental charges, the matter of
unreasonableness of the counsel fees need not be labored
further.
Turning now to the plaintiff's separate appeal (Case G.R. No. L-
18155): Her prayer for an award of actual or compensatory
damages for P83,333.33 is predicated on her alleged unrealized
profits due to her inability to sell the compound for the price of
P750,000.00 offered by one Vicente Alunan, which sale was
allegedly blocked because the System consolidated the title to
the property in its name. Plaintiff reckons the amount of
P83,333.33 by placing the actual value of the property at
P666,666.67, a figure arrived at by assuming that the System's
loan of P400,000.00 constitutes 60% of the actual value of the
security. The court a quo correctly refused to award such actual
or compensatory damages because it could not determine with
reasonable certainty the difference between the offered price
and the actual value of the property, for lack of competent
evidence. Without proof we cannot assume, or take judicial
notice, as suggested by the plaintiff, that the practice of lending
institutions in the country is to give out as loan 60% of the
actual value of the collateral. Nor should we lose sight of the
fact that the price offered by Alunan was payable in
installments covering five years, so that it may not actually
represent true market values.
Nor was there error in the appealed decision in denying moral
damages, not only on account of the plaintiff's failure to take
the witness stand and testify to her social humiliation,
wounded feelings, anxiety, etc., as the decision holds, but
primarily because a breach of contract like that of defendant,
not being malicious or fraudulent, does not warrant the award
of moral damages under Article 2220 of the Civil Code
(Ventanilla vs. Centeno, L-14333, 28 Jan. 1961; Fores vs.
Miranda, L-12163, 4 March 1959).
There is no basis for awarding exemplary damages either,
because this species of damages is only allowed in addition to
moral, temperate, liquidated, or compensatory damages, none
of which have been allowed in this case, for reasons herein
before discussed (Art. 2234, Civil Code; Velayo vs. Shell Co. of
P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and
Lorza, L-5164, Jan. 27, 1953, 49 O.G. No. 2, 515).
As to attorneys' fees, we agree with the trial court's stand that
in view of the absence of gross and evident bad faith in
defendant's refusal to satisfy the plaintiff's claim, and there
being none of the other grounds enumerated in Article 2208 of
the Civil Code, such absence precludes a recovery. The award of
attorneys' fees is essentially discretionary in the trial court, and
no abuse of discretion has been shown.
FOR THE FOREGOING REASONS, the appealed decision is
hereby affirmed, with costs against the defendant Government
Service Insurance System, in G.R. No.L-18287.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador,
Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal,
JJ., concur.

WOODCHILD V. ROXAS ELECTRIC


CALLEJO, SR., J.:

This is a petition for review on certiorari of the
Decision
[1]
of the Court of Appeals in CA-G.R. CV No. 56125
reversing the Decision
[2]
of the Regional Trial Court of Makati,
Branch 57, which ruled in favor of the petitioner.
The Antecedents

The respondent Roxas Electric and Construction
Company, Inc. (RECCI), formerly the Roxas Electric and
Construction Company, was the owner of two parcels of land,
identified as Lot No. 491-A-3-B-1 covered by Transfer
Certificate of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2
covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1
which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to
the Sumulong Highway, Antipolo, Rizal.
At a special meeting on May 17, 1991, the respondents
Board of Directors approved a resolution authorizing the
corporation, through its president, Roberto B. Roxas, to sell
Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area
of 7,213 square meters, at a price and under such terms and
conditions which he deemed most reasonable and
advantageous to the corporation; and to execute, sign and
deliver the pertinent sales documents and receive the proceeds
of the sale for and on behalf of the company.
[3]

Petitioner Woodchild Holdings, Inc. (WHI) wanted to
buy Lot No. 491-A-3-B-2 covered by TCT No. 78086 on which
it planned to construct its warehouse building, and a portion of
the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot
container van would be able to readily enter or leave the
property. In a Letter to Roxas dated June 21, 1991, WHI
President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2
under stated terms and conditions for P1,000 per square meter
or at the price of P7,213,000.
[4]
One of the terms incorporated
in Dys offer was the following provision:

5. This Offer to Purchase is made on the
representation and warranty of the
OWNER/SELLER, that he holds a good and
registrable title to the property, which shall
be conveyed CLEAR and FREE of all liens
and encumbrances, and that the area of 7,213
square meters of the subject property already
includes the area on which the right of way
traverses from the main lot (area) towards
the exit to the Sumulong Highway as shown
in the location plan furnished by the
Owner/Seller to the buyer. Furthermore, in
the event that the right of way is insufficient
for the buyers purposes (example: entry of a
45-foot container), the seller agrees to sell
additional square meter from his current
adjacent property to allow the buyer to full
access and full use of the property.
[5]


Roxas indicated his acceptance of the offer on page 2 of
the deed. Less than a month later or on July 1, 1991, Roxas, as
President of RECCI, as vendor, and Dy, as President of WHI, as
vendee, executed a contract to sell in which RECCI bound and
obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT
No. 78086 for P7,213,000.
[6]
On September 5, 1991, a Deed of
Absolute Sale
[7]
in favor of WHI was issued, under which Lot
No. 491-A-3-B-2 covered by TCT No. 78086 was sold
for P5,000,000, receipt of which was acknowledged by Roxas
under the following terms and conditions:

The Vendor agree (sic), as it hereby
agrees and binds itself to give Vendee the
beneficial use of and a right of way from
Sumulong Highway to the property herein
conveyed consists of 25 square meters wide
to be used as the latters egress from and
ingress to and an additional 25 square
meters in the corner of Lot No. 491-A-3-B-1,
as turning and/or maneuvering area for
Vendees vehicles.

The Vendor agrees that in the event
that the right of way is insufficient for the
Vendees use (ex entry of a 45-foot container)
the Vendor agrees to sell additional square
meters from its current adjacent property to
allow the Vendee full access and full use of
the property.


The Vendor hereby undertakes and
agrees, at its account, to defend the title of
the Vendee to the parcel of land and
improvements herein conveyed, against all
claims of any and all persons or entities, and
that the Vendor hereby warrants the right of
the Vendee to possess and own the said
parcel of land and improvements thereon
and will defend the Vendee against all
present and future claims and/or action in
relation thereto, judicial and/or
administrative. In particular, the Vendor
shall eject all existing squatters and
occupants of the premises within two (2)
weeks from the signing hereof. In case of
failure on the part of the Vendor to eject all
occupants and squatters within the two-week
period or breach of any of the stipulations,
covenants and terms and conditions herein
provided and that of contract to sell dated 1
July 1991, the Vendee shall have the right to
cancel the sale and demand reimbursement
for all payments made to the Vendor with
interest thereon at 36% per annum.
[8]

On September 10, 1991, the Wimbeco Builders, Inc.
(WBI) submitted its quotation for P8,649,000 to WHI for the
construction of the warehouse building on a portion of the
property with an area of 5,088 square meters.
[9]
WBI proposed
to start the project on October 1, 1991 and to turn over the
building to WHI on February 29, 1992.
[10]

In a Letter dated September 16, 1991, Ponderosa
Leather Goods Company, Inc. confirmed its lease agreement
with WHI of a 5,000-square-meter portion of the warehouse
yet to be constructed at the rental rate of P65 per square
meter. Ponderosa emphasized the need for the warehouse to
be ready for occupancy before April 1, 1992.
[11]
WHI accepted
the offer. However, WBI failed to commence the construction
of the warehouse in October 1, 1991 as planned because of the
presence of squatters in the property and suggested a
renegotiation of the contract after the squatters shall have been
evicted.
[12]
Subsequently, the squatters were evicted from the
property.
On March 31, 1992, WHI and WBI executed a Letter-
Contract for the construction of the warehouse building
for P11,804,160.
[13]
The contractor started construction in
April 1992 even before the building officials of Antipolo City
issued a building permit on May 28, 1992. After the warehouse
was finished, WHI issued on March 21, 1993 a certificate of
occupancy by the building official. Earlier, or on March 18,
1993, WHI, as lessor, and Ponderosa, as lessee, executed a
contract of lease over a portion of the property for a monthly
rental of P300,000 for a period of three years from March 1,
1993 up to February 28, 1996.
[14]

In the meantime, WHI complained to Roberto Roxas
that the vehicles of RECCI were parked on a portion of the
property over which WHI had been granted a right of
way. Roxas promised to look into the matter. Dy and Roxas
discussed the need of the WHI to buy a 500-square-meter
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as
provided for in the deed of absolute sale. However, Roxas died
soon thereafter. On April 15, 1992, the WHI wrote the RECCI,
reiterating its verbal requests to purchase a portion of the said
lot as provided for in the deed of absolute sale, and complained
about the latters failure to eject the squatters within the three-
month period agreed upon in the said deed.
The WHI demanded that the RECCI sell a portion of
Lot No. 491-A-3-B-1 covered by TCT No. 78085 for its
beneficial use within 72 hours from notice thereof, otherwise
the appropriate action would be filed against it. RECCI
rejected the demand of WHI. WHI reiterated its demand in a
Letter dated May 29, 1992. There was no response from
RECCI.
On June 17, 1992, the WHI filed a complaint against
the RECCI with the Regional Trial Court of Makati, for specific
performance and damages, and alleged, inter alia, the
following in its complaint:

5. The current adjacent property
referred to in the aforequoted paragraph of
the Deed of Absolute Sale pertains to the
property covered by Transfer Certificate of
Title No. N-78085 of the Registry of Deeds of
Antipolo, Rizal, registered in the name of
herein defendant Roxas Electric.

