G.R. No.

170782
June 22, 2009
SIAIN ENTERPRISES, INC., Petitioner,
vs.
CUPERTINO REALTY CORP. and EDWIN R. CATACUTAN,
Respondents.
DECISION
NACHURA, J.:
A corp., upon coming into existence, is invested by law w/ a
personality separate and distinct from those persons
composing it as well as from any other legal entity to which
it may be related. This separate and distinct personality is,
however, merely a fiction created by law for conveyance and
to promote the ends of justice (Siain Enterprises, Inc. v.
Cupertino Realty Corp. (2009))
DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
SIAIN ENTERPRISES v. CUPERTINO
G.R. No. 170782 | June 22, 2009
NACHURA,
This is a petition for review on certiorari under Rule 45 of the
Rules of Court assailing the decision of the Court of Appeals which
affirmed the decision of the Regional Trial Court.
Siain Enterprises, Inc. obtained a loan of P37,000,000.00 from
respondent Cupertino Realty Corporation
(Cupertino) covered by a promissory note signed by both
petitioners and Cupertinos respectivepresidents, Cua Le Leng and
Wilfredo Lua. The parties then executed an amendment to
promissory notewhich provided for a seventeen percent (17%)
interest per annum on the P37,000,000.00 loan. The amendment
to promissory note was likewise signed by Cua Le Leng and
Wilfredo Lua on behalf of petitioner and Cupertino, respectively.

Another promissory note was signed by Cua Le Leng in favor of

Cupertino for P160,000,000.00. Cua Le Leng signed the second
promissory note as maker, on behalf of petitioner, and as co-maker,
liable to Cupertino in her personal capacity.

However, on March 11, 1996, through counsel, wrote Cupertino and

demanded the release of the P160,000,000.00 loan. In complete
refutation, Cupertino, likewise through counsel, responded and
denied that it had yet to release the P160,000,000.00 loan.
Cupertino maintained that petitioner had long obtained the
proceeds of the aforesaid loan. With this, Cupertino instituted
extrajudicial foreclosure proceedings over the properties subject of
the amended real estate mortgage.

RTC rendered a decision dismissing petitioners complaintand

ordering it to pay Cupertino P100,000.00 each for actual and
exemplary damages, and P500,000.00 as attorneys fees. The RTC
recalled and set aside its previous order declaring the notarial

foreclosure of the mortgaged properties as null and void. On

appeal, the CA, as previously adverted to, affirmed the RTCs
ruling.
In this regard, the lower courts applied the doctrine of piercing the
veil of corporate fiction to preclude petitioner from disavowing
receipt of the P160,000,000.00 and paying its obligation under the
amended real estate mortgage.
ISSUE:
Petitioner asseverates that the lower courts erroneously applied the
doctrine of piercing the veil of corporate fiction when both gave
credence to Cupertinos evidence showing that petitioners affiliates
were the previous recipients of part of the P160,000,000.00
indebtedness of petitioner to Cupertino. Is this valid?
HELD:
Yes.
As a general rule, a corporation will be deemed a separate legal
entity until sufficient reason to the contrary
appears.
But the rule is not absolute. A corporations separate and distinct
legal personality may be disregarded and the veil of corporate
fiction pierced when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime.
In this case, Cupertino presented overwhelming evidence that
petitioner and its affiliate corporations had received the proceeds of
the P160,000,000.00 loan increase which was then made the
consideration for the Amended Real Estate Mortgage. The facts
established in the case at bar has convinced the Court of the
propriety to apply the principle by virtue of which, the juridical
personalities of the various corporations involved are disregarded
and the ensuing liability of the corporation to attach directly to its
responsible officers and stockholders
These are as follows:
1.That the checks, debit memos and the pledges of the jewelries,
condominium units and trucks were
constituted not exclusively in the name of [petitioner] but also
either in the name of Yuyek Manufacturing
Corporation, Siain Transport, Inc., Cua Leleng and Alberto Lim is of
no moment.
2.Siain and Yuyek have [a] common set of [incorporators],
stockholders and board of directors;
3.They have the same internal bookkeeper and accountant in the
person of Rosemarie Ragodon;
4.They have the same office address at 306 Jose Rizal St.,
Mandaluyong City;
5.They have the same majority stockholder and president in the
person of Cua Le Leng; and

6.In relation to Siain Transport, Cua Le Leng had the unlimited

authority by and on herself, without authority
from the Board of Directors, to use the funds of Siain Trucking to
pay the obligation incurred by the
[petitioner] corporation.
7.As such, [petitioner] corporation is now estopped from denying
the above apparent authorities of Cua Le
Leng who holds herself to the public as possessing the power to do
those acts, against any person who
dealt in good faith as in the case of Cupertino.

FULL TEXT:
Before us is a petition for review on certiorari under Rule 45 of the
Rules of Court assailing the decision of the Court of Appeals in CAG.R. CV No. 714241 which affirmed the decision of the Regional
Trial Court, Branch 29, Iloilo City in Civil Case No. 23244. 2
On April 10, 1995, petitioner Siain Enterprises, Inc. obtained a loan
of P37,000,000.00 from respondent Cupertino Realty Corporation
(Cupertino) covered by a promissory note signed by both
petitioners and Cupertinos respective presidents, Cua Le Leng and
Wilfredo Lua. The promissory note authorizes Cupertino, as the
creditor, to place in escrow the loan proceeds of P37,000,000.00
with Metropolitan Bank & Trust Company to pay off petitioners loan
obligation with Development Bank of the Philippines (DBP). To
secure the loan, petitioner, on the same date, executed a real
estate mortgage over two (2) parcels of land and other
immovables, such as equipment and machineries.
Two (2) days thereafter, or on April 12, 1995, the parties executed
an amendment to promissory note which provided for a seventeen
percent (17%) interest per annum on the P37,000,000.00 loan.3
The amendment to promissory note was likewise signed by Cua Le
Leng and Wilfredo Lua on behalf of petitioner and Cupertino,
respectively.
On August 16, 1995, Cua Le Leng signed a second promissory note
in favor of Cupertino for P160,000,000.00. Cua Le Leng signed the
second promissory note as maker, on behalf of petitioner, and as
co-maker, liable to Cupertino in her personal capacity. This second
promissory note provides:
PROMISSORY NOTE
AMOUNT
DATE: AUGUST 16
ONE HUNDRED SIXTY MILLION PESOS
(PHP 160,000,000.00)
FOR VALUE RECEIVED, after one (1) year from this date on or
August 16, 1996, WE, SIAIN ENTERPRISES INC. with Metro Manila
office address at 306 J.P. Rizal St., Mandaluyong City, represented
herein by its duly authorized President, Ms. LELENG CUA, (a copy
of her authority is hereto attached as Annex "A") and Ms. LELENG
CUA in her personal capacity, a resident of ILOILO CITY, jointly and
severally, unconditionally promise to pay CUPERTINO REALTY
CORPORATION, or order, an existing corporation duly organized
under Philippine laws, the amount/sum of ONE HUNDRED SIXTY
MILLION PESOS (PHP 160,000,000.00), Philippine Currency,

without further need of any demand, at the office of CUPERTINO

REALTY CORPORATION;
The amount/sum of ONE HUNDRED SIXTY MILLION PESOS (PHP
160,000,000.00) shall earn a compounding interest of 30% per
annum which interest shall be payable to CUPERTINO REALTY
CORPORATION at its above given address ON THE FIRST DAY OF
EVERY MONTH WITHOUT THE NEED OF DEMAND.
In case We fail to pay the principal amount of this note at maturity
or in the event of bankruptcy or insolvency, receivership, levy of
execution, garnishment or attachment or in case of conviction for a
criminal offense carrying with it the penalty of civil interdiction or in
any of the cases covered by Article 1198 of the Civil Code of the
Philippines, then the entire principal of this note and other interests
and penalties due thereon shall, at the option of CUPERTINO
REALTY CORPORATION, immediately become due and payable and
We jointly and severally agree to pay additionally a penalty at the
rate of THREE PERCENT (3%) per month on the total amount/sum
due until fully paid. Furthermore, We jointly and severally agree to
pay an additional sum equivalent to 20% of the total amount due
but in no case less than PHP 100,000.00 as and for attorneys fees
in addition to expenses and costs of suit.
We hereby authorize and empower CUPERTINO REALTY
CORPORATION at its option at any time, without notice, to apply to
the payment of this note and or any other particular obligation or
obligations of all or any one of us to CUPERTINO REALTY
CORPORATION, as it may select, irrespective of the dates of
maturity, whether or not said obligations are then due, any and all
moneys, checks, securities and things of value which are now or
which may hereafter be in its hand on deposit or otherwise to the
credit of, or belonging to, both or any one of us, and CUPERTINO
REALTY CORPORATION is hereby authorized to sell at public or
private sale such checks, securities, or things of value for the
purpose of applying the proceeds thereof to such payments of this
note.
We hereby expressly consent to any extension and/or renewals
hereof in whole or in part and/or partial payment on account which
may be requested by and granted to us or any one of us for the
payment of this note as long as the remaining unpaid balance shall
earn an interest of THREE percent (3%) a month until fully paid.
Such renewals or extensions shall, in no case, be understood as a
novation of this note or any provision thereof and We will thereby
continue to be liable for the payment of this note.
We submit to the jurisdiction of the Courts of the City of Manila or
of the place of execution of this note, at the option of CUPERTINO
REALTY CORPORATION without divesting any other court of the its
jurisdiction, for any legal action which may arise out of this note. In
case of judical execution of this obligation, or any part of it, we
hereby waive all our rights under the provisions of Rule 39, section
12 of the Rules of Court.
We, who are justly indebted to CUPERTINO REALTY CORPORATION,
agree to execute respectively a real estate mortgage and a pledge
or a chattel mortgage covering securities to serve as collaterals for
this loan and to execute likewise an irrevocable proxy to allow
representatives of the creditor to be able to monitor acts of
management so as to prevent any premature call of this loan. We

further undertake to execute any other kind of document which

amendment, all other terms and conditions of said Real Estate
CUPERTINO REALTY CORPORATION may solely believe is necessary
Mortgage dated 10 April 1995 are hereby confirmed, ratified and
in order to effect any security over any collateral.
continued to be in full force and effect, and that this agreement be
For this purpose, Ms. LELENG CUA, upon the foregoing promissory
made an integral part of said Real Estate Mortgage.5
note, has this 16th day of Aug 1995, pledged her shares of stocks
Curiously however, and contrary to the tenor of the foregoing loan
in SIAIN ENTERPRISES, INC., worth PHP 1,800,000.00 which she
documents, petitioner, on March 11, 1996, through counsel, wrote
hereby confesses as representing 80% of the total outstanding
Cupertino and demanded the release of the P160,000,000.00 loan
shares of the said company.
increase covered by the amendment of real estate mortgage. 6 In
In default of payment of said note or any part thereof at maturity,
the demand letter, petitioners counsel stated that despite repeated
Ms. LELENG CUA hereby authorizes CUPERTINO REALTY
verbal demands, Cupertino had yet to release the P160,000,000.00
CORPORATION or its assigns, to dispose of said security or any part
loan. On May 17, 1996, petitioner demanded anew from Cupertino
thereof at public sale. The proceeds of such sale or sales shall,
the release of the P160,000,000.00 loan.7
after payment of all expenses and commissions attending said sale
In complete refutation, Cupertino, likewise through counsel,
or sales, be applied to this promissory note and the balance, if any,
responded and denied that it had yet to release the
after payment of this promissory note and interest thereon, shall
P160,000,000.00 loan. Cupertino maintained that petitioner had
be returned to the undersigned, her heirs, successors and
long obtained the proceeds of the aforesaid loan. Cupertino
administrators; it shall be optional for the owner of the promissory
declared petitioners demand as made to "abscond from a just and
note to bid for and purchase the securities or any part thereof.
valid obligation," a mere afterthought, following Cupertinos letter
(signed) demanding payment of the P37,000,000.00 loan covered by the
first promissory note which became overdue on March 5, 1996.
LELENG CUA
SIAIN ENTERPRISES, INC.
Not surprisingly,
Cupertino instituted extrajudicial foreclosure
In her personal
capacity
proceedings over the properties subject of the amended real estate
CO-MAKER
mortgage. The auction sale was scheduled on October 11, 1996
By:
with respondent Notary Public Edwin R. Catacutan commissioned to
(signed)
conduct the same. This prompted petitioner to file a complaint with
LELENG CUA
a prayer for a restraining order to enjoin Notary Public Catacutan
MAKER
from proceeding with the public auction.
WITNESSES:
The following are the parties conflicting claims, summarized by the
(signed)
RTC, and quoted verbatim by the CA in its decision:
EDGARDO LUA
"The verified complaint alleges that [petitioner] is engaged in the
(signed)
manufacturing and retailing/wholesaling business. On the other
ROSE MARIE RAGODON4
hand, Cupertino is engaged in the realty business. That on April 10,
Parenthetically, on even date, the parties executed an amendment
1995, [petitioner] executed a Real Estate Mortgage over its real
of real estate mortgage, providing in pertinent part:
properties covered by Transfer Certificates of title Nos. T-75109 and
WHEREAS, on 10 April 1995, the [petitioner] executed, signed and
T-73481 ("the mortgage properties") of the Register of Deeds of
delivered a Real Estate Mortgage to and in favor of [Cupertino] on
Iloilo in favor of Cupertino to secure the formers loan obligation to
certain real estate properties to secure the payment to [Cupertino]
the latter in the amount of Php37,000,000.00. That it has been the
of a loan in the amount of THIRTY SEVEN MILLION PESOS
agreement between [petitioner] and Cupertino that the aforesaid
(P37,000,000.00) Philippine Currency, granted by [Cupertino] was
loan will be non-interest bearing. Accordingly, the parties saw to it
ratified (sic) on 10 April 1995 before Constancio Mangoba, Jr.,
that the promissory note (evidencing their loan agreement) did not
Notary Public in Makati City, as Doc. No. 242; in Page No. 50; Book
provide any stipulation with respect to interest. On several
No., XVI; Series of 1995, and duly recorded in the Office of the
occasions thereafter, [petitioner] made partial payments to
Register of Deeds for the said City of Iloilo;
Cupertino in respect of the aforesaid loan obligation by the former
WHEREAS, the [petitioner] has increased its loan payable to
to the latter in the total amount of Php7,985,039.08, thereby
[Cupertino] which now amounts to ONE HUNDRED NINETY SEVEN
leaving a balance of Php29,014,960.92. On August 16, 1995,
MILLION PESOS (197,000,000.00); and
[petitioner] and Cupertino executed an amendment of Real Estate
WHEREAS, the [petitioner] and [Cupertino] intend to amend the
Mortgage (Annex "C") increasing the total loan covered by the
said Real Estate Mortgage in order to reflect the current total loan
aforesaid REM from Php37,000,000.00 to P197,000,000.00. This
secured by the said Real Estate Mortgage;
amendment to REM was executed preparatory to the promised
NOW, THEREFORE, for and in consideration of the foregoing
release by Cupertino of additional loan proceeds to [petitioner] in
premises, the parties hereto have agreed and by these presents do
the total amount of Php160,000,000.00. However, despite the
hereby agree to amend said Real Estate Mortgage dated 10 April
execution of the said amendment to REM and its subsequent
1995 mentioned above by substituting the total amount of the loan
registration with the Register of Deeds of Iloilo City and
secured by said Real Estate Mortgage from P37,000,000.00 to
notwithstanding the clear agreement between [petitioner] and
P197,000,000.00.
Cupertino and the latter will release and deliver to the former the
It is hereby expressly understood that with the foregoing

