300 SCRA 579 Business Organization Corporation Law Corporation Generally Not

Entitled To Moral Damages Power To Enter Into Contracts

In 1968, the government undertook to support the financing of Marinduque Mining and
Industrial Corporation (MMIC). The government then issued debenture bonds in favor of MMIC
which enable the latter to take out loans from the Development Bank of the Philippines (DBP)
and the Philippine National Bank (PNB). The loans were mortgaged by MMICs assets. In 1984
however, MMICs indebtedness reached P13.7 billion and P8.7 billion to DPB and PNB
respectively. MMIC had trouble paying and this exposed the government, because of the
debenture bonds, to a P22 billion obligation.
In order to mitigate MMICs loan liability, a financial restructuring plan (FRP) was drafted in the
presence of MMICs representatives as well as representatives from DBP and PNB. The two
banks however never formally approved the said FRP. Eventually, the staggering loans became
overdue and PNB and DBP chose to foreclose MMICs assets, FRP no longer feasible at that
point. So the assets were foreclosed and were eventually assigned to the Asset Privatization Trust
(APT).
Later, Jesus Cabarrus, Sr., a stockholder of MMIC initiated a derivative suit against PNB and
DBP with APT being impleaded as the successor in interest of the two banks. The suit basically
questioned the foreclosure as Cabarrus asserted that the foreclosure was invalid because he
insisted that the FRP was adopted by PNB and DBP as a consequence of the presence of the
banks representatives when the said FRP was drafted. Cabarrus asserts that APT should restore
the assets to MMIC and that PNB and DBP should honor the FRP. The suit was filed in the RTC
of Makati but while the case was pending, the parties agreed to submit the case for arbitration.
Hence, Makati RTC dismissed the case upon motion of the parties.
The Arbitration Committee (AC) which heard the case ruled in favor of Cabarrus. The AC
granted Cabarrus prayer and at the same time awarded him P10 million in moral damages. Not
only that, the AC also awarded P2.5 billion in moral damages in favor of MMIC to be paid by
the government. APTs MFR was denied. Cabarrus then filed before the Makati RTC a motion to
confirm the arbitration award. APT opposed the same as it alleged that the motion is improper.
Makati RTC denied APTs opposition and confirmed the arbitration award. The Court of Appeals
affirmed the ruling of the RTC.
ISSUE: Whether or not the ruling of the Arbitration Committee as affirmed by the Regional
Trial Court of Makati (Branch 62) and the Court of Appeals is correct.
HELD: No.
1. The award of damages in favor of MMIC is improper. First, it was not made a party to the
case. The derivative suit filed by Cabarrus failed to implead MMIC. So how can an award
for damages be awarded to a non-party? Second, even if MMIC, which is actually a real
party in interest, was impleaded, it is not entitled to moral damages. It is not yet a well
settled jurisprudence that corporations are entitled to moral damages. While the Supreme

Court in some cases did award certain corporations moral damages for besmirched
reputations, such is not applicable in this case because when the alleged wrongful
foreclosure was done, MMIC was already in bad standing hence it has no good
wholesome reputation to protect. So it could not be said that there was a reputation
besmirched by the act of foreclosure. Likewise, the award of moral damages in favor of
Cabarrus is invalid. He cannot have possibly suffered any moral damages because the
alleged wrongful act was committed against MMIC. It is a basic postulate that a
corporation has a personality separate and distinct from its stockholders. The properties
foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong was committed in
the foreclosure, it was done against the corporation.
2. The FRP is not valid hence the foreclosure is valid. The mere presence of DBPs and
PNBs representatives during the drafting of FRP is not constitutive of the banks formal
approval of the FRP. The representatives are personalities distinct from PNB and DBP.
PNB and DBP have their own boards and officers who may have different decisions. The
representatives were not shown to have been authorized by the respective boards of the
two banks to enter into any agreement with MMIC.
3. Further, the proceeding is procedurally infirm. RTC Makati had already dismissed the
civil case when the parties opted for arbitration. Hence, it should have never took
cognizance of the Cabarrus motion to confirm the AC award. The same should have
been brought through a separate action not through a motion because RTC Makati
already lost jurisdiction over the case when it dismissed it to give way for the arbitration.
The arbitration was a not a continuation of the civil case filed in Makati RTC.