6. Defendant Roxas Electric in
patent violation of the express and valid
terms of the Deed of Absolute Sale
unjustifiably refused to deliver to Woodchild
Holdings the stipulated beneficial use and
right of way consisting of 25 square meters
and 55 square meters to the prejudice of the
plaintiff.

7. Similarly, in as much as the 25
square meters and 55 square meters alloted
to Woodchild Holdings for its beneficial use
is inadequate as turning and/or maneuvering
area of its 45-foot container van, Woodchild
Holdings manifested its intention pursuant
to para. 5 of the Deed of Sale to purchase
additional square meters from Roxas Electric
to allow it full access and use of the
purchased property, however, Roxas Electric
refused and failed to merit Woodchild
Holdings request contrary to defendant
Roxas Electrics obligation under the Deed of
Absolute Sale (Annex A).

8. Moreover, defendant, likewise,
failed to eject all existing squatters and
occupants of the premises within the
stipulated time frame and as a consequence
thereof, plaintiffs planned construction has
been considerably delayed for seven (7)
months due to the squatters who continue to
trespass and obstruct the subject property,
thereby Woodchild Holdings incurred
substantial losses amounting
to P3,560,000.00 occasioned by the
increased cost of construction materials and
labor.

9. Owing further to Roxas
Electrics deliberate refusal to comply with
its obligation under Annex A, Woodchild
Holdings suffered unrealized income
of P300,000.00 a month or P2,100,000.00
supposed income from rentals of the subject
property for seven (7) months.

10. On April 15, 1992, Woodchild
Holdings made a final demand to Roxas
Electric to comply with its obligations and
warranties under the Deed of Absolute Sale
but notwithstanding such demand,
defendant Roxas Electric refused and failed
and continue to refuse and fail to heed
plaintiffs demand for compliance.

Copy of the demand letter dated April
15, 1992 is hereto attached as Annex B and
made an integral part hereof.

11. Finally, on 29 May 1991,
Woodchild Holdings made a letter request
addressed to Roxas Electric to particularly
annotate on Transfer Certificate of Title No.
N-78085 the agreement under Annex A
with respect to the beneficial use and right of
way, however, Roxas Electric unjustifiably
ignored and disregarded the same.

Copy of the letter request dated 29
May 1992 is hereto attached as Annex C
and made an integral part hereof.

12. By reason of Roxas Electrics
continuous refusal and failure to comply
with Woodchild Holdings valid demand for
compliance under Annex A, the latter was
constrained to litigate, thereby incurring
damages as and by way of attorneys fees in
the amount of P100,000.00 plus costs of suit
and expenses of litigation.
[15]

The WHI prayed that, after due proceedings,
judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully
prayed that judgment be rendered in favor of
Woodchild Holdings and ordering Roxas
Electric the following:

a) to deliver to
Woodchild Holdings
the beneficial use of
the stipulated 25
square meters and 55
square meters;
b) to sell to Woodchild
Holdings additional
25 and 100 square
meters to allow it full
access and use of the
purchased property
pursuant to para. 5 of
the Deed of Absolute
Sale;
c) to cause annotation on
Transfer Certificate
of Title No. N-78085
the beneficial use and
right of way granted
to Woodchild
Holdings under the
Deed of Absolute
Sale;
d) to pay Woodchild
Holdings the amount
of P5,660,000.00,
representing actual
damages and
unrealized income;
e) to pay attorneys fees
in the amount
of P100,000.00; and
f) to pay the costs of
suit.
Other reliefs just and equitable are
prayed for.
[16]

In its answer to the complaint, the RECCI alleged that
it never authorized its former president, Roberto Roxas, to
grant the beneficial use of any portion of Lot No. 491-A-3-B-1,
nor agreed to sell any portion thereof or create a lien or burden
thereon. It alleged that, under the Resolution approved on
May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-
3-B-2 covered by TCT No. 78086. As such, the grant of a right
of way and the agreement to sell a portion of Lot No. 491-A-3-
B-1 covered by TCT No. 78085 in the said deed are ultra
vires. The RECCI further alleged that the provision therein
that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI
lacked the essential elements of a binding contract.
[17]


In its amended answer to the complaint, the RECCI
alleged that the delay in the construction of its warehouse
building was due to the failure of the WHIs contractor to
secure a building permit thereon.
[18]


During the trial, Dy testified that he told Roxas that
the petitioner was buying a portion of Lot No. 491-A-3-B-1
consisting of an area of 500 square meters, for the price
of P1,000 per square meter.

On November 11, 1996, the trial court rendered
judgment in favor of the WHI, the decretal portion of which
reads:

WHEREFORE, judgment is hereby
rendered directing defendant:

(1) To allow plaintiff the beneficial
use of the existing right of way plus the
stipulated 25 sq. m. and 55 sq. m.;

(2) To sell to plaintiff an
additional area of 500 sq. m. priced
at P1,000 per sq. m. to allow said plaintiff
full access and use of the purchased property
pursuant to Par. 5 of their Deed of Absolute
Sale;

(3) To cause annotation on TCT
No. N-78085 the beneficial use and right of
way granted by their Deed of Absolute Sale;

(4) To pay plaintiff the amount
of P5,568,000 representing actual damages
and plaintiffs unrealized income;

(5) To pay plaintiff P100,000
representing attorneys fees; and

To pay the costs of suit.

SO ORDERED.
[19]


The trial court ruled that the RECCI was estopped
from disowning the apparent authority of Roxas under the May
17, 1991 Resolution of its Board of Directors. The court
reasoned that to do so would prejudice the WHI which
transacted with Roxas in good faith, believing that he had the
authority to bind the WHI relating to the easement of right of
way, as well as the right to purchase a portion of Lot No. 491-A-
3-B-1 covered by TCT No. 78085
The RECCI appealed the decision to the CA, which
rendered a decision on November 9, 1999 reversing that of the
trial court, and ordering the dismissal of the complaint. The
CA ruled that, under the resolution of the Board of Directors of
the RECCI, Roxas was merely authorized to sell Lot No. 491-A-
3-B-2 covered by TCT No. 78086, but not to grant right of way
in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to
grant an option to the petitioner to buy a portion thereof. The
appellate court also ruled that the grant of a right of way and an
option to the respondent were so lopsided in favor of the
respondent because the latter was authorized to fix the location
as well as the price of the portion of its property to be sold to
the respondent. Hence, such provisions contained in the deed
of absolute sale were not binding on the RECCI. The appellate
court ruled that the delay in the construction of WHIs
warehouse was due to its fault.

The Present Petition


The petitioner now comes to this Court asserting
that:

I.
THE COURT OF APPEALS ERRED IN
HOLDING THAT THE DEED OF
ABSOLUTE SALE (EXH. C) IS ULTRA
VIRES.

II.
THE COURT OF APPEALS GRAVELY
ERRED IN REVERSING THE RULING OF
THE COURT A QUO ALLOWING THE
PLAINTIFF-APPELLEE THE BENEFICIAL
USE OF THE EXISTING RIGHT OF WAY
PLUS THE STIPULATED 25 SQUARE
METERS AND 55 SQUARE METERS
BECAUSE THESE ARE VALID
STIPULATIONS AGREED BY BOTH
PARTIES TO THE DEED OF ABSOLUTE
SALE (EXH. C).

III.
THERE IS NO FACTUAL PROOF OR
EVIDENCE FOR THE COURT OF APPEALS
TO RULE THAT THE STIPULATIONS OF
THE DEED OF ABSOLUTE SALE (EXH.
C) WERE DISADVANTAGEOUS TO THE
APPELLEE, NOR WAS APPELLEE
DEPRIVED OF ITS PROPERTY WITHOUT
DUE PROCESS.

IV.
IN FACT, IT WAS WOODCHILD WHO WAS
DEPRIVED OF PROPERTY WITHOUT DUE
PROCESS BY THE ASSAILED DECISION.

V.
THE DELAY IN THE CONSTRUCTION WAS
DUE TO THE FAILURE OF THE
APPELLANT TO EVICT THE SQUATTERS
ON THE LAND AS AGREED IN THE DEED
OF ABSOLUTE SALE (EXH. C).