aforesaid additional loan proceeds of P160,000,000.00 after the

signing of pertinent documents and the registration of the
amendment of REM, Cupertino failed and refused to release the
said additional amount for no apparent reason at all, contrary to its
repeated promises which [petitioner] continuously relied on. On
account of Cupertinos unfulfilled promises, [petitioner] repeatedly
demanded from Cupertino the release and/or delivery of the said
Php160,000,000.00 to the former. However, Cupertino still failed
and refused and continuously fails and refuses to release and/or
deliver the Php160,000,000.00 to [petitioner]. When [petitioner]
tendered payment of the amount of Php29,014,960.92 which is the
remaining balance of the Php37,000,000.00 loan subject of the
REM, in order to discharge the same, Cupertino unreasonably and
unjustifiably refused acceptance thereof on the ground that the
previous payment amounting to Php7,985,039.08, was applied by
Cupertino to alleged interests and not to principal amount, despite
the fact that, as earlier stated, the aforesaid loan by agreement of
the parties, is non-interest bearing. Worst, unknown to [petitioner],
Cupertino was already making arrangements with [respondent]
Notary Public for the extrajudicial sale of the mortgage properties
even as [petitioner] is more than willing to pay the
Php29,014,960.92 which is the remaining balance of the
Php37,000,000.00 loan and notwithstanding Cupertinos unjustified
refusal and failure to deliver to [petitioner] the amount of
Php160,000,000.00. In fact, a notarial sale of the mortgaged
properties is already scheduled on 04 October 1996 by
[respondent] Notary Public at his office located at Rm. 100, Iloilo
Casa Plaza, Gen Luna St., Iloilo City. In view of the foregoing,
Cupertino has no legal right to foreclose the mortgaged properties.
In any event, Cupertino cannot extrajudicially cause the foreclosure
by notarial sale of the mortgage properties by [respondent] Notary
Public as there is nothing in the REM (dated 10 April 1995) or in
the amendment thereto that grants Cupertino the said right.
xxxx
"[Respondents] finally filed an answer to the complaint, alleging
that the loan have (sic) an interest of 17% per annum: that no
payment was ever made by [petitioner], that [petitioner] has
already received the amount of the loan prior to the execution of
the promissory note and amendment of Real Estate Mortgage, xxx.
"[Petitioner] filed a supplemental complaint alleging subsequent
acts made by defendants causing the subsequent auction sale and
registering the Certificates of Auction Sale praying that said auction
sale be declared null and void and ordering the Register of Deeds to
cancel the registration and annotation of the Certificate of Notarial
Sale."
Thereafter, the Pre-Trial conference was set. Both parties submitted
their respective Brief and the following facts were admitted, viz:
1. Execution of the mortgage dated April 10, 1995;
2. Amendment of Real Estate Mortgage dated August 16, 1995;
3. Execution of an Extra-Judicial Foreclosure by the [Cupertino];
4. Existence of two (2) promissory notes;
5. Existence but not the contents of the demand letter March 11,
1996 addressed to Mr. Wilfredo Lua and receipt of the same by
[Cupertino]; and
6. Notice of Extra-Judicial Foreclosure Sale."

For failing to arrive at an amicable settlement, trial on the merits

ensued. The parties presented oral and documentary evidence to
support their claims and contentions. [Petitioner] insisted that she
never received the proceeds of Php160,000,000.00, thus, the
foreclosure of the subject properties is null and void. [Cupertino]
on the other hand claimed otherwise.8
After trial, the RTC rendered a decision dismissing petitioners
complaint and ordering it to pay Cupertino P100,000.00 each for
actual and exemplary damages, and P500,000.00 as attorneys
fees. The RTC recalled and set aside its previous order declaring
the notarial foreclosure of the mortgaged properties as null and
void. On appeal, the CA, as previously adverted to, affirmed the
RTCs ruling.
In dismissing petitioners complaint and finding for Cupertino, both
the lower courts upheld the validity of the amended real estate
mortgage. The RTC found, as did the CA, that although the
amended real estate mortgage fell within the exceptions to the
parol evidence rule under Section 9, Rule 130 of the Rules of Court,
petitioner still failed to overcome and debunk Cupertinos evidence
that the amended real estate mortgage had a consideration, and
petitioner did receive the amount of P160,000,000.00 representing
its incurred obligation to Cupertino. Both courts ruled that as
between petitioners bare denial and negative evidence of nonreceipt of the P160,000,000.00, and Cupertinos affirmative
evidence on the existence of the consideration, the latter must be
given more weight and value. In all, the lower courts gave
credence to Cupertinos evidence that the P160,000,000.00
proceeds were the total amount received by petitioner and its
affiliate companies over the years from Wilfredo Lua, Cupertinos
president. In this regard, the lower courts applied the doctrine of
"piercing the veil of corporate fiction" to preclude petitioner from
disavowing receipt of the P160,000,000.00 and paying its
obligation under the amended real estate mortgage.
Undaunted, petitioner filed this appeal insisting on the nullity of the
amended real estate mortgage. Petitioner is adamant that the
amended real estate mortgage is void as it did not receive the
agreed consideration therefor i.e. P160,000,000.00. Petitioner
avers that the amended real estate mortgage does not accurately
reflect the agreement between the parties as, at the time it signed
the document, it actually had yet to receive the amount of
P160,000,000.00. Lastly, petitioner asseverates that the lower
courts erroneously applied the doctrine of "piercing the veil of
corporate fiction" when both gave credence to Cupertinos evidence
showing that petitioners affiliates were the previous recipients of
part of the P160,000,000.00 indebtedness of petitioner to
Cupertino.
We are in complete accord with the lower courts rulings.
Well-entrenched in jurisprudence is the rule that factual findings of
the trial court, especially when affirmed by the appellate court, are
accorded the highest degree of respect and are considered
conclusive between the parties.9 A review of such findings by this
Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are
grounded entirely on speculation, surmises or conjectures; (2)
when a lower courts inference from its factual findings is

manifestly mistaken, absurd or impossible; (3) when there is grave

abuse of discretion in the appreciation of facts; (4) when the
findings of the appellate court go beyond the issues of the case, or
fail to notice certain relevant facts which, if properly considered,
will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are
conclusions without mention of the specific evidence on which they
are based, are premised on the absence of evidence, or are
contradicted by evidence on record. 10 None of these exceptions
necessitating a reversal of the assailed decision obtains in this
instance.
Conversely, we cannot subscribe to petitioners faulty reasoning.
First. All the loan documents, on their face, unequivocally declare
petitioners indebtedness to Cupertino:
1. Promissory Note dated April 10, 1995, prefaced with a "[f]or
value received," and the escrow arrangement for the release of the
P37,000,000.00 obligation in favor of DBP, another creditor of
petitioner.
2. Mortgage likewise dated April 10, 1995 executed by petitioner to
secure its P37,000,000.00 loan obligation with Cupertino.
3. Amendment to Promissory Note for P37,000,000.00 dated April
12, 1995 which tentatively sets the interest rate at seventeen
percent (17%) per annum.
4. Promissory Note dated August 16, 1995, likewise prefaced with
"[f]or value received," and unconditionally promising to pay
Cupertino P160,000,000.00 with a stipulation on compounding
interest at thirty percent (30%) per annum. The Promissory Note
requires, among others, the execution of a real estate mortgage to
serve as collateral therefor. In case of default in payment,
petitioner, specifically, through its president, Cua Le Leng,
authorizes Cupertino to "dispose of said security or any part thereof
at [a] public sale."
5. Amendment of Real Estate Mortgage also dated August 16, 1995
with a recital that the mortgagor, herein petitioner, has increased
its loan payable to the mortgagee, Cupertino, from P37,000,000.00
to P197,000,000.00. In connection with the increase in loan
obligation, the parties confirmed and ratified the Real Estate
Mortgage dated April 10, 1995.
Unmistakably, from the foregoing chain of transactions, a
presumption has arisen that the loan documents were supported by
a consideration.
Rule 131, Section 3 of the Rules of Court specifies that a disputable
presumption is satisfactory if uncontradicted and not overcome by
other evidence. Corollary thereto, paragraphs (r) and (s) thereof
and Section 24 of the Negotiable Instruments Law read:
SEC. 3. Disputable presumptions. The following presumptions are
satisfactory if uncontradicted, but may be contradicted and
overcome by other evidence:
xxxx
(r) That there was sufficient consideration for a contract;
(s) That a negotiable instrument was given or indorsed for a
sufficient consideration;
xxx
SEC. 24. Presumption of consideration. Every negotiable
instrument is deemed prima facie to have been issued for a

valuable consideration; and every person whose signature appears

thereon to have become a party thereto for value.
Second. The foregoing notwithstanding, petitioner insists that the
Amended Real Estate Mortgage was not supported by a
consideration, asserting non-receipt of the P160,000,000.00 loan
increase reflected in the Amended Real Estate Mortgage. However,
petitioners bare-faced assertion does not even dent, much less,
overcome the aforesaid presumptions on consideration for a
contract. As deftly pointed out by the trial court:
x x x In this case, this Court finds that the [petitioner] has not
been able to establish its claim of non-receipt by a preponderance
of evidence. Rather, the Court is inclined to give more weight and
credence to the affirmative and straightforward testimony of
[Cupertino] explaining in plain and categorical words that the
Php197,000,000.00 loan represented by the amended REM was the
total sum of the debit memo, the checks, the real estate mortgage
and the amended real estate mortgage, the pledges of jewelries,
the trucks and the condominiums plus the interests that will be
incurred which all in all amounted to Php197,000,000.00. It is a
basic axiom in this jurisdiction that as between the plaintiffs
negative evidence of denial and the defendants affirmative
evidence on the existence of the consideration, the latter must be
given more weight and value. Moreover, [Cupertinos] foregoing
testimony on the existence of the consideration of the
Php160,000,000.00 promissory note has never been refuted nor
denied by the [petitioner], who while initially having manifested
that it will present rebuttal evidence eventually failed to do so,
despite all available opportunities accorded to it. By such failure to
present rebutting evidence, [Cupertinos] testimony on the
existence of the consideration of the amended real estate mortgage
does not only become impliedly admitted by the [petitioner], more
significantly, to the mind of this Court, it is a clear indication that
[petitioner] has no counter evidence to overcome and defeat the
[Cupertinos] evidence on the matter. Otherwise, there is no logic
for [petitioner] to withhold it if available. Assuming that indeed it
exists, it may be safely assumed that such evidence having been
willfully suppressed is adverse if produced.
The presentation by [petitioner] of its cash Journal Receipt Book as
proof that it did not receive the proceeds of the Php160,000,000.00
promissory note does not likewise persuade the Court. In the first
place, the subject cash receipt journal only contained cash receipts
for the year 1995. But as appearing from the various checks and
debit memos issued by Wilfredo Lua and his wife, Vicky Lua and
from the formers unrebutted testimony in Court, the issuance of
the checks, debit memos, pledges of jewelries, condominium units,
trucks and the other components of the Php197,000,000.00
amended real estate mortgage had all taken place prior to the year
1995, hence, they could not have been recorded therein. What is
more, the said cash receipt journal appears to be prepared solely at
the behest of the [petitioner], hence, can be considered as
emanating from a "poisonous tree" therefore self-serving and
cannot be given any serious credibility.11
Significantly, petitioner asseverates that the parol evidence rule,
which excludes other evidence, apart from the written agreement,
to prove the terms agreed upon by the parties contained therein, 12