VI.
THE COURT OF APPEALS GRAVELY
ERRED IN REVERSING THE RULING OF
THE COURT A QUO DIRECTING THE
DEFENDANT TO PAY THE PLAINTIFF
THE AMOUNT OF P5,568,000.00
REPRESENTING ACTUAL DAMAGES AND
PLAINTIFFS UNREALIZED INCOME AS
WELL AS ATTORNEYS FEES.
[20]



The threshold issues for resolution are the following: (a)
whether the respondent is bound by the provisions in the deed
of absolute sale granting to the petitioner beneficial use and a
right of way over a portion of Lot No. 491-A-3-B-1 accessing
to the Sumulong Highway and granting the option to the
petitioner to buy a portion thereof, and, if so, whether such
agreement is enforceable against the respondent; (b) whether
the respondent failed to eject the squatters on its property
within two weeks from the execution of the deed of absolute
sale; and, (c) whether the respondent is liable to the petitioner
for damages.
On the first issue, the petitioner avers that, under its
Resolution of May 17, 1991, the respondent authorized Roxas,
then its president, to grant a right of way over a portion of Lot
No. 491-A-3-B-1 in favor of the petitioner, and an option for the
respondent to buy a portion of the said property. The
petitioner contends that when the respondent sold Lot No. 491-
A-3-B-2 covered by TCT No. 78086, it (respondent) was well
aware of its obligation to provide the petitioner with a means of
ingress to or egress from the property to the Sumulong
Highway, since the latter had no adequate outlet to the public
highway. The petitioner asserts that it agreed to buy the
property covered by TCT No. 78085 because of the grant by the
respondent of a right of way and an option in its favor to buy a
portion of the property covered by TCT No. 78085. It contends
that the respondent never objected to Roxas acceptance of its
offer to purchase the property and the terms and conditions
therein; the respondent even allowed Roxas to execute the deed
of absolute sale in its behalf. The petitioner asserts that the
respondent even received the purchase price of the property
without any objection to the terms and conditions of the said
deed of sale. The petitioner claims that it acted in good faith,
and contends that after having been benefited by the said sale,
the respondent is estopped from assailing its terms and
conditions. The petitioner notes that the respondents Board of
Directors never approved any resolution rejecting the deed of
absolute sale executed by Roxas for and in its behalf. As such,
the respondent is obliged to sell a portion of Lot No. 491-A-3-
B-1 covered by TCT No. 78085 with an area of 500 square
meters at the price of P1,000 per square meter, based on its
evidence and Articles 649 and 651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so
authorized under the May 17, 1991 Resolution of its Board of
Directors to impose a burden or to grant a right of way in favor
of the petitioner on Lot No. 491-A-3-B-1, much less convey a
portion thereof to the petitioner. Hence, the respondent was
not bound by such provisions contained in the deed of absolute
sale. Besides, the respondent contends, the petitioner cannot
enforce its right to buy a portion of the said property since
there was no agreement in the deed of absolute sale on the
price thereof as well as the specific portion and area to be
purchased by the petitioner.
We agree with the respondent.
In San Juan Structural and Steel Fabricators, Inc. v.
Court of Appeals,
[21]
we held that:

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 corporations
board of directors. 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 by-laws 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, by-laws, or relevant
provisions of law.
[22]

Generally, the acts of the corporate officers within the
scope of their authority are binding on the
corporation. However, under Article 1910 of the New Civil
Code, acts done by such officers beyond the scope of their
authority cannot bind the corporation unless it has ratified
such acts expressly or tacitly, or is estopped from denying
them:
Art. 1910. The principal must comply
with all the obligations which the agent may
have contracted within the scope of his
authority.
As for any obligation wherein the
agent has exceeded his power, the principal
is not bound except when he ratifies it
expressly or tacitly.
Thus, contracts entered into by corporate officers
beyond the scope of authority are unenforceable against the
corporation unless ratified by the corporation.
[23]

In BA Finance Corporation v. Court of Appeals,
[24]
we
also ruled that persons dealing with an assumed agency,
whether the assumed agency be a general or special one, are
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.
In this case, the respondent denied authorizing its then
president Roberto B. Roxas to sell a portion of Lot No. 491-A-
3-B-1 covered by TCT No. 78085, and to create a lien or burden
thereon. The petitioner was thus burdened to prove that the
respondent so authorized Roxas to sell the same and to create a
lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution
of the Board of Directors of the respondent, which is worded as
follows:

RESOLVED, as it is hereby resolved,
that the corporation, thru the President, sell
to any interested buyer, its 7,213-sq.-meter
property at the Sumulong Highway,
Antipolo, Rizal, covered by Transfer
Certificate of Title No. N-78086, at a price
and on terms and conditions which he deems
most reasonable and advantageous to the
corporation;

FURTHER RESOLVED, that Mr.
ROBERTO B. ROXAS, President of the
corporation, be, as he is hereby authorized to
execute, sign and deliver the pertinent sales
documents and receive the proceeds of sale
for and on behalf of the company.
[25]



Evidently, Roxas was not specifically authorized under
the said resolution to grant a right of way in favor of the
petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to
sell to the petitioner a portion thereof. The authority of Roxas,
under the resolution, to sell Lot No. 491-A-3-B-2 covered by
TCT No. 78086 did not include the authority to sell a portion of
the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey
real rights thereon. Neither may such authority be implied
from the authority granted to Roxas to sell Lot No. 491-A-3-B-2
to the petitioner on such terms and conditions which he
deems most reasonable and advantageous. Under paragraph
12, Article 1878 of the New Civil Code, a special power of
attorney is required to convey real rights over immovable
property.
[26]
Article 1358 of the New Civil Code requires that
contracts which have for their object the creation of real rights
over immovable property must appear in a public
document.
[27]
The petitioner cannot feign ignorance of the
need for Roxas to have been specifically authorized in writing
by the Board of Directors to be able to validly grant a right of
way and agree to sell a portion of Lot No. 491-A-3-B-1. The
rule is that if the act of the agent is one which requires
authority in writing, those dealing with him are charged with
notice of that fact.
[28]


Powers of attorney are generally construed strictly
and courts will not infer or presume broad powers from deeds
which do not sufficiently include property or subject under
which the agent is to deal.
[29]
The general rule is that the power
of attorney must be pursued within legal strictures, and the
agent can neither go beyond it; nor beside it. The act done
must be legally identical with that authorized to be done.
[30]
In
sum, then, the consent of the respondent to the assailed
provisions in the deed of absolute sale was not obtained; hence,
the assailed provisions are not binding on it.
We reject the petitioners submission that, in allowing
Roxas to execute the contract to sell and the deed of absolute
sale and failing to reject or disapprove the same, the
respondent thereby gave him apparent authority to grant a
right of way over Lot No. 491-A-3-B-1 and to grant an option
for the respondent to sell a portion thereof to the
petitioner. Absent estoppel or ratification, apparent authority
cannot remedy the lack of the written power required under
the statement of frauds.
[31]
In addition, the petitioners fallacy
is its wrong assumption of the unproved premise that the
respondent had full knowledge of all the terms and conditions
contained in the deed of absolute sale when Roxas executed it.
It bears stressing that apparent authority is based on
estoppel and can arise from two instances: first, the principal
may knowingly permit the agent to so hold himself out as
having such authority, and in this way, the principal becomes
estopped to claim that the agent does not have such authority;
second, the principal may so clothe the agent with the indicia of
authority as to lead a reasonably prudent person to believe that
he actually has such authority.
[32]
There can be no apparent
authority of an agent without acts or conduct on the part of the
principal and such acts or conduct of the principal must have
been known and relied upon in good faith and as a result of the
exercise of reasonable prudence by a third person as claimant
and such must have produced a change of position to its
detriment. The apparent power of an agent is to be determined
by the acts of the principal and not by the acts of the agent.
[33]

For the principle of apparent authority to apply, the
petitioner was burdened to prove the following: (a) the acts of
the respondent justifying belief in the agency by the petitioner;
(b) knowledge thereof by the respondent which is sought to be
held; and, (c) reliance thereon by the petitioner consistent with
ordinary care and prudence.
[34]
In this case, there is no
evidence on record of specific acts made by the
respondent
[35]
showing or indicating that it had full knowledge
of any representations made by Roxas to the petitioner that the
respondent had authorized him to grant to the respondent an
option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT
No. 78085, or to create a burden or lien thereon, or that the
respondent allowed him to do so.
The petitioners contention that by receiving and
retaining the P5,000,000 purchase price of Lot No. 491-A-3-B-
2, the respondent effectively and impliedly ratified the grant of
a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to
grant to the petitioner an option to sell a portion thereof, is
barren of merit. It bears stressing that the respondent sold Lot
No. 491-A-3-B-2 to the petitioner, and the latter had taken
possession of the property. As such, the respondent had the
right to retain the P5,000,000, the purchase price of the
property it had sold to the petitioner. For an act of the
principal to be considered as an implied ratification of an
unauthorized act of an agent, such act must be inconsistent
with any other hypothesis than that he approved and intended
to adopt what had been done in his name.
[36]
Ratification is
based on waiver the intentional relinquishment of a known
right. Ratification cannot be inferred from acts that a principal
has a right to do independently of the unauthorized act of the
agent. Moreover, if a writing is required to grant an authority
to do a particular act, ratification of that act must also be in
writing.
[37]
Since the respondent had not ratified the
unauthorized acts of Roxas, the same are
unenforceable.
[38]
Hence, by the respondents retention of the
amount, it cannot thereby be implied that it had ratified the
unauthorized acts of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA
erred in dismissing its complaint for damages against the
respondent on its finding that the delay in the construction of
its warehouse was due to its (petitioners) fault. The petitioner
asserts that the CA should have affirmed the ruling of the trial
court that the respondent failed to cause the eviction of the
squatters from the property on or before September 29, 1991;
hence, was liable for P5,660,000. The respondent, for its part,
asserts that the delay in the construction of the petitioners
warehouse was due to its late filing of an application for a
building permit, only on May 28, 1992
The petitioners contention is meritorious. The
respondent does not deny that it failed to cause the eviction of
the squatters on or before September 29, 1991. Indeed, the
respondent does not deny the fact that when the petitioner
wrote the respondent demanding that the latter cause the
eviction of the squatters on April 15, 1992, the latter were still
in the premises. It was only after receiving the said letter in
April 1992 that the respondent caused the eviction of the
squatters, which thus cleared the way for the petitioners
contractor to commence the construction of its warehouse and
secure the appropriate building permit therefor.
The petitioner could not be expected to file its
application for a building permit before April 1992 because the
squatters were still occupying the property. Because of the
respondents failure to cause their eviction as agreed upon, the
petitioners contractor failed to commence the construction of
the warehouse in October 1991 for the agreed price
of P8,649,000. In the meantime, costs of construction
materials spiraled. Under the construction contract entered
into between the petitioner and the contractor, the petitioner
was obliged to pay P11,804,160,
[39]
including the additional
work costing P1,441,500, or a net increase
of P1,712,980.
[40]
The respondent is liable for the difference
between the original cost of construction and the increase
thereon, conformably to Article 1170 of the New Civil Code,
which reads:
Art. 1170. Those who in the performance of
their obligations are guilty of fraud, negligence, or
delay and those who in any manner contravene the
tenor thereof, are liable for damages.
The petitioner, likewise, lost the amount
of P3,900,000 by way of unearned income from the lease of the
property to the Ponderosa Leather Goods Company. The
respondent is, thus, liable to the petitioner for the said amount,
under Articles 2200 and 2201 of the New Civil Code:
Art. 2200. Indemnification for
damages shall comprehend not only the
value of the loss suffered, but also that of the
profits which the obligee failed to obtain.
Art. 2201. In contracts and quasi-
contracts, the damages for which the obligor
who acted in good faith is liable shall be
those that are the natural and probable
consequences of the breach of the obligation,
and which the parties have foreseen or could
have reasonably foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or
wanton attitude, the obligor shall be
responsible for all damages which may be
reasonably attributed to the non-
performance of the obligation.
In sum, we affirm the trial courts award of damages
and attorneys fees to the petitioner.
IN LIGHT OF ALL THE FOREGOING, judgment
is hereby rendered AFFIRMING the assailed Decision of the
Court of Appeals WITH MODIFICATION. The respondent
is ordered to pay to the petitioner the amount ofP5,612,980 by
way of actual damages and P100,000 by way of attorneys
fees. No costs.

SO ORDERED.



WESTMONT V. CA


D E C I S I O N


CARPIO MORALES, J.:

Inland Construction and Development Corp. (Inland)
obtained various loans and other credit accommodations from
petitioner, then known as Associated Citizens Bank ([the bank]
which later became United Overseas Bank, Phils., and still later
Westmost Bank) in 1977.

To secure the payment of its obligations, Inland
executed real estate mortgages over three real properties
in Pasig City covered by Transfer Certificates of Title Nos.
4820, 4821 and 4822.
[1]


Inland likewise issued promissory notes in favor of
the bank, viz:


Promissory Note No. BD-2739-
77
Amount: P155,000.00
Due Date: January 2, 1978
[2]


Promissory Note No. BD-
2884-77
Amount: P880,000.00
Due Date: February 23,
1978
[3]


Promissory Note No. BD-2997
Amount: P60,000.00
Due Date: March 22,
1978
[4]
(Emphasis supplied)



When the first and second promissory notes fell due,
Inland defaulted in its payments. It, however, authorized the
bank to debit P350,000 from its savings account to partially
satisfy its obligations.
[5]


It appears that by a Deed of Assignment, Conveyance and
Release dated May 2, 1978, Felix Aranda, President of Inland,
assigned and conveyed all his rights and interests at Hanil-
Gonzales Construction & Development (Phils.) Corporation
(Hanil-Gonzales Corporation) in favor of Horacio Abrantes
(Abrantes), Executive Vice-President and General Manager of
Hanil-Gonzales Corporation. Under the same Deed of
Assignment, it appears that Abrantes assumed, among other
obligations of Inland and Aranda, Promissory Note No.
BD-2884-77 in the amount of P800,000 as shown in the May
26, 1978 Deed of Assignment of Obligation in which Aranda
and Inland, on one hand, and Abrantes and Hanil-Gonzales
Corporation, on the other, forged as follows:

x x x x.

WHEREAS, among the
obligations assumed by Mr. HORACIO C.
ABRANTES [in the May 2, 1978 Deed] is the
account of the FIRST PARTY (Aranda and
Inland) in favor of the ASSOCIATED
CITIZENS BANK as evidenced
by Promissory Note No. BD-2884-77 in
the amount of EIGHT HUNDRED EIGHTY
THOUSAND (P880,000.00) PESOS, x x x
x;

WHEREAS, the parties herein
have agreed to obtain the conformity
of the ASSOCIATED CITIZENS BANK
to the foregoing arrangement x x x x;

NOW, THEREFORE, the herein
parties have mutually agreed that the
SECOND PARTY (Abrantes and Hanil-
Gonzalez) shall assume full and complete
liability and responsibility for the payment to
ASSOCIATED CITIZENS BANK Promissory
Note No. BD-2884-77 x x x x.

THE SECOND PARTY shall make
such necessary arrangements with the
ASSOCIATED CITIZENS BANK for the full
liquidation of said account, x x x x.

x x x x. (Emphasis and
underscoring supplied)


The banks Account Officer, Lionel Calo Jr. (Calo), signed for
its conformity to the deed.
[6]


On December 14, 1979, Inland was served a Notice of
Sheriffs Sale foreclosing the real estate mortgages over its real
properties, prompting it to file a complaint for injunction
against the bank and the Provincial Sheriff of Rizal at the
Regional Trial Court (RTC) of Pasig City.
[7]
This complaint was
later amended.
[8]


Answering the amended complaint, the bank
underscored that it had no knowledge, much less did it give its
conformity to the alleged assignment of the obligation covered
by PN# BD-2884 [-77].
[9]


The trial court found that the bank ratified the act of
its account officer Calo, thus:

x x x x. Culled from the evidence on
record, the Court finds that the defendant
Bank ratified the act of Calo when its
Executive Committee failed to
repudiate the assignment within a
reasonable time and even approved
the request for a restructuring of
Liberty Const. & Dev. Corp./Hanil-
Gonzales Construction & Development
Corp.s obligations, which included
the P880,000.00 loan (Exhibit U to
X, and its submarkings). Clearly, the
assumption of the loan was very well known
to the defendant Bank and the latter posed
no objection to it. In fact, the positive act on
the part of the defendant in restructuring the
loan of the assignee attest to its consent in
the said transaction. The evidence on record
conveys the fact that the Hanil-Gonzales
Const. and Development Corp. assumed the
obligation of the plaintiff on the SECOND
NOTE. Later, it asked the defendant for a
restructuring of its loan, including
the P880,000.00 loan. Thereafter,
payments were made by the assignee to the
defendant Bank. The preponderance of
evidence tilts heavily in favor of the plaintiff
claiming that a case
of delegacion occurs.
[10]
(Emphasis and
italics supplied; Underscoring in the
original)


It accordingly rendered judgment in favor of Inland by
Decision
[11]
of March 31, 1992, the dispositive portion of which
reads:

WHEREFORE, judgment is hereby
rendered in favor of the plaintiff and against
the defendants, permanently, perpetually
and forever restraining and
enjoining the defendants Associated
Citizens Bank and the Sheriff of this
Court from proceeding with the
foreclosure of and conducting an
auction sale on the real estate covered by
and embraced in Transfer Certificates of
Title Nos. 4820, 4821 and 4822 of the
Register of Deeds of Rizal (now Pasig, Metro
Manila) and to refund to plaintiff the amount
ofP8,866.89, with legal interest thereon from
the filing of the complaint until full payment,
with costs.