is not applicable to the Amended Real Estate Mortgage. Both the

trial and appellate courts agreed with petitioner and did not apply
the parol evidence rule. Yet, despite the allowance to present
evidence and prove the invalidity of the Amended Real Estate
Mortgage, petitioner still failed to substantiate its claim of nonreceipt of the proceeds of the P160,000,000.00 loan increase.
Moreover, petitioner was the plaintiff in the trial court, the party
that brought suit against respondent. Accordingly, it had the
burden of proof, the duty to present a preponderance of evidence
to establish its claim.13 However, petitioners evidence consisted
only of a barefaced denial of receipt and a vaguely drawn theory
that in their previous loan transaction with respondent covered by
the first promissory note, it did not receive the proceeds of the
P37,000,000.00. Petitioner conveniently ignores that this particular
promissory note secured by the real estate mortgage was under an
escrow arrangement and taken out to pay its obligation to DBP.
Thus, petitioner, quite obviously, would not be in possession of the
proceeds of the loan. Contrary to petitioners contention, there is
no precedent to explain its stance that respondent undertook to
release the P160,000,000.00 loan only after it had first signed the
Amended Real Estate Mortgage.1avvphi1
Third. Petitioner bewails the lower courts application of the
doctrine of "piercing the veil of corporate fiction."
As a general rule, a corporation will be deemed a separate legal
entity until sufficient reason to the contrary appears. 14 But the rule
is not absolute. A corporations separate and distinct legal
personality may be disregarded and the veil of corporate fiction
pierced when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. 15
In this case, Cupertino presented overwhelming evidence that
petitioner and its affiliate corporations had received the proceeds of
the P160,000,000.00 loan increase which was then made the
consideration for the Amended Real Estate Mortgage. We quote
with favor the RTCs and the CAs disquisitions on this matter:
That the checks, debit memos and the pledges of the jewelries,
condominium units and trucks were constituted not exclusively in
the name of [petitioner] but also either in the name of Yuyek
Manufacturing Corporation, Siain Transport, Inc., Cua Leleng and
Alberto Lim is of no moment. For the facts established in the case
at bar has convinced the Court of the propriety to apply the
principle known as "piercing the veil of the corporate entity" by
virtue of which, the juridical personalities of the various
corporations involved are disregarded and the ensuing liability of
the corporation to attach directly to its responsible officers and
stockholders. x x x
xxxx
The conjunction of the identity of the [petitioner] corporation in
relation to Siain Transport, Inc. (Siain Transport), Yuyek
Manufacturing Corp. (Yuyek), as well as the individual personalities
of Cua Leleng and Alberto Lim has been indubitably shown in the
instant case by the following established considerations, to wit:
1. Siain and Yuyek have [a] common set of [incorporators],
stockholders and board of directors;
2. They have the same internal bookkeeper and accountant in the
person of Rosemarie Ragodon;

3. They have the same office address at 306 Jose Rizal St.,
Mandaluyong City;
4. They have the same majority stockholder and president in the
person of Cua Le Leng; and
5. In relation to Siain Transport, Cua Le Leng had the unlimited
authority by and on herself, without authority from the Board of
Directors, to use the funds of Siain Trucking to pay the obligation
incurred by the [petitioner] corporation.
Thus, it is crystal clear that [petitioner] corporation, Yuyek and
Siain Transport are characterized by oneness of operations vested
in the person of their common president, Cua Le Leng, and unity in
the keeping and maintenance of their corporate books and records
through their common accountant and bookkeeper, Rosemarie
Ragodon. Consequently, these corporations are proven to be the
mere alter-ego of their president Cua Leleng, and considering that
Cua Leleng and Alberto Lim have been living together as common
law spouses with three children, this Court believes that while
Alberto Lim does not appear to be an officer of Siain and Yuyek,
nonetheless, his receipt of certain checks and debit memos from
Willie Lua and Victoria Lua was actually for the account of his
common-law wife, Cua Leleng and her alter ego corporations. While
this Court agrees with Siain that a corporation has a personality
separate and distinct from its individual stockholders or members,
this legal fiction cannot, however, be applied to its benefit in this
case where to do so would result to injustice and evasion of a valid
obligation, for well settled is the rule in this jurisdiction that the veil
of corporate fiction may be pierced when it is used as a shield to
further an end subversive of justice, or for purposes that could not
have been intended by the law that created it; or to justify wrong,
or for evasion of an existing obligation. Resultantly, the obligation
incurred and/or the transactions entered into either by Yuyek, or by
Siain Trucking, or by Cua Leleng, or by Alberto Lim with Cupertino
are deemed to be that of the [petitioner] itself.
The same principle equally applies to Cupertino. Thus, while it
appears that the issuance of the checks and the debit memos as
well as the pledges of the condominium units, the jewelries, and
the trucks had occurred prior to March 2, 1995, the date when
Cupertino was incorporated, the same does not affect the validity of
the subject transactions because applying again the principle of
piercing the corporate veil, the transactions entered into by
Cupertino Realty Corporation, it being merely the alter ego of
Wilfredo Lua, are deemed to be the latters personal transactions
and vice-versa.16
xxxx
x x x Firstly. As can be viewed from the extant record of the instant
case, Cua Leleng is the majority stockholder of the three (3)
corporations namely, Yuyek Manufacturing Corporation, Siain
Transport, Inc., and Siain Enterprises Inc., at the same time the
President thereof. Second. Being the majority stockholder and the
president, Cua Le leng has the unlimited power, control and
authority without the approval from the board of directors to obtain
for and in behalf of the [petitioner] corporation from [Cupertino]
thereby mortgaging her jewelries, the condominiums of her
common law husband, Alberto Lim, the trucks registered in the
name of [petitioner] corporations sister company, Siain Transport

Inc., the subject lots registered in the name of [petitioner]

corporation and her oil mill property at Iloilo City. And, to apply the
proceeds thereof in whatever way she wants, to the prejudice of
the public.
As such, [petitioner] corporation is now estopped from denying the
above apparent authorities of Cua Le Leng who holds herself to the
public as possessing the power to do those acts, against any
person who dealt in good faith as in the case of Cupertino.17
WHEREFORE, premises considered, the petition is DENIED. The
Decision of the Court of Appeals in CA-G.R. CV No. 71424 is
AFFIRMED. Costs against the petitioner.
SO ORDERED.
G.R. No. 154975
January 29, 2007
GENERAL CREDIT CORPORATION (now PENTA CAPITAL
FINANCE CORPORATION), Petitioner,
vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION
and CCC EQUITY CORPORATION, Respondents.
DECISION
GARCIA, J.:
General Credit Corp v. Alsons Dev. and Investment Corp
FACTS: Petitioner General Credit Corporation (GCC), then known as
Commercial Credit Corporation (CCC), established CCC franchise
companies in different urban centers of the country. In furtherance
of its business, GCC was able to secure license from Central Bank
(CB) and SEC to engage also in quasibanking activities. On the
other hand, respondent CCC Equity Corporation (EQUITY) was
organized in by GCC for the purpose of, among other things, taking
over the operations and management of the various franchise
companies. At a time material hereto, respondent Alsons
Development and Investment Corporation (ALSONS) and the
Alcantara family, each owned, just like GCC, shares in the aforesaid
GCC franchise companies, e.g., CCC Davao and CCC Cebu. ALSONS
and the Alcantara family, for a consideration of P2M, sold their
shareholdings (101,953 shares), in the CCC franchise companies to
EQUITY. EQUITY issued ALSONS et al., a "bearer" promissory note
for P2M with a one-year maturity date. 4 years later, the Alcantara
family assigned its rights and interests over the bearer note to
ALSONS which became the holder thereof. But even before the
execution of the assignment deal aforestated, letters of demand for
interest payment were already sent to EQUITY. EQUITY no longer
then having assets or property to settle its obligation nor being
extended financial support by GCC, pleaded inability to pay.
ALSONS, having failed to collect on the bearer note
aforementioned, filed a complaint for a sum of money8 against
EQUITY and GCC. GCC is being impleaded as party-defendant for
any judgment ALSONS might secure against EQUITY and, under
the doctrine of piercing the veil of corporate fiction, against GCC,
EQUITY having been organized as a tool and mere conduit of GCC.
According to EQUITY (cross-claim against GCC): it acted merely as
intermediary or bridge for loan transactions and other dealings of

GCC to its franchises and the investing public; and is solely

dependent upon GCC for its funding requirements. Hence, GCC is
solely and directly liable to ALSONS, the former having failed to
provide EQUITY the necessary funds to meet its obligations to
ALSONS. GCC filed its ANSWER to Cross-claim, stressing that it is a
distinct and separate entity from EQUITY. RTC, finding that EQUITY
was but an instrumentality or adjunct of GCC and considering the
legal consequences and implications of such relationship, rendered
judgment for Alson. CA affirmed.
ISSUE: WON the doctrine of "Piercing the Veil of Corporate Fiction"
should be applied in the case at bar.
HELD: YES. The notion of separate personality, however, may be
disregarded under the doctrine "piercing the veil of corporate
fiction" as in fact the court will often look at the corporation as a
mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group. Another
formulation of this doctrine is that when two (2) business
enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one
and the same. Authorities are agreed on at least three (3) basic
areas where piercing the veil, with which the law covers and
isolates the corporation from any other legal entity to which it may
be related, is allowed. These are: 1) defeat of public convenience,
as when the corporate fiction is used as vehicle for the evasion of
an existing obligation; 2) fraud cases or when the corporate entity
is used to justify a wrong, protect fraud, or defend a crime; or 3)
alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation. The Court agrees with the
disposition of the CA on the application of the piercing doctrine to
the transaction subject of this case. Per the Courts count, the trial
court enumerated no less than 20 documented circumstances and
transactions, which, taken as a package, indeed strongly supported
the conclusion that respondent EQUITY was but an adjunct, an
instrumentality or business conduit of petitioner GCC. This relation,
in turn, provides a justifying ground to pierce petitioners corporate
existence as to ALSONS claim in question. Foremost of what the
trial court referred to as "certain circumstances" are the
commonality of directors, officers and stockholders and even
sharing of office between petitioner GCC and respondent EQUITY;
certain financing and management arrangements between the two,
allowing the petitioner to handle the funds of the latter; the virtual
domination if not control wielded by the petitioner over the
finances, business policies and practices of respondent EQUITY; and
the establishment of respondent EQUITY by the petitioner to
circumvent CB rules. Verily, indeed, as the relationships binding
herein [respondent EQUITY and petitioner GCC] have been that of
"parent-subsidiary corporations" the foregoing principles and

doctrines find suitable applicability in the case at bar; and, it having

been satisfactorily and indubitably shown that the said relationships
had been used to perform certain functions not characterized with
legitimacy, this Court feels amply justified to "pierce the veil of
corporate entity" and disregard the separate existence of the
parent and subsidiary the latter having been so controlled by the
parent that its separate identity is hardly discernible thus becoming
a mere instrumentality or alter ego of the former.
FULL TEXT: In this petition for review on certiorari under Rule 45
of the Rules of Court, petitioner General Credit Corporation, now
known as Penta Capital Finance Corporation, seeks to annul and set
aside the Decision1 and Resolution2 dated April 11, 2002 and
August 20, 2002, respectively, of the Court of Appeals (CA) in CAG.R. CV No. 31801, affirming the November 8, 1990 decision of the
Regional Trial Court (RTC) of Makati City in its Civil Case No. 12707,
an action for a sum of money thereat instituted by the herein
respondent Alsons Development and Investment Corporation
against the petitioner and respondent CCC Equity Corporation.
The facts:
Shortly after its incorporation in 1957 as a finance and investment
company, petitioner General Credit Corporation (GCC, for short),
then known as Commercial Credit Corporation (CCC), established
CCC franchise companies in different urban centers of the country.3
In furtherance of its business, GCC had, as early as 1974, applied
for and was able to secure license from the then Central Bank (CB)
of the Philippines and the Securities and Exchange Commission
(SEC) to engage also in quasi-banking activities. 4 On the other
hand, respondent CCC Equity Corporation (EQUITY, for brevity) was
organized in November 1994 by GCC for the purpose of, among
other things, taking over the operations and management of the
various franchise companies. At a time material hereto, respondent
Alsons Development and Investment Corporation (ALSONS,
hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all
surnamed Alcantara, and Alfredo de Borja (hereinafter the
Alcantara family, for convenience), each owned, just like GCC,
shares in the aforesaid GCC franchise companies, e.g., CCC Davao
and CCC Cebu.
In December 1980, ALSONS and the Alcantara family, for a
consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings a total of 101,953 shares, more or less in the
CCC franchise companies to EQUITY.[5] On January 2, 1981,
EQUITY issued ALSONS et al., a "bearer" promissory note for
P2,000,000.00 with a one-year maturity date, at 18% interest per
annum, with provisions for damages and litigation costs in case of
default.6
Some four years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which thenceforth
became the holder thereof.7 But even before the execution of the
assignment deal aforestated, letters of demand for interest
payment were already sent to EQUITY, through its President,
Wilfredo Labayen, who pleaded inability to pay the stipulated
interest, EQUITY no longer then having assets or property to settle
its obligation nor being extended financial support by GCC.