SO ORDERED. (Emphasis and
underscoring supplied)

The bank appealed the trial courts decision to the
Court of Appeals which, by Decision
[12]
of May 31, 1995,
modified the same, disposing as follows:
[13]


WHEREFORE, the decision
appealed from is hereby AFFIRMED only
insofar as it finds appellant Associated Bank
to have ratified the Deed of
Assignment (Exhibit O), but REVERSED in
all other respects, and judgment is
accordingly rendered ordering the plaintiff-
appellee Inland Construction and
Development Corporation to pay defendant-
appellant Associated Bank the sum of One
Hundred Eighty Six Thousand Two Hundred
Forty One Pesos and Eighty Six Centavos
(P186,241.86) with legal interest thereon
computed from December 21, 1979 until the
same is fully paid.

No pronouncement as to costs.

SO ORDERED. (Underscoring
supplied)


In affirming the observation of the trial court that the
bank ratified the assignment of Inlands Promissory Note No.
BD-2884-77, the appellate court discoursed as follows:

In the instant case, both the
assignors (Aranda and Inland) and
assignees (Abrantes and Hanil-Gonzales) in
the subject deed of assignment have been
major clients of Associated Bank for several
years with accounts amounting to millions of
pesos. For several years, Associated
Bank had, either intentionally or
negligently, been habitually clothing
Calo with the apparent powers to
perform acts in behalf of the bank. x x
x x.

x x x x.

Calo signed the subject deed of
assignment on or about May 26, 1978. The
principal obligation covered by the deed
involved a hefty sum of eight hundred eighty
thousand pesos (P880,000.00). Despite the
enormity of the amount
involved, Associated Bank never made
any attempt to repudiate the act of
Calo until almost seven (7) years later,
when Mitos C. Olivares, Manager of the Cash
Department of Associated Bank, issued an
INTER-OFFICE MEMORANDUM
dated May 20, 1985 which pertinently reads:

2) Conforme of Associated Bank
signed by Lionel Calo Jr. has no bearing
since he has no authority to sign for the bank
as he was only an account officer with no
signing authority;

x x x x.

5) I suggest, Mr. Calo be asked to be
present at court hearings to explain why he
signed for the bank, knowing his limitations

The abovequoted inter-office
memorandum is addressed internally
to the other offices within Associated
Bank. It is not addressed to Inland or
any outsider for that matter. Worse, it
was not even offered in evidence by
Associated Bank to give Inland the
opportunity to object to or comment
on the said document, but was merely
attached as one of the annexes to the banks
MEMORANDUM FOR
DEFENDANTS. Obviously, no evidentiary
weight may be attached to said inter-office
memorandum, which is even self serving. In
fact, it ought not to be considered at
all. (Emphasis and underscoring supplied)


The appellate court, however, specifically mentioned
that the lower court erred when it rendered a decision which
permanently, perpetually and forever restrains the sheriff
from proceeding with the threatened foreclosure auction sale of
the subject mortgage properties.
[14]


The bank moved for partial reconsideration of the
appellate courts decision on the aspect of its ratification of the
Deed of Assignment but the same was denied by
Resolution
[15]
of January 24, 1996.

The bank, via two different counsels,
[16]
filed before
this Court separate petitions for review, G.R. No.
123650, Associated Citizens Bank, et al. v. Court of Appeals, et
al; and G.R. No. 123822, Westmont Bank (formerly Associated
Bank) v. Inland Construction & Development Corp., assailing
the same appellate courts decision. Owing to a series of
oversight,
[17]
the petition in G.R. 123650 was initially dismissed
but was later reinstated by Resolution of June 21, 1999.

The records
[18]
show that Inland failed to file its
comment and memorandum on the petitions.

Both petitions for review impute error on the part of
the appellate court in

AFFIRMING THE FINDING OF
THE TRIAL COURT THAT PETITIONER
HAVE [SIC] RATIFIED THE DEED OF
ASSIGNMENT (EXH. O).


The bank, which had, as reflected early on, become
known as Westmont Bank (petitioner), maintains that Calo had
no authority to bind it in the Deed of Assignment and that a
single, isolated unauthorized act of its agent is not sufficient to
establish that it clothed him with apparent
authority. Petitioner adds that the records fail to disclose
evidence of similar acts of Calo executed either in its favor or in
favor of other parties.
[19]
Moreover, petitioner reasserts that
the unauthorized act of Calo never came to its knowledge,
hence, it is not estopped from repudiating the Deed of
Assignment.
[20]


The petitions fail.

The general rule remains that, in the absence of
authority from the board of directors, no person, not even its
officers, can validly bind a corporation.
[21]
If a corporation,
however, consciously lets one of its officers, or any other agent,
to act within the scope of an apparent authority, it will be
estopped from denying such officers authority.
[22]


The records show that Calo was the one assigned to
transact on petitioners behalf respecting the loan transactions
and arrangements of Inland as well as those of Hanil-Gonzales
and Abrantes. Since it conducted business through Calo, who
is an Account Officer, it is presumed that he had authority to
sign for the bank in the Deed of Assignment.

Petitioner cannot feign ignorance of the May 26,
1978 Deed of Assignment, the pertinent portion of which was
quoted above. Notably, assignee Abrantes notified petitioner
about his assumption of Inlands obligation. Thus, in his July
26, 1979 letter to petitioner, he wrote:

This refers to the accounts of
Liberty Construction and Development
Corporation (LCDC) and our sister-company,
Hanil-Gonzalez Construction & Development
Corporation (HGCDC) which as of July 31,
1979 was computed at P1,814,442.40,
inclusive of interest, penalties and fees, net
of marginal deposits. This includes the
account of Inland Construction &
Development Corporation which had
been assumed by HGCDC.
[23]
(Emphasis
and underscoring supplied)

That petitioner sent the following reply-letter, dated November
29, 1982, to the above-quoted letter to it of assignee Abrantes
indicates that it had full and complete knowledge of the
assumption by Abrantes of Inlands obligation:

We are pleased to advise you that
our Executive Committee in its meeting last
November 25, 1982, has approved your
request for the restructuring of your
outstanding obligations x x x
x.
[24]
(Underscoring supplied)

Respecting this reply-letter of the bank granting
Hanil-Gonzales request to restructure its loans, petitioner, as a
banking institution, is expected to have exercised the highest
degree of diligence and meticulousness in the conduct of its
business. When it received the loan restructuring
request, with specific mention of Inlands Promissory Note No.
BD-2884-77, petitioner-bank was under obligation to
fastidiously scrutinize such loan account. And since it clearly
approved the request for restructuring, any uncertainty that
its reply-letter approving such request may not thus work to
prejudice Hanil-Gonzales or Inland.


Petitioner relies heavily, however, on the Courts
pronouncement in Yao Ka Sin Trading that it was incumbent
upon, in this case, Inland to prove that petitioner had clothed
its account officer with apparent power to conform to the Deed
of Assignment.
[25]


Petitioners simplistic reading of Yao Ka Sin Trading
v. Court of Appeals
[26]
does not impress. In Yao Ka Sin
Trading, the therein respondent cement company had shown
by clear and convincing evidence that its president was not
authorized to undertake a particular transaction. It presented
its by-laws stating that only its board of directors has the power
to enter into an agreement or contract of any kind. The
companys board of directors even forthwith issued a
resolution to repudiate the contract. Thus, it was only after the
company successfully discharged its burden that the other
party, the therein petitioner Yao Ka Sin Trading, had to prove
that indeed the cement company had clothed its president with
the apparent power to execute the contract by evidence of
similar acts executed in its favor or in favor of other parties.

Unmistakably, the Courts directive in Yao Ka Sin
Trading is that a corporation should first prove by clear
evidence that its corporate officer is not in fact authorized to
act on its behalf before the burden of evidence shifts to the
other party to prove, by previous specific acts, that an officer
was clothed by the corporation with apparent authority.

It bears noting that in Westmont Bank v.
Pronstroller,
[27]
the therein petitioner Westmont Bank,
through a management committee, proved that it rejected the
letter-agreement entered into by its assistant vice-
president. Consequently, the therein respondent had to prove
by citing other instances of the said officers apparent authority
to bind the bank-therein petitioner.