What happened next, as narrated in the assailed Decision of the

CA, may be summarized, as follows:
1. On January 14, 1986, before the RTC of Makati, ALSONS, having
failed to collect on the bearer note aforementioned, filed a
complaint for a sum of money8 against EQUITY and GCC. The case,
docketed as Civil Case No. 12707, was eventually raffled to Branch
58 of the court. As stated in par. 4 of the complaint, GCC is being
impleaded as party-defendant for any judgment ALSONS might
secure against EQUITY and, under the doctrine of piercing the veil
of corporate fiction, against GCC, EQUITY having been organized as
a tool and mere conduit of GCC.
2. Answering with a cross-claim against GCC, EQUITY stated by
way of special and affirmative defenses that it (EQUITY):
a) was purposely organized by GCC for the latter to avoid CB Rules
and Regulations on DOSRI (Directors, Officers, Stockholders and
Related Interest) limitations, and that it acted merely as
intermediary or bridge for loan transactions and other dealings of
GCC to its franchises and the investing public; and
b) is solely dependent upon GCC for its funding requirements, to
settle, among others, equity purchases made by investors on the
franchises; hence, GCC is solely and directly liable to ALSONS, the
former having failed to provide EQUITY the necessary funds to
meet its obligations to ALSONS.
3. GCC filed its ANSWER to Cross-claim, stressing that it is a
distinct and separate entity from EQUITY and alleging, in essence
that the business relationships with each other were always at
arms length. And following the denial of its motion to dismiss
ALSONS complaint, on the ground of lack of jurisdiction and want
of cause of action, GCC filed its Answer thereto and set up
affirmative defenses with counterclaim for exemplary damages and
attorneys fees.
Issues having been joined, trial ensued. Presented by ALSONS, but
testifying as adverse witnesses, were CB and GCC officers. Among
other things, ALSONS evidence, which included the EQUITY-issued
"bearer" promissory note marked as Exhibit "K" and over sixty (60)
other marked and subsequently admitted documents, 9 were to the
effect that five (5) incorporators, each contributing P100,000.00 as
the initial paid up capital of the company, organized EQUITY to
manage, as it did manage, various GCC franchises through
management contracts. Before EQUITYs incorporation, however,
GCC was already into the financing business as it was in fact
managing and operating various CCC franchises. Presented in
evidence, too, was the September 29, 1982 letter-reply of one G.
Villanueva, then GCC President, to EQUITY President Wilfredo
Labayen, bearing on the sale of EQUITY shares to third parties, part
of the proceeds of which the Alcantaras wanted applied to liquidate
the promissory note in question. In said letter, Mr. Villanueva
explained that the GCC Board denied the Alcantaras request to be
paid out of such proceeds, but nonetheless authorized EQUITY to
pay them interest out of EQUITYs operation income, in preference
over what was due GCC.10
Albeit EQUITY presented its president, it opted to adopt the
testimony of some of ALSONS witnesses, inclusive of the

documentary exhibits testified to by each of them, as its evidence.

For its part, GCC called only Wilfredo Labayen to testify. It stuck to
its underlying defense of separateness and presented documentary
evidence detailing the organizational structures of both GCC and
EQUITY. And in a bid to negate the notion that it was conducting its
business illegally, GCC presented CB and SEC-issued licenses
authoring it to engage in financing and quasi-banking activities. It
also adduced evidence to prove that it was never a party to any of
the actionable documents ALSONS and its predecessors-in-interest
had in their possession and that the November 27, 1985 deed of
assignment of rights over the promissory note was unenforceable.
Eventually, the trial court, on its finding that EQUITY was but an
instrumentality or adjunct of GCC and considering the legal
consequences and implications of such relationship, came out with
its decision on November 8, 1990, rendering judgment for ALSONS,
to wit:
WHEREFORE, the foregoing premises considered, judgment is
hereby rendered in favor of plaintiff [ALSONS] and against the
defendants [EQUITY and GCC] who are hereby ordered, jointly and
severally, to pay plaintiff:
1. the principal sum of Two Million Pesos (P2,000,000.00) together
with the interest due thereon at the rate of eighteen percent (18%)
annually computed from Jan. 2, 1981 until the obligation is fully
paid;
2. liquidated damages due thereon equivalent to three percent
(3%) monthly computed from January 2, 1982 until the obligation
is fully paid;
3. attorneys fees in an amount equivalent to twenty four percent
(24%) of the total obligation due; and
4. the costs of suit.
IT IS SO ORDERED. (Words in brackets added.)
Therefrom, GCC went on appeal to the CA where its appellate
recourse was docketed as CA-G.R. CV No. 31801, ascribing to the
trial court the commission of the following errors:
1. In holding that there is a "Parent-Subsidiary" corporate
relationship between EQUITY and GCC;
2. In not holding that EQUITY and GCC are distinct and separate
corporate entities;
3. In applying the doctrine of "Piercing the Veil of Corporate Fiction"
in the case at bar; and
4. In not holding ALSONS in estoppel to question the corporate
personality of EQUITY.
On April 11, 2002, the appellate court rendered the herein assailed
Decision,11 affirming that of the trial court, thus:
WHEREFORE, premises considered, the Decision of the Regional
Trial Court, Branch 58, Makati in Civil Case No. 12707 is hereby
AFFIRMED.
SO ORDERED.
In time, GCC moved for reconsideration followed by a motion for
oral argument, but both motions were denied by the CA in its
equally assailed Resolution of August 20, 2002.12
Hence, GCCs present recourse anchored on the following
arguments, issues and/or submissions:
1. The motion for oral argument with motion for reconsideration
and its supplement were perfunctorily denied by the CA without

justifiable basis;
2. There is absolutely no basis for piercing the veil of corporate
fiction;
3. Respondent Alsons is not a real party-in-interest as the
promissory note payable to bearer subject of the collection suit is
but a simulated document and/or refers to another party. Moreover,
the subject promissory note is not admissible in evidence because
it has not been duly authenticated and it is an altered document;
4. The fact of full payment stated in the ten (10) deeds of sale of
the shares of stock is conclusive on the sellers, and by the patrol
evidence rule, the alleged fact of its non-payment cannot be
introduced in evidenced; and
5. The counter-claim filed by GCC against Alsons should be granted
in the interest of justice.
The petition and the arguments and/or issues holding it together
are without merit. The desired reversal of the assailed decision and
resolution of the appellate court is accordingly DENIED.
Instead of raising distinctly formulated questions of law, as is
expected of one seeking a review under Rule 45 of the Rules of
Court of a final CA judgment,13 petitioner GCC starts off by voicing
disappointment over the "perfunctory" denial by the CA of its twin
motions for reconsideration and oral argument. Petitioner, to be
sure, cannot plausibly expect a reversal action premised on the
cursory way its motions were denied, if such indeed were the case.
Such manner of denial, while perhaps far from ideal, is not even a
recognized ground for appeal by certiorari, unless a denial of due
process ensues, which is not the case here. And lest it be
overlooked, the CA prefaced its assailed denial resolution with the
clause: "[F]inding no reversible error committed to warrant the
modification and/or reversal of the April 11, 2002 Decision,"
suggesting that the appellate court gave the petitioners motion for
reconsideration the attention it deserved. At the very least, the
petitioner was duly apprised of the reasons why reconsideration
could not be favorably considered. An extended resolution was not
really necessary to dispose of the motion for reconsideration in
question.
Petitioners lament about being deprived of procedural due process
owing to the denial of its motion for oral argument is simply
specious. Under the CA Internal Rules, the appellate court may tap
any of the three (3) alternatives therein provided to aid the court in
resolving appealed cases before it. It may rely on available records
alone, require the submission of memoranda or set the case for
oral argument. The option the Internal Rules thus gives the CA
necessarily suggests that the appellate court may, at its sound
discretion, dispense with a tedious oral argument exercise. Rule VI,
Section 6 of the 2002 Internal Rules of the CA, provides:
SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for
review, after the receipt of the respondents comment on the
petition, the Court [of Appeals] may dismiss the petition if it
finds the same to be patently without merit , otherwise, it shall
give due course to it.
xxx xxx xxx
If the petition is given due course, the Court may consider the case
submitted for decision or require the parties to submit their
memorandum or set the case for oral argument. xxx. After the oral

argument or upon submission of the memoranda the case shall

be deemed submitted for decision.
In the case at bench, records reveal that the appellate court, in line
with the prescription of its own rules, required the parties to just
submit, as they did, their respective memoranda to properly
ventilate their separate causes. Under this scenario, the petitioner
cannot be validly heard, having been deprived of due process.
Just like the first, the last three (3) arguments set forth in the
petition will not carry the day for the petitioner. In relation
therewith, the Court notes that these arguments and the issues
behind them were not raised before the trial court. This appellate
maneuver cannot be allowed. For, well-settled is the rule that
issues or grounds not raised below cannot be resolved on review in
higher courts.14 Springing surprises on the opposing party is
antithetical to the sporting idea of fair play, justice and due
process; hence, the proscription against a party shifting from one
theory at the trial court to a new and different theory in the
appellate level. On the same rationale, points of law, theories,
issues not brought to the attention of the lower court or, in fine, not
interposed during the trial cannot be raised for the first time on
appeal.15
There are, to be sure, exceptions to the rule respecting what may
be raised for the first time on appeal. Lack of jurisdiction over when
the issues raised present a matter of public policy 16 comes
immediately to mind. None of the well-recognized exceptions
obtain in this case, however.
Lest it be overlooked vis--vis the same last three arguments thus
pressed, both the trial court and the CA, based on the evidence
adduced, adjudged the petitioner and respondent EQUITY jointly
and severally liable to pay what respondent ALSONS is entitled to
under the "bearer" promissory note. The judgment argues against
the notion of the note being simulated or altered or that
respondent ALSONS has no standing to sue on the note, not being
the payee of the "bearer" note. For, the declaration of liability not
only presupposes the duly established authenticity and due
execution of the promissory note over which ALSONS, as the holder
in due course thereof, has interest, but also the untenability of the
petitioners counterclaim for attorneys fees and exemplary
damages against ALSONS. At bottom, the petitioner predicated
such counter-claim on the postulate that respondent ALSONS had
no cause of action, the supposed promissory note being, according
to the petitioner, either a simulated or an altered document.
In net effect, the definitive conclusion of the appellate court
affirmatory of that of the trial court was that the bearer
promissory note (Exh. "K") was a genuine and authentic instrument
payable to the holder thereof. This factual determination, as a
matter of long and sound appellate practice, deserves great weight
and shall not be disturbed on appeal, save for the most compelling
reasons,17 such as when that determination is clearly without
evidentiary support or when grave abuse of discretion has been
committed.18 This is as it should be since the Court, in petitions for
review of CA decisions under Rule 45 of the Rules of Court, usually
limits its inquiry only to questions of law. Stated otherwise, it is not
the function of the Court to analyze and weigh all over again the
evidence or premises supportive of the factual holdings of lower

courts.19
As nothing in the record indicates any of the exceptions adverted to
above, the factual conclusion of the CA that the P2 Million
promissory note in question was authentic and was issued at the
first instance to respondent ALSONS and the Alcantara family for
the amount stated on its face, must be affirmed. It should be
stressed in this regard that even the issuing entity, i.e., respondent
EQUITY, never challenged the genuineness and due execution of
the note.
This brings us to the remaining but core issue tendered in this case
and aptly raised by the petitioner, to wit: whether there is
absolutely no basis for piercing GCCs veil of corporate identity.
A corporation is an artificial being vested by law with a personality
distinct and separate from those of the persons composing it 20 as
well as from that of any other entity to which it may be related. 21
The first consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be
made to answer for acts and liabilities of its stockholders or those
of legal entities to which it may be connected or vice versa. 22
The notion of separate personality, however, may be disregarded
under the doctrine "piercing the veil of corporate fiction" as in
fact the court will often look at the corporation as a mere collection
of individuals or an aggregation of persons undertaking business as
a group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine
is that when two (2) business enterprises are owned, conducted
and controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or one and the same.23
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts, appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of
justice.24 After all, the concept of corporate entity was not meant to
promote unfair objectives.
Authorities are agreed on at least three (3) basic areas where
piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related,
is allowed.25 These are: 1) defeat of public convenience, 26 as when
the corporate fiction is used as vehicle for the evasion of an
existing obligation;27 2) fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a crime; 28 or 3)
alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.29
The CA found valid grounds to pierce the corporate veil of petitioner
GCC, there being justifiable basis for such action. When the
appellate court spoke of a justifying factor, the reference was to
what the trial court said in its decision, namely: the existence of
"certain circumstances [which], taken together, gave rise to the
ineluctable conclusion that [respondent] EQUITY is but an

instrumentality or adjunct of [petitioner] GCC."