In the present petitions, petitioner-bank failed to
discharge its primary burden of proving that Calo
was not authorized to bind it, as it did not present proof that
Calo was unauthorized. It did not present, much less cite, any
Resolution from its Board of Directors or its Charter or By-laws
from which the Court could reasonably infer that he indeed had
no authority to sign in its behalf or bind it in the Deed of
Assignment. The May 20, 1985 inter-office
memorandum
[28]
stating that Calo had no signing
authority remains self-serving as it does not even form part of
petitioners body of evidence.

Thus, the assertion that the petitioner cannot be
faulted for its delay in repudiating the apparent authority of
Calo is similarly flawed, there being no evidence on record that
it had actually repudiated such apparent authority. It should
be noted that it was the bank which pleaded that defense in the
first place. What is extant in the records is a reasonable
certainty that the bank had ratified the Deed of Assignment.

The assumption that a ruling on the issue of
ratification would affect any and all foreclosure proceedings on
the mortgaged properties remains unfounded. For the
challenged appellate courts Decision
[29]
still mentioned the
possibility of foreclosing on the mortgaged properties as Inland
was still indebted to the bank in the amount of P186, 241.86
covering the other two promissory notes (No. BD-2739-77 and
No. BD-2997) and other obligations that Inland was not able to
satisfy upon maturity.

Both the trial courts and the appellate courts
inferences and conclusion that petitioner ratified its account
officers act are thus rationally based on evidence and
circumstances duly highlighted in their respective
decisions. Absent any serious abuse or evident lack of basis or
capriciousness of any kind, the lower courts findings of fact are
conclusive upon this Court.
[30]





WHEREFORE, the petitions are DENIED. The
decision of the Court of Appeals in CA-G.R. CV No. 39634
is AFFIRMED.

Costs against petitioner.

SO ORDERED.


ASSOCIATED BANK V. PRONSTROLLER

DECISION
NACHURA, J.:

This is a Petition for Review on Certiorari under Rule
45 of the Rules of Court filed by petitioner Associated Bank
(now United Overseas Bank [Phils.]) assailing the Court of
Appeals (CA) Decision
[1]
dated February 27, 2001, which in
turn affirmed the Regional Trial Court
[2]
(RTC)
Decision
[3]
dated November 14, 1997 in Civil Case No. 94-3298
for Specific Performance. Likewise assailed is the appellate
courts Resolution
[4]
dated May 31, 2001 denying petitioners
motion for reconsideration.

The facts of the case are as follows:

On April 21, 1988, the spouses Eduardo and Ma. Pilar
Vaca (spouses Vaca) executed a Real Estate Mortgage (REM) in
favor of the petitioner
[5]
over their parcel of residential land
with an area of 953 sq. m. and the house constructed thereon,
located at No. 18, Lovebird Street, Green Meadows Subdivision
1, Quezon City (herein referred to as the subject property). For
failure of the spouses Vaca to pay their obligation, the subject
property was sold at public auction with the petitioner as the
highest bidder. Transfer Certificate of Title (TCT) No. 254504,
in the name of spouses Vaca, was cancelled and a new one --
TCT No. 52593-- was issued in the name of the petitioner.
[6]


The spouses Vaca, however, commenced an action for
the nullification of the real estate mortgage and the foreclosure
sale. Petitioner, on the other hand, filed a petition for the
issuance of a writ of possession which was denied by the
RTC. Petitioner, thereafter, obtained a favorable judgment
when the CA granted its petition but the spouses Vaca
questioned the CA decision before this Court in the case
docketed as G.R. No. 109672.
[7]


During the pendency of the aforesaid cases, petitioner
advertised the subject property for sale to interested buyers
for P9,700,000.00.
[8]
Respondents Rafael and Monaliza
Pronstroller offered to purchase the property
forP7,500,000.00. Said offer was made through Atty. Jose
Soluta, Jr. (Atty. Soluta), petitioners Vice-President, Corporate
Secretary and a member of its Board of Directors.
[9]
Petitioner
accepted respondents offer of P7.5 million. Consequently,
respondents paid petitioner P750,000.00, or 10% of the
purchase price, as down payment.
[10]


On March 18, 1993, petitioner, through Atty. Soluta,
and respondents, executed a Letter-Agreement setting forth
therein the terms and conditions of the sale, to wit:

1. Selling price shall be at P7,500,000.00
payable as follows:

a. 10% deposit and balance
of P6,750,000.00 to be deposited under
escrow agreement. Said escrow deposit
shall be applied as payment upon
delivery of the aforesaid property to the
buyers free from occupants.

b. The deposit shall be made within ninety
(90) days from date hereof. Any interest
earned on the aforesaid investment shall
be for the buyers account. However, the
10% deposit is non-interest earning.
[11]



Prior to the expiration of the 90-day period within which
to make the escrow deposit, in view of the pendency of the case
between the spouses Vaca and petitioner involving the subject
property,
[12]
respondents requested that the balance of the
purchase price be made payable only upon service on them of a
final decision or resolution of this Court affirming petitioners
right to possess the subject property. Atty. Soluta referred
respondents proposal to petitioners Asset Recovery and
Remedial Management Committee (ARRMC) but the latter
deferred action thereon.
[13]


On July 14, 1993, a month after they made the request
and after the payment deadline had lapsed, respondents and
Atty. Soluta, acting for the petitioner, executed another Letter-
Agreement allowing the former to pay the balance of the
purchase price upon receipt of a final order from this Court (in
the Vaca case) and/or the delivery of the property to them free
from occupants.
[14]


Towards the end of 1993, or in early 1994, petitioner
reorganized its management. Atty. Braulio Dayday (Atty.
Dayday) became petitioners Assistant Vice-President and
Head of the Documentation Section, while Atty. Soluta was
relieved of his responsibilities. Atty. Dayday reviewed
petitioners records of its outstanding accounts and discovered
that respondents failed to deposit the balance of the purchase
price of the subject property. He, likewise, found that
respondents requested for an extension of time within which to
pay. The matter was then resubmitted to the ARRMC during
its meeting on March 4, 1994, and it was
disapproved. ARRMC, thus, referred the matter to petitioners
Legal Department for rescission or cancellation of the contract
due to respondents breach thereof.
[15]


On May 5, 1994, Atty. Dayday informed respondents that
their request for extension was disapproved by ARRMC and, in
view of their breach of the contract, petitioner was rescinding
the same and forfeiting their deposit. Petitioner added that if
respondents were still interested in buying the subject
property, they had to submit their new
proposal.
[16]
Respondents went to the petitioners office, talked
to Atty. Dayday and gave him the Letter-Agreement of July 14,
1993 to show that they were granted an extension. However,
Atty. Dayday claimed that the letter was a mistake and that
Atty. Soluta was not authorized to give such extension.
[17]


On June 6, 1994, respondents proposed to pay the
balance of the purchase price as follows: P3,000,000.00 upon
the approval of their proposal and the balance after six (6)
months.
[18]
However, the proposal was disapproved by the
petitioners President. In a letter dated June 9, 1994, petitioner
advised respondents that the former would accept the latters
proposal only if they would pay interest at the rate of 24.5% per
annum on the unpaid balance. Petitioner also allowed
respondents a refund of their deposit of P750,000.00 if they
would not agree to petitioners new proposal.
[19]


For failure of the parties to reach an agreement,
respondents, through their counsel, informed petitioner that
they would be enforcing their agreement dated July 14,
1993.
[20]
Petitioner countered that it was not aware of the
existence of the July 14 agreement and that Atty. Soluta was
not authorized to sign for and on behalf of the bank. It,
likewise, reiterated the rescission of their previous agreement
because of the breach committed by respondents.
[21]


On July 14, 1994, in the Vaca case, this Court upheld
petitioners right to possess the subject property.

On July 28, 1994, respondents commenced the instant
suit by filing a Complaint for Specific Performance before the
RTC of Antipolo, Rizal.
[22]
The case was raffled to Branch 72
and was docketed as Civil Case No. 94-3298. Respondents
prayed that petitioner be ordered to sell the subject property to
them in accordance with their letter-agreement of July 14,
1993. They, likewise, caused the annotation of a notice of lis
pendens at the dorsal portion of TCT No. 52593.

For its part, petitioner contended that their contract had
already been rescinded because of respondents failure to
deposit in escrow the balance of the purchase price within the
stipulated period.
[23]


During the pendency of the case, petitioner sold the
subject property to the spouses Vaca, who eventually registered
the sale; and on the basis thereof, TCT No. 52593 was cancelled
and TCT No. 158082 was issued in their names.
[24]
As new
owners, the spouses Vaca started demolishing the house on the
subject property which, however, was not completed by virtue
of the writ of preliminary injunction issued by the court.
[25]


On November 14, 1997, the trial court finally resolved the
matter in favor of respondents, disposing, as follows:

WHEREFORE, premises considered,
the Court finds defendants rescission of the
Agreement to Sell to be null and void for
being contrary to law and public policy.

ACCORDINGLY, defendant bank is
hereby ordered to accept plaintiffs payment
of the balance of the purchase price in the
amount of Six Million Seven Hundred Fifty
Thousand Pesos (P6,750,000.00) and to
deliver the title and possession to subject
property, free from all liens and
encumbrances upon receipt of said
payment. Likewise, defendant bank is
ordered to pay plaintiffs moral damages and
attorneys fees in the amount of One
Hundred Thirty Thousand Pesos
(P130,000.00) and expenses of litigation in
the amount of Twenty Thousand Pesos
(P20,000.00).

SO ORDERED.
[26]



Applying the rule of apparent authority,
[27]
the court
upheld the validity of the July 14, 1993 Letter-Agreement
where the respondents were given an extension within which to
make payment. Consequently, respondents did not incur in
delay, and thus, the court concluded that the rescission of the
contract was without basis and contrary to law.
[28]


On appeal, the CA affirmed the RTC decision and upheld
Atty. Solutas authority to represent the petitioner. It further
ruled that petitioner had no right to unilaterally rescind the
contract; otherwise, it would give the bank officers license to
continuously review and eventually rescind contracts entered
into by previous officers. As to whether respondents were
estopped from enforcing the July 14, 1993 Letter-Agreement,
the appellate court ruled in the negative. It found, instead, that
petitioners were estopped from questioning the efficacy of the
July 14 agreement because of its failure to repudiate the same
for a period of one year.
[29]
Thus, the court said in its decision:

1. The Appellant (Westmont Bank) is
hereby ordered to execute a Deed of
Absolute Sale in favor of the Appellees
over the property covered by Transfer
Certificate of Title No. 52593, including the
improvement thereon, and secure, from the
Register of Deeds, a Torrens Title over the
said property free from all liens, claims or
encumbrances upon the payment by the
Appellees of the balance of the purchase
price of the property in the amount
of P6,750,000.00;

2. The Register of Deeds is hereby
ordered to cancel Transfer Certificate of Title
No. 158082 under the names of the Spouses
Eduardo [and Ma. Pilar] Vaca and to issue
another under the names of the Appellees as
stated in the preceding paragraph;

3. The appellant is hereby ordered to
pay to the appellee Rafael Pronstroller the
amount of P100,000.00 as and by way of
moral damages and to pay to the Appellees
the amount of P30,000.00 as and by way of
attorneys fees and the amount
ofP20,000.00 for litigation expense.

4. The counterclaims of the
Appellant are dismissed.

SO ORDERED.
[30]



Petitioners motion for reconsideration was denied
on May 31, 2001. Hence, the present petition raising the
following issues:

I.

THE NARRATION OR STATEMENT OF
THE FACTS OF THE CASE BY THE
HONORABLE COURT OF APPEALS IS
TOTALLY BEREFT OF EVIDENTIARY
SUPPORT, CONTRARY TO THE EVIDENCE
ON RECORD AND PURELY BASED ON
ERRONEOUS ASSUMPTIONS,
PRESUMPTIONS, SURMISES, AND
CONJECTURES.

II.

THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN MERELY RELYING
UPON THE MANIFESTLY ERRONEOUS
FINDING OF THE HONORABLE TRIAL
COURT ON THE ALLEGED APPARENT
AUTHORITY OF ATTY. JOSE SOLUTA, JR.
IN THAT THE LATTERS FINDING IS
CONTRARY TO THE UNDISPUTED FACTS
AND THE EVIDENCE ON RECORD.

III.

THE HONORABLE COURT OF APPEALS
OWN FINDING THAT ATTY. JOSE
SOLUTA, JR. HAD AUTHORITY TO SELL
THE SUBJECT PROPERTY ON HIS OWN
(EVEN WITHOUT THE COMMITTEES
APPROVAL) IS LIKEWISE GROSSLY
ERRONEOUS, FINDS NO EVIDENTIARY
SUPPORT AND IS EVEN CONTRARY TO
THE EVIDENCE ON RECORD IN THAT

A.) AT NO TIME DID PETITIONER ADMIT
THAT ATTY. JOSE SOLUTA, JR. IS
AUTHORIZED TO SELL THE SUBJECT
PROPERTY ON HIS OWN;

B.) THE AUTHORITY OF ATTY. JOSE
SOLUTA, JR. CANNOT BE PRESUMED
FROM HIS DESIGNATIONS OR TITLES;
AND

C.) RESPONDENTS FULLY KNEW OR HAD
KNOWLEDGE OF THE LACK OF
AUTHORITY OF ATTY. JOSE SOLUTA, JR.
TO SELL THE SUBJECT PROPERTY ON
HIS OWN.

IV.

THE HONORABLE TRIAL COURT AND
THE HONORABLE COURT OF APPEALS
GROSSLY MISAPPLIED THE DOCTRINE
OF APPARENT AUTHORITY IN THE
PRESENT CASE.

V.

THE HONORABLE TRIAL COURT AND
THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN NOT HOLDING THAT
THE CONTRACT TO SELL CONTAINED IN
THE MARCH 18, 1993 LETTER WAS
VALIDLY RESCINDED BY PETITIONER.

VI.

THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN NOT HOLDING
RESPONDENTS ESTOPPED FROM
DENYING THE VALIDITY OF THE
RESCISSION OF THE CONTRACT TO SELL
AS EMBODIED IN THE MARCH 18, 1993
LETTER AND THE LACK OF AUTHORITY
OF ATTY. SOLUTA, JR. TO GRANT THE
EXTENSION AS CONTAINED IN HIS
LETTER OF JULY 14, 1993 AFTER THEY
VOLUNTARILY SUBMITTED WITH FULL
KNOWLEDGE OF ITS IMPORT AND
IMPLICATION A NEW OFFER TO
PURCHASE THE SUBJECT PROPERTY
CONTAINED IN THEIR LETTER DATED
JUNE 6, 1994.

VII.

IN ANY EVENT, THE HONORABLE COURT
OF APPEALS ERRED IN NOT HOLDING
THAT THE CONTRACT TO SELL UNDER
THE LETTER OF MARCH 18, 1993 AND
THE LETTER OF JULY 14, 1993 HAD BEEN
VACATED WHEN RESPONDENTS
VOLUNTARILY SUBMITTED WITH FULL
KNOWLEDGE OF ITS IMPORT AND
IMPLICATION THEIR NEW OFFER
CONTAINED IN THEIR LETTER OF JUNE
6, 1994 WITHOUT ANY CONDITION OR
RESERVATION WHATSOEVER.

VIII.

THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING PETITIONER
ESTOPPED FROM QUESTIONING THE
VALIDITY OF THE JULY 14, 1993 LETTER
SIGNED BY ATTY. JOSE SOLUTA, JR.

IX.

THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN HOLDING THAT
PETITIONER ALLEGEDLY ACTED
FRAUDULENTLY AND IN BAD FAITH IN
ITS DEALINGS WITH RESPONDENTS.

X.

THE ORDER OF THE HONORABLE
COURT OF APPEALS TO CANCEL TCT NO.
158082 UNDER THE NAMES OF SPS.
VACA IS A COLLATERAL ATTACK
AGAINST THE SAID CERTIFICATE OF
TITLE WHICH IS PROSCRIBED BY
SECTION 48 OF P.D. 1529.

XI.

THE HONORABLE COURT OF APPEALS
ERRED IN AWARDING MORAL
DAMAGES, ATTORNEYS FEES, AND
EXPENSES OF LITIGATION IN FAVOR OF
RESPONDENTS.
[31]



Reduced to bare essentials, the decision on the instant
petition hinges on the resolution of the following specific
questions: 1) Is the petitioner bound by the July 14,
1993 Letter-Agreement signed by Atty. Soluta under the
doctrine of apparent authority? 2) Was there a valid rescission
of the March 18, 1993 and/or July 14, 1993 Letter-Agreement?
3) Are the respondents estopped from enforcing the July 14
Letter-Agreement because of their June 6, 1994 new
proposal? 4) Is the petitioner estopped from questioning the
validity of the July 14 letter because of its failure to repudiate
the same and 5) Is the instant case a collateral attack on TCT
No. 158082 in the name of the spouses Vaca?

The petition is unmeritorious.