The Court agrees with the disposition of the appellate court on the
application of the piercing doctrine to the transaction subject of this
case. Per the Courts count, the trial court enumerated no less than
20 documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit
of petitioner GCC. This relation, in turn, provides a justifying
ground to pierce petitioners corporate existence as to ALSONS
claim in question. Foremost of what the trial court referred to as
"certain circumstances" are the commonality of directors, officers
and stockholders and even sharing of office between petitioner GCC
and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle
the funds of the latter; the virtual domination if not control wielded
by the petitioner over the finances, business policies and practices
of respondent EQUITY; and the establishment of respondent
EQUITY by the petitioner to circumvent CB rules. For a perspective,
the following are some relevant excerpts from the trial courts
decision setting forth in some detail the tipping circumstances
adverted to therein:
It must be noted that as characterized by their business
relationship, [respondent] EQUITY and [petitioner] GCC had
common directors and/or officers as well as stockholders. This is
revealed by the proceedings recorded in SEC Case No. 25-81
entitled "Avelina Ramoso, et al., vs. GCC, et al., where it was
established, thru the testimony of EQUITYs own President that
more than 90% of the stockholders of EQUITY were also
stockholders of GCC .. Disclosed likewise is the fact that when
[EQUITYs President] Labayen sold the shareholdings of EQUITY in
said franchise companies, practically the entire proceeds thereof
were surrendered to GCC, and not received by EQUITY (EXHIBIT
"RR") xxx.
It was likewise shown by a preponderance of evidence that not only
had GCC financed EQUITY and that the latter was heavily
indebted to the former but EQUITY was, in fact, a wholly owned
subsidiary of GCC. Thus, as affirmed by EQUITYs President, the
funds invested by EQUITY in the CCC franchise companies actually
came from CCC Phils. or GCC (Exhibit "Y-5"). that, as disclosed by
the Auditors report for 1982, past due receivables alone of GCC
exceeded P101,000,000.00 mostly to GCC affiliates especially CCC
EQUITY. ; that [CBs] Report of Examination dated July 14, 1977
shows that EQUITY which has a paid-up capital of only
P500,000.00 was the biggest borrower of GCC with a total loan of
P6.70 Million .
xxx xxx xxx
It has likewise been amply substantiated by [respondent ALSONS]
evidence that not only did GCC cause the incorporation of
EQUITY, but, the latter had grossly inadequate capital for the
pursuit of its line of business to the extent that its business affairs
were considered as GCCs own business endeavors. xxx.
xxx xxx xxx
ALSONS has likewise shown that the bonuses of the officers and
directors of EQUITY was based on its total financial performance
together with all its affiliates both firms were sharing one and the

same office when both were still operational and that the
directors and executives of EQUITY never acted independently
but took their orders from GCC.
The evidence has also indubitably established that EQUITY was
organized by GCC for the purpose of circumventing [CB] rules
and regulations and the Anti-Usury Law. Thus, as disclosed by the
Advance Report on the result of Central Banks Operations
Examination conducted on GCC as of March 31, 1977 (EXHIBITS
"FFF" etc.), the latter violated [CB] rules and regulations by : (a)
using as a conduit its non-quasi bank affiliates . (b) issuing
without recourse facilities to enable GCC to extend credit to
affiliates like EQUITY which go beyond the single borrowers limit
without the need of showing outstanding balance in the book of
accounts. (Emphasis over words in brackets added.)
It bears to stress at this point that the facts and the inferences
drawn therefrom, upon which the two (2) courts below applied the
piercing doctrine, stand, for the most part, undisputed. Among
these is, to reiterate, the matter of EQUITY having been
incorporated to serve, as it did serve, as an instrumentality or
adjunct of GCC. With the view we take of this case, GCC did not
adduce any evidence, let alone rebut the testimonies and
documents presented by ALSONS, to establish the prevailing
circumstances adverted to that provided the justifying occasion to
pierce the veil of corporate fiction between GCC and EQUITY. We
quote the trial court:
Verily, indeed, as the relationships binding herein [respondent
EQUITY and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily
and indubitably shown that the said relationships had been used to
perform certain functions not characterized with legitimacy, this
Court feels amply justified to "pierce the veil of corporate entity"
and disregard the separate existence of the percent (sic) and
subsidiary the latter having been so controlled by the parent that
its separate identity is hardly discernible thus becoming a mere
instrumentality or alter ego of the former. Consequently, as the
parent corporation, [petitioner] GCC maybe (sic) held responsible
for the acts and contracts of its subsidiary [respondent] EQUITY most especially if the latter (who had anyhow acknowledged its
liability to ALSONS) maybe (sic) without sufficient property with
which to settle its obligations. For, after all, GCC was the entity
which initiated and benefited immensely from the fraudulent
scheme perpetrated in violation of the law. (Words in parenthesis in
the original; emphasis and bracketed words added).
Given the foregoing considerations, it behooves the petitioner, as a
matter of law and equity, to assume the legitimate financial
obligation of a cash-strapped subsidiary corporation which it
virtually controlled to such a degree that the latter became its
instrument or agent. The facts, as found by the courts a quo, and
the applicable law call for this kind of disposition. Or else, the Court
would be allowing the wrong use of the fiction of corporate veil.
WHEREFORE, the instant petition is DENIED and the appealed
Decision and Resolution of the Court of Appeals are accordingly
AFFIRMED.
Costs against the petitioner.

SO ORDERED.

PNB, and now NASUDECO, allegedly failed and refused to pay AEEC
their just, valid and demandable obligation (The President of the
NASUDECO is also the Vice-President of the PNB. AEEC besought
said official to pay the outstanding obligation of PASUMIL,
inasmuch as PNB and NASUDECO now owned and possessed the
assets of PASUMIL, and these defendants all benefited from the
works, and the electrical, as well as the engineering
Commercial Law - Corporation Law, 2005 ( 9 )
Narratives (Berne Guerrero)

Philippine National Bank vs. Andrada Electric &

Engineering Co. [GR 142936, 17 April 2002]
Third Division, Panganiban (J): 3 concur, 1 on official leave
Facts: On 26 August 1975, the Philippine national Bank (PNB)
acquired the assets of the Pampanga Sugar Mills (PASUMIL) that
were earlier foreclosed by the Development Bank of the Philippines
(DBP) under LOI 311. The PNB organized the ational Sugar
Development Corporation (NASUDECO) in September 1975, to take
ownership and possession of the assets and ultimately to
nationalize and consolidate its interest in other PNB controlled
sugar mills. Prior to 29 October 1971, PASUMIL engaged the
services of the Andrada Electric & Engineering Company (AEEC) for
electrical rewinding and repair, most of which were partially paid by
PASUMIL, leaving several unpaid accounts with AEEC. On 29
October 1971, AEEC and PASUMIL entered into a contract for AEEC
to perform the (a) Construction of a power house building; 3
reinforced concrete foundation for 3 units 350 KW diesel engine
generating sets, 3 reinforced concrete foundation for the 5,000 KW
and 1,250 KW turbo generator sets, among others. Aside from the
work contract, PASUMIL required AEEC to perform extra work, and
provide electrical equipment and spare parts. Out of the total
obligation of P777,263.80, PASUMIL had paid only P250,000.00,
leaving an unpaid balance, as of 27 June 1973, amounting to
P527,263.80. Out of said unpaid balance of P527,263.80, PASUMIL
made a partial payment to AEEC of P14,000.00, in broken
amounts, covering the period from 5 January 1974 up to 23 May
1974, leaving an unpaid balance of P513,263.80. PASUMIL and

and repairs, performed by AEEC). Because of the failure and refusal

of PNB, PASUMIL and/or NASUDECO to pay their obligations, AEEC
allegedly suffered actual damages in the total amount of
P513,263.80; and that in order to recover these sums, AEEC was
compelled to engage the professional services of counsel, to whom
AEEC agreed to pay a sum equivalent to 25% of the amount of the
obligation due by way of attorney's fees. PNB and NASUDECO filed
a joint motion to dismiss on the ground that the complaint failed to
state sufficient allegations to establish a cause of action against
PNB and NASUDECO, inasmuch as there is lack or want of privity of
contract between the them and AEEC. Said motion was denied by
the trial court in its 27 November order, and ordered PNB nad
NASUDECO to file their answers within 15 days. After due
proceedings, the Trial Court rendered judgment in favor of AEEC
and against PNB, NASUDECO and PASUMIL; the latter being
ordered to pay jointly and severally the former (1) the sum of
P513,623.80 plus interest thereon at the rate of 14% per annum as
claimed from 25 September 1980 until fully paid; (2) the sum of
P102,724.76 as attorney's fees; and, (3) Costs. PNB and
NASUDECO appealed. The Court of Appeals affirmed the decision of
the trial court in its decision of 17 April 2000 (CA-GR CV 57610.
PNB and NASUDECO filed the petition for review.
Issue: Whether PNB and NASUDECO may be held liable for
PASUMILs liability to AEEC.
Held: Basic is the rule that a corporation has a legal personality
distinct and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or management
of some assets of the Pampanga Sugar Mill (PASUMIL), which had
earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not
make PNB liable for the PASUMIL's contractual debts to Andrada
Electric & Engineering Company (AEEC). Piercing the veil of
corporate fiction may be allowed only if the following elements
concur: (1) control not mere stock control, but complete
domination not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been

such that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or a
wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of
plaintiff's legal right; and (3) the said control and breach of duty
must have proximately caused the injury or unjust loss complained
of. The absence of the foregoing elements in the present case
precludes the piercing of the corporate veil. First, other than the
fact that PNB and NASUDECO acquired the assets of PASUMIL,
there is no showing that their control over it warrants the disregard
of corporate personalities. Second, there is no evidence that their
juridical personality was used to commit a fraud or to do a wrong;
or that the separate corporate entity was farcically used as a mere
alter ego, business conduit or instrumentality of another entity or
person. Third, AEEC was not defrauded or injured when PNB and
NASUDECO acquired the assets of PASUMIL. Hence, although the
assets of NASUDECO can be easily traced to PASUMIL, the transfer
of the latter's assets to PNB and NASUDECO was not fraudulently
entered into in order to escape liability for its debt to AEEC. Neither
was there any merger or consolidation with respect to PASUMIL and
PNB. The procedure prescribed under Title IX of the Corporation
Code 59 was not followed. In fact, PASUMIL's corporate existence
had not been legally extinguished or terminated. Further, prior to
PNB's acquisition of the foreclosed assets, PASUMIL had previously
made partial payments to AEEC for the former's obligation in the
amount of P777,263.80. As of 27 June 1973, PASUMIL had paid
P250,000 to AEEC and, from 5 January 1974 to 23 May 1974,
another P14,000. Neither did PNB expressly or impliedly agree to
assume the debt of PASUMIL to AEEC. LOI 11 explicitly provides
that PNB shall study and submit recommendations on the claims of
PASUMIL's creditors. Clearly, the corporate separateness between
PASUMIL and PNB remains, despite AEEC's insistence to the
contrary.
FULL TEXT:
G.R. No. 142936
April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT
CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct
and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or management
of some assets of the Pampanga Sugar Mill (PASUMIL), which had
earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not
make PNB liable for the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000

Decision1 of the Court of Appeals (CA) in CA-GR CV No. 57610. The

decretal portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2
The Facts
The factual antecedents of the case are summarized by the Court
of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is
a partnership duly organized, existing, and operating under the
laws of the Philippines, with office and principal place of business at
Nos. 794-812 Del Monte [A]venue, Quezon City, while the
defendant [herein petitioner] Philippine National Bank (herein
referred to as PNB), is a semi-government corporation duly
organized, existing and operating under the laws of the Philippines,
with office and principal place of business at Escolta Street, Sta.
Cruz, Manila; whereas, the other defendant, the National Sugar
Development Corporation (NASUDECO in brief), is also a semigovernment corporation and the sugar arm of the PNB, with office
and principal place of business at the 2nd Floor, Sampaguita
Building, Cubao, Quezon City; and the defendant Pampanga Sugar
Mills (PASUMIL in short), is a corporation organized, existing and
operating under the 1975 laws of the Philippines, and had its
business office before 1975 at Del Carmen, Floridablanca,
Pampanga; that the plaintiff is engaged in the business of general
construction for the repairs and/or construction of different kinds of
machineries and buildings; that on August 26, 1975, the defendant
PNB acquired the assets of the defendant PASUMIL that were
earlier foreclosed by the Development Bank of the Philippines
(DBP) under LOI No. 311; that the defendant PNB organized the
defendant NASUDECO in September, 1975, to take ownership and
possession of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar mills; that
prior to October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most of
which were partially paid by the defendant PASUMIL, leaving
several unpaid accounts with the plaintiff; that finally, on October
29, 1971, the plaintiff and the defendant PASUMIL entered into a
contract for the plaintiff to perform the following, to wit
(a) Construction of one (1) power house building;
(b) Construction of three (3) reinforced concrete foundation for
three (3) units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation for the
5,000 KW and 1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning tests sum for three
(3) 350 KW diesel engine generating set[s];
(e) Installation of turbine and diesel generating sets including
transformer, switchboard, electrical wirings and pipe provided those
stated units are completely supplied with their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all
existing concrete foundation and drainage canals, excavation, and
earth fillings all for the total amount of P543,500.00 as evidenced
by a contract, [a] xerox copy of which is hereto attached as Annex
A and made an integral part of this complaint;
that aside from the work contract mentioned-above, the defendant
PASUMIL required the plaintiff to perform extra work, and provide
electrical equipment and spare parts, such as:

(a) Supply of electrical devices;

(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) Supply of diesel engine parts and other related works including
fabrication of parts.
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid balance, as
of June 27, 1973, amounting to P527,263.80, as shown in the
Certification of the chief accountant of the PNB, a machine copy of
which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a
partial payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23, 1974,
leaving an unpaid balance of P513,263.80; that the defendant
PASUMIL and the defendant PNB, and now the defendant
NASUDECO, failed and refused to pay the plaintiff their just, valid
and demandable obligation; that the President of the NASUDECO is
also the Vice-President of the PNB, and this official holds office at
the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought
this official to pay the outstanding obligation of the defendant
PASUMIL, inasmuch as the defendant PNB and NASUDECO now
owned and possessed the assets of the defendant PASUMIL, and
these defendants all benefited from the works, and the electrical,
as well as the engineering and repairs, performed by the plaintiff;
that because of the failure and refusal of the defendants to pay
their just, valid, and demandable obligations, plaintiff suffered
actual damages in the total amount of P513,263.80; and that in
order to recover these sums, the plaintiff was compelled to engage
the professional services of counsel, to whom the plaintiff agreed to
pay a sum equivalent to 25% of the amount of the obligation due
by way of attorneys fees. Accordingly, the plaintiff prayed that
judgment be rendered against the defendants PNB, NASUDECO,
and PASUMIL, jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum of
P513,263.80, with annual interest of 14% from the time the
obligation falls due and demandable;
(2) Condemning the defendants to pay attorneys fees amounting
to 25% of the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
"The defendants PNB and NASUDECO filed a joint motion to dismiss
the complaint chiefly on the ground that the complaint failed to
state sufficient allegations to establish a cause of action against
both defendants, inasmuch as there is lack or want of privity of
contract between the plaintiff and the two defendants, the PNB and
NASUDECO, said defendants citing Article 1311 of the New Civil
Code, and the case law ruling in Salonga v. Warner Barnes & Co.,
88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et
al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order
of November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.