Well-settled is the rule that the findings of the RTC, as
affirmed by the appellate court, are binding on this Court. In a
petition for review on certiorari under Rule 45 of the Rules of
Court, as in this case, this Court may not review the findings of
fact all over again. It must be stressed that this Court is not a
trier of facts, and it is not its function to re-examine and weigh
anew the respective evidence of the parties.
[32]
The findings of
the CA are conclusive on the parties and carry even more
weight when these coincide with the factual findings of the trial
court, unless the factual findings are not supported by the
evidence on record.
[33]
Petitioner failed to show why the above
doctrine should not be applied to the instant case.

Contrary to petitioners contention that the CAs factual
findings are not supported by the evidence on record, the
assailed decision clearly shows that the appellate court not only
relied on the RTCs findings but made its own analysis of the
record of the case. The CA decision contains specific details
drawn from the contents of the pleadings filed by both parties,
from the testimonies of the witnesses and from the
documentary evidence submitted. It was from all these that
the appellate court drew its own conclusion using applicable
legal principles and jurisprudential rules.

The Court notes that the March 18, 1993 Letter-
Agreement was written on a paper with petitioners
letterhead. It was signed by Atty. Soluta with the conformity of
respondents. The authority of Atty. Soluta to act for and on
behalf of petitioner was not reflected in said letter or on a
separate paper attached to it. Yet, petitioner recognized Atty.
Solutas authority to sign the same and, thus, acknowledged its
binding effect. On the other hand, the July 14, 1993 letter was
written on the same type of paper with the same letterhead and
of the same form as the earlier letter. It was also signed by the
same person with the conformity of the same
respondents. Again, nowhere in said letter did petitioner
specifically authorize Atty. Soluta to sign it for and on its
behalf. This time, however, petitioner questioned the validity
and binding effect of the agreement, arguing that Atty. Soluta
was not authorized to modify the earlier terms of the contract
and could not in any way bind the petitioner.

We beg to differ.

The general rule is that, in the absence of authority from
the board of directors, no person, not even its officers, can
validly bind a corporation. The power and responsibility to
decide whether the corporation should enter into a contract
that will bind the corporation is lodged in the board of
directors. However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board may
validly delegate some of its functions and powers to officers,
committees and agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or
impliedly, by habit, custom, or acquiescence, in the general
course of business.
[34]


The authority of a corporate officer or agent in dealing
with third persons may be actual or apparent. The doctrine of
apparent authority, with special reference to banks, had long
been recognized in this jurisdiction.
[35]
Apparent authority is
derived not merely from practice. Its existence may be
ascertained through 1) the general manner in which the
corporation holds out an officer or agent as having the power to
act, or in other words, the apparent authority to act in general,
with which it clothes him; or 2) the acquiescence in his acts of
a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary
powers.
[36]


Accordingly, the authority to act for and to bind a
corporation may be presumed from acts of recognition in other
instances, wherein the power was exercised without any
objection from its board or shareholders. Undoubtedly,
petitioner had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution expressly
authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement.
It is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the power
to bind the corporation.
[37]


Naturally, the third person has little or no information
as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law.
[38]
What
transpires in the corporate board room is entirely an internal
matter. Hence, petitioner may not impute negligence on the
part of the respondents in failing to find out the scope of Atty.
Solutas authority. Indeed, the public has the right to rely on
the trustworthiness of bank officers and their acts.
[39]


As early as June 1993, or prior to the 90-day period
within which to make the full payment, respondents already
requested a modification of the earlier agreement such that the
full payment should be made upon receipt of this Courts
decision confirming petitioners right to the subject
property. The matter was brought to the petitioners attention
and was in fact discussed by the members of the
Board. Instead of acting on said request (considering that the
90-day period was about to expire), the board deferred action
on the request. It was only after one year and after the banks
reorganization that the board rejected respondents
request. We cannot therefore blame the respondents in relying
on the July 14, 1993 Letter-Agreement. Petitioners inaction,
coupled with the apparent authority of Atty. Soluta to act on
behalf of the corporation, validates the July 14 agreement and
thus binds the corporation. All these taken together, lead to no
other conclusion than that the petitioner attempted to defraud
the respondents. This is bolstered by the fact that it forged
another contract involving the same property, with another
buyer, the spouses Vaca, notwithstanding the pendency of the
instant case.

We would like to emphasize that if a corporation
knowingly permits its officer, or any other agent, to perform
acts within the scope of an apparent authority, holding him out
to the public as possessing power to do those acts, the
corporation will, as against any person who has dealt in good
faith with the corporation through such agent, be estopped
from denying such authority.
[40]


Petitioner further insists that specific performance is not
available to respondents because the Letter-Agreements had
already been rescinded --- the March 18 agreement because of
the breach committed by the respondents; and the July 14
letter because of the new offer of the respondents which was
not approved by petitioner.

Again, the argument is misplaced.

Basic is the rule that a contract constitutes the law
between the parties. Concededly, parties may validly stipulate
the unilateral rescission of a contract.
[41]
This is usually in the
form of a stipulation granting the seller the right to forfeit
installments or deposits made by the buyer in case of the
latters failure to make full payment on the stipulated
date. While the petitioner in the instant case may have the
right, under the March 18 agreement, to unilaterally rescind
the contract in case of respondents failure to comply with the
terms of the contract,
[42]
the execution of the July 14
Agreement prevented petitioner from exercising the right to
rescind. This is so because there was in the first place, no
breach of contract, as the date of full payment had already been
modified by the later agreement.

Neither can the July 14, 1993 agreement be
considered abandoned by respondents act of making a new
offer, which was unfortunately rejected by petitioner. A careful
reading of the June 6, 1994 letter of respondents impels this
Court to believe that such offer was made only to demonstrate
their capacity to purchase the subject property.
[43]
Besides,
even if it was a valid new offer, they did so only due to the
fraudulent misrepresentation made by petitioner that their
earlier contracts had already been rescinded. Considering
respondents capacity to pay and their continuing interest in
the subject property,
[44]
to abandon their right to the contract
and to the property, absent any form of protection, is contrary
to human nature. The presumption that a person takes
ordinary care of his concerns applies and remains
unrebutted.
[45]
Obviously therefore, respondents made the new
offer without abandoning the previous contract. Since there
was never a perfected new contract, the July 14,
1993 agreement was still in effect and there was no
abandonment to speak of.

In its final attempt to prevent respondents from
attaining a favorable result, petitioner argues that the instant
case should not prosper because the cancellation of TCT No.
158082 is a collateral attack on the title which is proscribed by
law.

Such contention is baseless.

Admittedly, during the pendency of the case,
respondents timely registered a notice of lis pendens to warn
the whole world that the property was the subject of a pending
litigation.

Lis pendens, which literally means pending suit, refers
to the jurisdiction, power or control which a court acquires
over property involved in a suit, pending the continuance of the
action, and until final judgment. Founded upon public policy
and necessity, lis pendens is intended to keep the properties in
litigation within the power of the court until the litigation is
terminated, and to prevent the defeat of the judgment or
decree by subsequent alienation. Its notice is an
announcement to the whole world that a particular property is
in litigation and serves as a warning that one who acquires an
interest over said property does so at his own risk or that he
gambles on the result of the litigation over said property.
[46]


The filing of a notice of lis pendens has a twofold
effect: (1) to keep the subject matter of the litigation within the
power of the court until the entry of the final judgment to
prevent the defeat of the final judgment by successive
alienations; and (2) to bind a purchaser, bona fide or not, of
the land subject of the litigation to the judgment or decree that
the court will promulgate subsequently.
[47]


This registration, therefore, gives the court clear
authority to cancel the title of the spouses Vaca, since the sale
of the subject property was made after the notice of lis
pendens. Settled is the rule that the notice is not considered a
collateral attack on the title,
[48]
for the indefeasibility of the title
shall not be used to defraud another especially if the latter
performs acts to protect his rights such as the timely
registration of a notice of lis pendens.

As to the liability for moral damages, attorneys fees
and expenses of litigation, we affirm in toto the appellate
courts conclusion. Article 2220
[49]
of the New Civil Code
allows the recovery of moral damages in breaches of contract
where the party acted fraudulently and in bad faith. As found
by the CA, petitioner undoubtedly acted fraudulently and in
bad faith in breaching the letter-agreements. Despite the
pendency of the case in the RTC, it sold the subject property to
the spouses Vaca and allowed the demolition of the house even
if there was already a writ of preliminary injunction lawfully
issued by the court. This is apart from its act of unilaterally
rescinding the subject contract. Clearly, petitioners acts are
brazen attempts to frustrate the decision that the court may
render in favor of respondents.
[50]
It is, likewise, apparent that
because of petitioners acts, respondents were compelled to
litigate justifying the award of attorneys fees and expenses of
litigation.

WHEREFORE, premises considered, the petition
is DENIED. The Decision of the Court of Appeals
dated February 27, 2001 and its Resolution dated May 31,
2001 in CA-G.R. CV No. 60315 are AFFIRMED.

SO ORDERED.