"In their answer, the defendant NASUDECO reiterated the grounds

of its motion to dismiss, to wit:
That the complaint does not state a sufficient cause of action
against the defendant NASUDECO because: (a) NASUDECO is not x
x x privy to the various electrical construction jobs being sued upon
by the plaintiff under the present complaint; (b) the taking over by
NASUDECO of the assets of defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of defendant PASUMIL
pursuant to martial law powers of the President under the
Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI
No. 311) authorized or commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the corporate obligations of
PASUMIL as that being involved in the present case; and, (d) all
that was mentioned by the said letter of instruction insofar as the
PASUMIL liabilities [were] concerned [was] for the PNB, or its
subsidiary corporation the NASUDECO, to make a study of, and
submit [a] recommendation on the problems concerning the same.
"By way of counterclaim, the NASUDECO averred that by reason of
the filing by the plaintiff of the present suit, which it [labeled] as
unfounded or baseless, the defendant NASUDECO was constrained
to litigate and incur litigation expenses in the amount of
P50,000.00, which plaintiff should be sentenced to pay.
Accordingly, NASUDECO prayed that the complaint be dismissed
and on its counterclaim, that the plaintiff be condemned to pay
P50,000.00 in concept of attorneys fees as well as exemplary
damages.
"In its answer, the defendant PNB likewise reiterated the grounds of
its motion to dismiss, namely: (1) the complaint states no cause of
action against the defendant PNB; (2) that PNB is not a party to the
contract alleged in par. 6 of the complaint and that the alleged
services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiffs suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under LOI No.
189-A; (3) that the PNB take-over of the assets of the defendant
PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume its
operations in time for the 1974-75 milling season, and that nothing
in the said LOI No. 189-A, as well as in LOI No. 311, authorized or
directed PNB to assume the corporate obligation/s of PASUMIL, let
alone that for which the present action is brought; (4) that PNBs
management and operation under LOI No. 311 did not refer to any
asset of PASUMIL which the PNB had to acquire and thereafter
[manage], but only to those which were foreclosed by the DBP and
were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and the
Development Bank of the Philippines (DBP) entered into a
Redemption Agreement whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal
properties of PASUMIL, as shown in Annex C which is made an
integral part of the answer; (6) that again, conformably with LOI
No. 311, PNB pursuant to a Deed of Assignment dated October 21,
1975, conveyed, transferred, and assigned for valuable
consideration, in favor of NASUDECO, a distinct and independent
corporation, all its (PNB) rights and interest in and under the above

Redemption Agreement. This is shown in Annex D which is also

made an integral part of the answer; [7] that as a consequence of
the said Deed of Assignment, PNB on October 21, 1975 ceased to
managed and operate the above-mentioned assets of PASUMIL,
which function was now actually transferred to NASUDECO. In
other words, so asserted PNB, the complaint as to PNB, had
become moot and academic because of the execution of the said
Deed of Assignment; [8] that moreover, LOI No. 311 did not
authorize or direct PNB to assume the corporate obligations of
PASUMIL, including the alleged obligation upon which this present
suit was brought; and [9] that, at most, what was granted to PNB
in this respect was the authority to make a study of and submit
recommendation on the problems concerning the claims of
PASUMIL creditors, under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily
constrained to litigate and to incur expenses in this case, hence it is
entitled to claim attorneys fees in the amount of at least
P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be
sentenced to pay defendant PNB the sum of P50,000.00 as
attorneys fees, aside from exemplary damages in such amount
that the court may seem just and equitable in the premises.
"Summons by publication was made via the Philippines Daily
Express, a newspaper with editorial office at 371 Bonifacio Drive,
Port Area, Manila, against the defendant PASUMIL, which was
thereafter declared in default as shown in the August 7, 1981 Order
issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment, the
decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against the defendant Corporation, Philippine National Bank (PNB)
NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay
jointly and severally the former the following:
1. The sum of P513,623.80 plus interest thereon at the rate of
14% per annum as claimed from September 25, 1980 until fully
paid;
2. The sum of P102,724.76 as attorneys fees; and,
3. Costs.
SO ORDERED.
Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
Judge"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the
basic tenets of justice and equity for a corporation to take over and
operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising
therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the
Courts consideration:

"I
The Court of Appeals gravely erred in law in holding the herein
petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners[] takeover of the management and operation of PASUMIL pursuant to the
mandates of LOI No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the
case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific
Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue
of whether PNB is liable for the unpaid debts of PASUMIL to
respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition
for review under Rule 45 of the Rules of Court. 7 To this rule,
however, there are some exceptions enumerated in Fuentes v.
Court of Appeals.8 After a careful scrutiny of the records and the
pleadings submitted by the parties, we find that the lower courts
misappreciated the evidence presented.9 Overlooked by the CA
were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision.10
Petitioners posit that they should not be held liable for the
corporate debts of PASUMIL, because their takeover of the latters
foreclosed assets did not make them assignees. On the other hand,
respondent asserts that petitioners and PASUMIL should be treated
as one entity and, as such, jointly and severally held liable for
PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another will
not be liable for the debts of the selling corporation, provided the
former acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume
the debts, (2) where the transaction amounts to a consolidation or
merger of the corporations, (3) where the purchasing corporation is
merely a continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape liability
for those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It
possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence. 12
It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it may
be related.13 This is basic.
Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corporation is just
an alter ego of a person or of another corporation. 14 For reasons of
public policy and in the interest of justice, the corporate veil will
justifiably be impaled15 only when it becomes a shield for fraud,

illegality or inequity committed against third persons.16

Hence, any application of the doctrine of piercing the corporate veil
should be done with caution.17 A court should be mindful of the
milieu where it is to be applied.18 It must be certain that the
corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its
rights.19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed. 20 Otherwise, an injustice that
was never unintended may result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment
credit,22 to avoid inclusion of corporate assets as part of the estate
of the decedent,23 to escape liability arising from a debt, 24 or to
perpetuate fraud and/or confuse legitimate issues 25 either to
promote or to shield unfair objectives 26 or to cover up an otherwise
blatant violation of the prohibition against forum-shopping. 27 Only
in these and similar instances may the veil be pierced and
disregarded.28
The question of whether a corporation is a mere alter ego is one of
fact.29 Piercing the veil of corporate fiction may be allowed only if
the following elements concur: (1) control -- not mere stock
control, but complete domination -- not only of finances, but of
policy and business practice in respect to the transaction attacked,
must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of
its own; (2) such control must have been used by the defendant to
commit a fraud or a wrong to perpetuate the violation of a
statutory or other positive legal duty, or a dishonest and an unjust
act in contravention of plaintiffs legal right; and (3) the said
control and breach of duty must have proximately caused the injury
or unjust loss complained of.30
We believe that the absence of the foregoing elements in the
present case precludes the piercing of the corporate veil. First,
other than the fact that petitioners acquired the assets of PASUMIL,
there is no showing that their control over it warrants the disregard
of corporate personalities.31 Second, there is no evidence that their
juridical personality was used to commit a fraud or to do a wrong;
or that the separate corporate entity was farcically used as a mere
alter ego, business conduit or instrumentality of another entity or
person.32 Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil,
respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate
personality rule.34 However, it utterly failed to discharge this
burden;35 it failed to establish by competent evidence that
petitioners separate corporate veil had been used to conceal fraud,
illegality or inequity.36
While we agree with respondents claim that the assets of the
National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL,37 we are not convinced that the transfer
of the latters assets to petitioners was fraudulently entered into in
order to escape liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the
mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted. 39 The bank was

justified in foreclosing the mortgage, because the PASUMIL account

had incurred arrearages of more than 20 percent of the total
outstanding obligation.40 Thus, DBP had not only a right, but also a
duty under the law to foreclose the subject properties. 41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB
acquired PASUMILs assets that DBP had foreclosed and purchased
in the normal course. Petitioner bank was likewise tasked to
manage temporarily the operation of such assets either by itself or
through a subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed
PASUMIL assets pursuant to Section 6 of Act No. 3135. 45 These
assets were later conveyed to PNB for a consideration, the terms of
which were embodied in the Redemption Agreement. 46 PNB, as
successor-in-interest, stepped into the shoes of DBP as PASUMILs
creditor.47 By way of a Deed of Assignment, 48 PNB then transferred
to NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we
had the occasion to resolve a similar issue. We ruled that PNB, DBP
and their transferees were not liable for Marinduque Minings
unpaid obligations to Remington Industrial Sales Corporation
(Remington) after the two banks had foreclosed the assets of
Marinduque Mining. We likewise held that Remington failed to
discharge its burden of proving bad faith on the part of Marinduque
Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts lifting
of the corporate mask.50 The CA did not point to any fact
evidencing bad faith on the part of PNB and its transferee. 51 The
corporate fiction was not used to defeat public convenience, justify
a wrong, protect fraud or defend crime. 52 None of the foregoing
exceptions was shown to exist in the present case. 53 On the
contrary, the lifting of the corporate veil would result in manifest
injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for
the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and
311, which expressly authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners contend that their
takeover of the operations of PASUMIL did not involve any
corporate merger or consolidation, because the latter had never
lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form
a new entity called the consolidated corporation. A merger, on the
other hand, is a union whereby one or more existing corporations
are absorbed by another corporation that survives and continues
the combined business.54
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. 55 Since a merger or
consolidation involves fundamental changes in the corporation, as
well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them. 56 For a valid merger or
consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required.57 These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent
corporations.58

In the case at bar, we hold that there is no merger or consolidation

with respect to PASUMIL and PNB. The procedure prescribed under
Title IX of the Corporation Code59 was not followed.
In fact, PASUMILs corporate existence, as correctly found by the
CA, had not been legally extinguished or terminated. 60 Further,
prior to PNBs acquisition of the foreclosed assets, PASUMIL had
previously made partial payments to respondent for the formers
obligation in the amount of P777,263.80. As of June 27, 1973,
PASUMIL had paid P250,000 to respondent and, from January 5,
1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the
debt of PASUMIL to respondent.61 LOI No. 11 explicitly provides
that PNB shall study and submit recommendations on the claims of
PASUMILs creditors.62 Clearly, the corporate separateness between
PASUMIL and PNB remains, despite respondents insistence to the
contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed
Decision SET ASIDE. No pronouncement as to costs.
SO ORDERED.

corporation. However, Nishino and his brother Yoshinobu Nishino

acquired more than 70% of the authorized capital stock.
Negotiations subsequently ensued in light of a planned takeover by
Nishino who would buy-out the shares of stock of Yamamoto who
was advised through a letter that he may take all the equipment/
machinery he had contributed to the company (for his own use and
sale) provided that the value of such machines is deducted from
the capital contributions which will be paid to him. However, the
letter requested that he give his comments on all the above,
soonest. On the basis of the said letter, Yamamoto attempted to
recover the machineries but Nishino hindered him to do so, drawing
him to file a Writ of Replevin. The Trial Court issued the writ.
However, on appeal, Nishino claimed that the properties being
recovered were owned by the corporation and the above-said letter
was a mere proposal which was not yet authorized by the Board of
Directors. Thus, the Court of Appeals reversed the trial courts
decision despite Yamamotos contention that the company is merely
an instrumentality of the Nishinos.
ISSUE:
Whether or not Yamamoto can recover the properties he
contributed to the company in view of the Doctrine of Piercing the
Veil of Corporate Fiction and Doctrine of Promissory Estoppel.

G.R. No. 150283

April 16, 2008

RYUICHI YAMAMOTO, petitioner,

vs.
NISHINO LEATHER INDUSTRIES,
NISHINO, respondents.

INC.

and

IKUO

RYUICHI
YAMAMOTO
v.
NISHINO
LEATHER
INDUSTRIES, INC. and IKUO NISHINO 551 SCRA 447
(2008)
To disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiffs legal
rights must be clearly and convincingly established. Also, without
acceptance, a mere offer produces no obligation.
Ryuichi Yamamoto and Ikuo Nishino agreed to enter into a joint
venture wherein Nishino would acquire such number of shares of
stock equivalent to 70% of the authorized capital stock of the

HELD:
One of the elements determinative of the applicability of the
doctrine of piercing the veil of corporate fiction is that control must
have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of the plaintiffs legal
rights. To disregard the separate juridical personality of a
corporation, the wrongdoing or unjust act in contravention of a
plaintiffs legal rights must be clearly and convincingly established;
it cannot be presumed. Without a demonstration that any of the
evils sought to be prevented by the doctrine is present, it does not
apply. Estoppel may arise from the making of a promise. However,
it bears noting that the letter was followed by a request for
Yamamoto to give his comments on all the above, soonest. What
was thus proffered to Yamamoto was not a promise, but a mere
offer, subject to his acceptance. Without acceptance, a mere offer
produces no obligation. Thus, the machineries and equipment,
which comprised Yamamotos investment, remained part of the
capital property of the corporation.
FULL TEXT:
DECISION
CARPIO MORALES, J.:
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese
national, organized under Philippine laws Wako Enterprises Manila,
Incorporated (WAKO), a corporation engaged principally in leather
tanning, now known as Nishino Leather Industries, Inc. (NLII), one
of herein respondents.
In 1987, Yamamoto and the other respondent, Ikuo Nishino

(Nishino), also a Japanese national, forged a Memorandum of

Agreement under which they agreed to enter into a joint venture
wherein Nishino would acquire such number of shares of stock
equivalent to 70% of the authorized capital stock of WAKO.
Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu)
acquired more than 70% of the authorized capital stock of WAKO,
reducing Yamamotos investment therein to, by his claim, 10%, 2
less than 10% according to Nishino.3
The corporate name of WAKO was later changed to, as reflected
earlier, its current name NLII.
Negotiations subsequently ensued in light of a planned takeover of
NLII by Nishino who would buy-out the shares of stock of
Yamamoto. In the course of the negotiations, Yoshinobu and
Nishinos counsel Atty. Emmanuel G. Doce (Atty. Doce) advised
Yamamoto by letter dated October 30, 1991, the pertinent portions
of which follow:
Hereunder is a simple memorandum of the subject matters
discussed with me by Mr. Yoshinobu Nishino yesterday, October
29th, based on the letter of Mr. Ikuo Nishino from Japan, and which
I am now transmitting to you.4
xxxx
12. Machinery and Equipment:
The following machinery/equipment have been contributed by you
to the company:
Splitting machine

1 unit

Samming machine

1 unit

Forklift

1 unit

Drums

4 units

Toggling machine

2 units

Regarding the above machines, you may take them out with you
(for your own use and sale) if you want, provided, the value of such
machines is deducted from your and Wakos capital contributions,
which will be paid to you.
Kindly let me know of your comments on all the above, soonest.
x x x x5 (Emphasis and underscoring supplied)
On the basis of such letter, Yamamoto attempted to recover the
machineries and equipment which were, by Yamamotos admission,
part of his investment in the corporation, 6 but he was frustrated by
respondents, drawing Yamamoto to file on January 15, 1992 before
the Regional Trial Court (RTC) of Makati a complaint 7 against them
for replevin.
Branch 45 of the Makati RTC issued a writ of replevin after
Yamamoto filed a bond. 8
In their Answer with Counterclaim,9 respondents claimed that the
machineries and equipment subject of replevin form part of
Yamamotos capital contributions in consideration of his equity in
NLII and should thus be treated as corporate property; and that
the above-said letter of Atty. Doce to Yamamoto was merely a

proposal, "conditioned on [Yamamotos] sell-out to . . . Nishino of

his entire equity,"10 which proposal was yet to be authorized by the
stockholders and Board of Directors of NLII.
By way of Counterclaim, respondents, alleging that they suffered
damage due to the seizure via the implementation of the writ of
replevin over the machineries and equipment, prayed for the award
to them of moral and exemplary damages, attorneys fees and
litigation expenses, and costs of suit.
The trial court, by Decision of June 9, 1995, decided the case in
favor of Yamamoto,11 disposing thus:
WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff
as the rightful owner and possessor of the machineries in question,
and making the writ of seizure permanent; (2) ordering defendants
to pay plaintiff attorneys fees and expenses of litigation in the
amount of Fifty Thousand Pesos (P50,000.00), Philippine Currency;
(3) dismissing defendants counterclaims for lack of merit; and (4)
ordering defendants to pay the costs of suit.
SO ORDERED.12 (Underscoring supplied)
On appeal,13 the Court of Appeals held in favor of herein
respondents and accordingly reversed the RTC decision and
dismissed the complaint.14 In so holding, the appellate court found
that the machineries and equipment claimed by Yamamoto are
corporate property of NLII and may not thus be retrieved without
the authority of the NLII Board of Directors; 15 and that petitioners
argument that Nishino and Yamamoto cannot hide behind the
shield of corporate fiction does not lie, 16 nor does petitioners
invocation of the doctrine of promissory estoppel. 17 At the same
time, the Court of Appeals found no ground to support respondents
Counterclaim.18
The Court of Appeals having denied 19 his Motion for
Reconsideration,20 Yamamoto filed the present petition,21 faulting
the Court of Appeals
A.
x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION
SHOULD NOT BE PIERCED IN THE CASE AT BAR.
B.
x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY
ESTOPPEL DOES NOT APPLY TO THE CASE AT BAR.
C.
x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR
ATTORNEYS FEES.22
The resolution of the petition hinges, in the main, on whether the
advice in the letter of Atty. Doce that Yamamoto may retrieve the
machineries and equipment, which admittedly were part of his
investment, bound the corporation. The Court holds in the
negative.
Indeed, without a Board Resolution authorizing respondent Nishino
to act for and in behalf of the corporation, he cannot bind the latter.
Under the Corporation Law, unless otherwise provided, corporate
powers are exercised by the Board of Directors.23
Urging this Court to pierce the veil of corporate fiction, Yamamoto
argues, viz:
During the negotiations, the issue as to the ownership of the
Machiner[ies] never came up. Neither did the issue on the proper
procedure to be taken to execute the complete take-over of the

Company come up since Ikuo, Yoshinobu, and Yamamoto were the

owners thereof, the presence of other stockholders being only for
the purpose of complying with the minimum requirements of the
law.
What course of action the Company decides to do or not to do
depends not on the "other members of the Board of Directors". It
depends on what Ikuo and Yoshinobu decide. The Company is but a
mere instrumentality of Ikuo [and] Yoshinobu.24
xxxx
x x x The Company hardly holds board meetings. It has an inactive
board, the directors are directors in name only and are there to do
the bidding of the Nish[i]nos, nothing more. Its minutes are paper
minutes. x x x 25
xxxx
The fact that the parties started at a 70-30 ratio and Yamamotos
percentage declined to 10% does not mean the 20% went to
others. x x x The 20% went to no one else but Ikuo himself. x x x
Yoshinobu is the younger brother of Ikuo and has no say at all in
the business. Only Ikuo makes the decisions. There were,
therefore, no other members of the Board who have not given their
approval.26 (Emphasis and underscoring supplied)
While the veil of separate corporate personality may be pierced
when the corporation is merely an adjunct, a business conduit, or
alter ego of a person,27 the mere ownership by a single stockholder
of even all or nearly all of the capital stocks of a corporation is not
by itself a sufficient ground to disregard the separate corporate
personality.28
The elements determinative of the applicability of the doctrine of
piercing the veil of corporate fiction follow:
"1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
the plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the instrumentality or alter ego
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendants
relationship to that operation."29 (Italics in the original; emphasis
and underscoring supplied)
In relation to the second element, to disregard the separate
juridical personality of a corporation, the wrongdoing or unjust act
in contravention of a plaintiffs legal rights must be clearly and
convincingly established; it cannot be presumed. 30 Without a
demonstration that any of the evils sought to be prevented by the
doctrine is present, it does not apply.31
In the case at bar, there is no showing that Nishino used the
separate personality of NLII to unjustly act or do wrong to
Yamamoto in contravention of his legal rights.

Yamamoto argues, in another vein, that promissory estoppel lies

against respondents, thus:
Under the doctrine of promissory estoppel, x x x estoppel may arise
from the making of a promise, even though without consideration,
if it was intended that the promise should be relied upon and in fact
it was relied upon, and if a refusal to enforce it would be virtually to
sanction the perpetration of fraud or would result in other injustice.
x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company.
For this purpose negotiations were had between the parties. Having
expressly given Yamamoto, through the Letter and through a
subsequent meeting at the Manila Peninsula where Ikuo himself
confirmed that Yamamoto may take out the Machinery from the
Company anytime, respondents should not be allowed to turn
around and do the exact opposite of what they have represented
they will do.
In paragraph twelve (12) of the Letter, Yamamoto was expressly
advised that he could take out the Machinery if he wanted to so,
provided that the value of said machines would be deducted from
his capital contribution x x x.
xxxx
Respondents cannot now argue that they did not intend for
Yamamoto to rely upon the Letter. That was the purpose of the
Letter to begin with. Petitioner[s] in fact, relied upon said Letter
and such reliance was further strengthened during their meeting at
the Manila Peninsula.
To sanction respondents attempt to evade their obligation would be
to sanction the perpetration of fraud and injustice against
petitioner.32 (Underscoring supplied)
It bears noting, however, that the aforementioned paragraph 12 of
the letter is followed by a request for Yamamoto to give his
"comments on all the above, soonest."33
What was thus proffered to Yamamoto was not a promise, but a
mere offer, subject to his acceptance. Without acceptance, a mere
offer produces no obligation.34
Thus, under Article 1181 of the Civil Code, "[i]n conditional
obligations, the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition." In the case at bar,
there is no showing of compliance with the condition for allowing
Yamamoto to take the machineries G.R. No. 165744
August 11, 2008
OSCAR C. REYES, petitioner,
vs.
HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH
INSURANCE CORPORATION, and RODRIGO C. REYES, respondents.
DECISION
Reyes v. RTC of Makati [G.R. No. 165744. August 11, 2008]
03
OCT
.date
OSCAR C. REYES, petitioner,
vs.
HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH
INSURANCE CORPORATION and RODRIGO C. REYES, respondents.

[G.R. No. 165744. August 11, 2008]

FACTS:
Petitioner and private respondent were siblings together with two
others, namely Pedro and Anastacia, in a family business
established as Zenith Insurance Corporation (Zenith), from which
they owned shares of stocks. The Pedro and Anastacia
subsequently died. The former had his estate judicially partitioned
among his heirs, but the latter had not made the same in her
shareholding in Zenith. Zenith and Rodrigo filed a complaint with
the Securities and Exchange Commission (SEC) against petitioner
(1) a derivative suit to obtain accounting of funds and assets of
Zenith, and (2) to determine the shares of stock of deceased Pedro
and Anastacia that were arbitrarily and fraudulently appropriated
[by Oscar, and were unaccounted for]. In his answer with
counterclaim, petitioner denied the illegality of the acquisition of
shares of Anastacia and questioned the jurisdiction of SEC to
entertain the complaint because it pertains to settlement of
[Anastacias] estate. The case was transferred to. Petitioner filed
Motion to Declare Complaint as Nuisance or Harassment Suit and
must be dismissed. RTC denied the motion. The motion was
elevated to the Court of Appeals by way of petition for certiorari,
prohibition and mandamus, but was again denied.
ISSUES:
Mercantile Law
(1) Whether or not Rodrigo may be considered a stockholder of
Zenith with respect to the shareholdings originally belonging to
Anastacia.
(2) Whether or not there is an intra-corporate relationship
between the parties that would characterize the case as an intracorporate dispute?
Remedial Law
(1) Whether or not the complaint is a mere nuisance or
harassment suit that should be dismissed under the Interim Rules
of Procedure of Intra-Corporate Controversies;
(2) Whether or not the complaint is a derivative suit within the
jurisdiction of the RTC acting as a special commercial court.
RULINGS:
Mercantile Law
(1) No. Rodrigo must, hurdle two obstacles before he can be
considered a stockholder of Zenith with respect to the
shareholdings originally belonging to Anastacia. First, he must
prove that there are shareholdings that will be left to him and his
co-heirs, and this can be determined only in a settlement of the
decedents estate. No such proceeding has been commenced to
date. Second, he must register the transfer of the shares allotted to
him to make it binding against the corporation. He cannot demand
that this be done unless and until he has established his specific
allotment (and prima facie ownership) of the shares. Without the
settlement of Anastacias estate, there can be no definite partition
and distribution of the estate to the heirs. Without the partition
and distribution, there can be no registration of the transfer. And
without the registration, we cannot consider the transferee-heir a
stockholder who may invoke the existence of an intra-corporate
relationship as premise for an intra-corporate controversy within
the jurisdiction of a special commercial court. The subject shares of

stock (i.e., Anastacias shares) are concerned Rodrigo cannot be

considered a stockholder of Zenith.
(2) No. Court cannot declare that an intra-corporate relationship
exists that would serve as basis to bring this case within the special
commercial courts jurisdiction under Section 5(b) of PD 902-A, as
amended because Rodrigos complaint failed the relationship test
above.
Remedial Law
(1) Yes. The rule is that a complaint must contain a plain, concise,
and direct statement of the ultimate facts constituting the plaintiffs
cause of action and must specify the relief sought. Section 5, Rule
8 of the Revised Rules of Court provides that in all averments of
fraud or mistake, the circumstances constituting fraud or mistake
must be stated with particularity. These rules find specific
application to Section 5(a) of P.D. No. 902-A which speaks of
corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the
stockholders.
Allegations
of
deceit,
machination,
false
pretenses,
misrepresentation, and threats are largely conclusions of law that,
without supporting statements of the facts to which the allegations
of fraud refer, do not sufficiently state an effective cause of
action. Fraud and mistake are required to be averred with
particularity in order to enable the opposing party to controvert the
particular facts allegedly constituting such fraud or mistake. Tested
against these standards, charges of fraud against Oscar were not
properly supported by the required factual allegations. While the
complaint contained allegations of fraud purportedly committed by
him, these allegations are not particular enough to bring the
controversy within the special commercial courts jurisdiction; they
are not statements of ultimate facts, but are mere conclusions of
law: how and why the alleged appropriation of shares can be
characterized as illegal and fraudulent were not explained nor
elaborated on. The case must be dismissed.
(2) No. The allegations of the present complaint do not amount to
a derivative suit. First, as already discussed above, Rodrigo is not a
shareholder with respect to the shareholdings originally belonging
to Anastacia; he only stands as a transferee-heir whose rights to
the share are inchoate and unrecorded. Second, in order that a
stockholder may show a right to sue on behalf of the corporation,
he must allege with some particularity in his complaint that he has
exhausted his remedies within the corporation by making a
sufficient demand upon the directors or other officers for
appropriate relief with the expressed intent to sue if relief is
denied. Lastly, Court found no injury, actual or threatened, alleged
to have been done to the corporation due to Oscars acts. If indeed
he illegally and fraudulently transferred Anastacias shares in his
own name, then the damage is not to the corporation but to his coheirs; the wrongful transfer did not affect the capital stock or the
assets of Zenith.
In summary, whether as an individual or as a derivative suit, the
RTC sitting as special commercial court has no jurisdiction to
hear Rodrigos complaint since what is involved is the determination
and distribution of successional rights to the shareholdings of
Anastacia
Reyes. Rodrigos
proper
remedy,
under
the

circumstances, is to institute a special proceeding for the

settlement of the estate of the deceased Anastacia Reyes, a move
that is not foreclosed by the dismissal of his present complaint.
BRION, J.:
This Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeks to set aside the Decision of the Court of Appeals (CA) 1
promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA
Decision affirmed the Order of the Regional Trial Court (RTC),
Branch 142, Makati City dated November 29, 2002 2 in Civil Case
No. 00-1553 (entitled "Accounting of All Corporate Funds and
Assets, and Damages") which denied petitioner Oscar C. Reyes
(Oscar) Motion to Declare Complaint as Nuisance or Harassment
Suit.
BACKGROUND FACTS
Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two
of the four children of the spouses Pedro and Anastacia Reyes.
Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of
Zenith Insurance Corporation (Zenith), a domestic corporation
established by their family. Pedro died in 1964, while Anastacia
died in 1993. Although Pedros estate was judicially partitioned
among his heirs sometime in the 1970s, no similar settlement and
partition appear to have been made with Anastacias estate, which
included her shareholdings in Zenith. As of June 30, 1990,
Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo
owned 8,715,637 and 4,250 shares, respectively.3
On May 9, 2000, Zenith and Rodrigo filed a complaint 4 with the
Securities and Exchange Commission (SEC) against Oscar,
docketed as SEC Case No. 05-00-6615. The complaint stated that
it is "a derivative suit initiated and filed by the complainant Rodrigo
C. Reyes to obtain an accounting of the funds and assets of
ZENITH INSURANCE CORPORATION which are now or formerly in
the control, custody, and/or possession of respondent [herein
petitioner Oscar] and to determine the shares of stock of deceased
spouses Pedro and Anastacia Reyes that were arbitrarily and
fraudulently appropriated [by Oscar] for himself [and] which were
not collated and taken into account in the partition, distribution,
and/or settlement of the estate of the deceased spouses, for which
he should be ordered to account for all the income from the time
he took these shares of stock, and should now deliver to his
brothers and sisters their just and respective shares."5 [Emphasis
supplied.]
In his Answer with Counterclaim, 6 Oscar denied the charge that he
illegally acquired the shares of Anastacia Reyes. He asserted, as a
defense, that he purchased the subject shares with his own funds
from the unissued stocks of Zenith, and that the suit is not a bona
fide derivative suit because the requisites therefor have not been
complied with. He thus questioned the SECs jurisdiction to
entertain the complaint because it pertains to the settlement of the
estate of Anastacia Reyes.
When Republic Act (R.A.) No. 87997 took effect, the SECs exclusive
and original jurisdiction over cases enumerated in Section 5 of
Presidential Decree (P.D.) No. 902-A was transferred to the RTC
designated as a special commercial court. 8 The records of Rodrigos
SEC case were thus turned over to the RTC, Branch 142, Makati,
and docketed as Civil Case No. 00-1553.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as

Nuisance or Harassment Suit.9 He claimed that the complaint is a
mere nuisance or harassment suit and should, according to the
Interim Rules of Procedure for Intra-Corporate Controversies, be
dismissed; and that it is not a bona fide derivative suit as it
partakes of the nature of a petition for the settlement of estate of
the deceased Anastacia that is outside the jurisdiction of a special
commercial court. The RTC, in its Order dated November 29, 2002
(RTC Order), denied the motion in part and declared:
A close reading of the Complaint disclosed the presence of two (2)
causes of action, namely: a) a derivative suit for accounting of the
funds and assets of the corporation which are in the control,
custody, and/or possession of the respondent [herein petitioner
Oscar] with prayer to appoint a management committee; and b) an
action for determination of the shares of stock of deceased spouses
Pedro and Anastacia Reyes allegedly taken by respondent, its
accounting and the corresponding delivery of these shares to the
parties brothers and sisters. The latter is not a derivative suit and
should properly be threshed out in a petition for settlement of
estate.
Accordingly, the motion is denied. However, only the derivative suit
consisting of the first cause of action will be taken cognizance of by
this Court.10
Oscar thereupon went to the CA on a petition for certiorari,
prohibition, and mandamus11 and prayed that the RTC Order be
annulled and set aside and that the trial court be prohibited from
continuing with the proceedings. The appellate court affirmed the
RTC Order and denied the petition in its Decision dated May 26,
2004. It likewise denied Oscars motion for reconsideration in a
Resolution dated October 21, 2004.
Petitioner now comes before us on appeal through a petition for
review on certiorari under Rule 45 of the Rules of Court.
ASSIGNMENT OF ERRORS
Petitioner Oscar presents the following points as conclusions the CA
should have made:
1. that the complaint is a mere nuisance or harassment suit that
should be dismissed under the Interim Rules of Procedure of IntraCorporate Controversies; and
2. that the complaint is not a bona fide derivative suit but is in fact
in the nature of a petition for settlement of estate; hence, it is
outside the jurisdiction of the RTC acting as a special commercial
court.
Accordingly, he prays for the setting aside and annulment of the CA
decision and resolution, and the dismissal of Rodrigos complaint
before the RTC.
THE COURTS RULING
We find the petition meritorious.
The core question for our determination is whether the trial court,
sitting as a special commercial court, has jurisdiction over the
subject matter of Rodrigos complaint. To resolve it, we rely on the
judicial principle that "jurisdiction over the subject matter of a case
is conferred by law and is determined by the allegations of the
complaint, irrespective of whether the plaintiff is entitled to all or
some of the claims asserted therein."12
JURISDICTION OF SPECIAL COMMERCIAL COURTS

P.D. No. 902-A enumerates the cases over which the SEC (now the
RTC acting as a special commercial court) exercises exclusive
jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative functions
of the Securities and Exchange Commission over corporations,
partnership, and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases
involving:
a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners,
members of associations or organizations registered with the
Commission.
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members, or associates, respectively; and between such
corporation, partnership or association and the State insofar as it
concerns their individual franchise or right to exist as such entity;
and
c) Controversies in the election or appointment of directors,
trustees, officers, or managers of such corporations, partnerships,
or associations.
The allegations set forth in Rodrigos complaint principally invoke
Section 5, paragraphs (a) and (b) above as basis for the exercise of
the RTCs special court jurisdiction. Our focus in examining the
allegations of the complaint shall therefore be on these two
provisions.
Fraudulent Devices and Schemes
The rule is that a complaint must contain a plain, concise, and
direct statement of the ultimate facts constituting the plaintiffs
cause of action and must specify the relief sought. 13 Section 5, Rule
8 of the Revised Rules of Court provides that in all averments of
fraud or mistake, the circumstances constituting fraud or mistake
must be stated with particularity.14 These rules find specific
application to Section 5(a) of P.D. No. 902-A which speaks of
corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the
stockholders.
In an attempt to hold Oscar responsible for corporate fraud,
Rodrigo alleged in the complaint the following:
3. This is a complaintto determine the shares of stock of the
deceased spouses Pedro and Anastacia Reyes that were arbitrarily
and fraudulently appropriated for himself [herein petitioner Oscar]
which were not collated and taken into account in the partition,
distribution, and/or settlement of the estate of the deceased
Spouses Pedro and Anastacia Reyes, for which he should be
ordered to account for all the income from the time he took these
shares of stock, and should now deliver to his brothers and sisters
their just and respective shares with the corresponding equivalent
amount of P7,099,934.82 plus interest thereon from 1978
representing his obligations to the Associated Citizens Bank that

was paid for his account by his late mother, Anastacia C. Reyes.
This amount was not collated or taken into account in the partition
or distribution of the estate of their late mother, Anastacia C.
Reyes.
3.1. Respondent Oscar C. Reyes, through other schemes of fraud
including misrepresentation, unilaterally, and for his own benefit,
capriciously transferred and took possession and control of the
management of Zenith Insurance Corporation which is considered
as a family corporation, and other properties and businesses
belonging to Spouses Pedro and Anastacia Reyes.
xxxx
4.1. During the increase of capitalization of Zenith Insurance
Corporation, sometime in 1968, the property covered by TCT No.
225324 was illegally and fraudulently used by respondent as a
collateral.
xxxx
5. The complainant Rodrigo C. Reyes discovered that by some
manipulative scheme, the shareholdings of their deceased mother,
Doa Anastacia C. Reyes, shares of stocks and [sic] valued in the
corporate books at P7,699,934.28, more or less, excluding interest
and/or dividends, had been transferred solely in the name of
respondent.
By
such
fraudulent
manipulations
and
misrepresentation, the shareholdings of said respondent Oscar C.
Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic]
the majority stockholder of Zenith Insurance Corporation, which
portion of said shares must be distributed equally amongst the
brothers and sisters of the respondent Oscar C. Reyes including the
complainant herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes and
Anastacia C. Reyes valued at P7,099,934.28 were illegally and
fraudulently transferred solely to the respondents [herein
petitioner Oscar] name and installed himself as a majority
stockholder of Zenith Insurance Corporation [and] thereby deprived
his brothers and sisters of their respective equal shares thereof
including complainant hereto.
xxxx
10.1 By refusal of the respondent to account of his [sic]
shareholdings in the company, he illegally and fraudulently
transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated
and/or distributed equally amongst the children, including the
complainant Rodrigo C. Reyes herein, to their damage and
prejudice.
xxxx
11.1 By continuous refusal of the respondent to account of his [sic]
shareholding with Zenith Insurance Corporation[,] particularly the
number of shares of stocks illegally and fraudulently transferred to
him from their deceased parents Sps. Pedro and Anastacia Reyes[,]
which are all subject for collation and/or partition in equal shares
among their children. [Emphasis supplied.]
Allegations
of
deceit,
machination,
false
pretenses,
misrepresentation, and threats are largely conclusions of law that,
without supporting statements of the facts to which the allegations
of fraud refer, do not sufficiently state an effective cause of action. 15

The late Justice Jose Feria, a noted authority in Remedial Law,

declared that fraud and mistake are required to be averred with
particularity in order to enable the opposing party to controvert the
particular facts allegedly constituting such fraud or mistake. 16
Tested against these standards, we find that the charges of fraud
against Oscar were not properly supported by the required factual
allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not particular
enough to bring the controversy within the special commercial
courts jurisdiction; they are not statements of ultimate facts, but
are mere conclusions of law: how and why the alleged
appropriation of shares can be characterized as "illegal and
fraudulent" were not explained nor elaborated on.
Not every allegation of fraud done in a corporate setting or
perpetrated by corporate officers will bring the case within the
special commercial courts jurisdiction. To fall within this
jurisdiction, there must be sufficient nexus showing that the
corporations nature, structure, or powers were used to facilitate
the fraudulent device or scheme. Contrary to this concept, the
complaint presented a reverse situation. No corporate power or
office was alleged to have facilitated the transfer of the shares;
rather, Oscar, as an individual and without reference to his
corporate personality, was alleged to have transferred the shares of
Anastacia to his name, allowing him to become the majority and
controlling stockholder of Zenith, and eventually, the corporations
President. This is the essence of the complaint read as a whole and
is particularly demonstrated under the following allegations:
5. The complainant Rodrigo C. Reyes discovered that by some
manipulative scheme, the shareholdings of their deceased mother,
Doa Anastacia C. Reyes, shares of stocks and [sic] valued in the
corporate books at P7,699,934.28, more or less, excluding interest
and/or dividends, had been transferred solely in the name of
respondent.
By
such
fraudulent
manipulations
and
misrepresentation, the shareholdings of said respondent Oscar C.
Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic]
the majority stockholder of Zenith Insurance Corporation, which
portion of said shares must be distributed equally amongst the
brothers and sisters of the respondent Oscar C. Reyes including the
complainant herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes and
Anastacia C. Reyes valued at P7,099,934.28 were illegally and
fraudulently transferred solely to the respondents [herein
petitioner Oscar] name and installed himself as a majority
stockholder of Zenith Insurance Corporation [and] thereby deprived
his brothers and sisters of their respective equal shares thereof
including complainant hereto. [Emphasis supplied.]
In ordinary cases, the failure to specifically allege the fraudulent
acts does not constitute a ground for dismissal since such defect
can be cured by a bill of particulars. In cases governed by the
Interim Rules of Procedure on Intra-Corporate Controversies,
however, a bill of particulars is a prohibited pleading. 17 It is
essential, therefore, for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant
wishes to invoke the courts special commercial jurisdiction.

We note that twice in the course of this case, Rodrigo had been
given the opportunity to study the propriety of amending or
withdrawing the complaint, but he consistently refused. The courts
function in resolving issues of jurisdiction is limited to the review of
the allegations of the complaint and, on the basis of these
allegations, to the determination of whether they are of such
nature and subject that they fall within the terms of the law
defining the courts jurisdiction. Regretfully, we cannot read into the
complaint any specifically alleged corporate fraud that will call for
the exercise of the courts special commercial jurisdiction. Thus, we
cannot affirm the RTCs assumption of jurisdiction over Rodrigos
complaint on the basis of Section 5(a) of P.D. No. 902-A.18
Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in the
Courts approach in classifying what constitutes an intra-corporate
controversy. Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate controversy was
limited to a consideration of the intra-corporate relationship
existing between or among the parties. 19 The types of relationships
embraced under Section 5(b), as declared in the case of Union
Glass & Container Corp. v. SEC,20 were as follows:
a) between the corporation, partnership, or association and the
public;
b) between the corporation, partnership, or association and its
stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the
State as far as its franchise, permit or license to operate is
concerned; and
d) among the stockholders, partners, or associates themselves.
[Emphasis supplied.]
The existence of any of the above intra-corporate relations was
sufficient to confer jurisdiction to the SEC, regardless of the subject
matter of the dispute. This came to be known as the relationship
test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol
Mountain Reserve, Inc.,21 the Court introduced the nature of the
controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an
intra-corporate controversy; to rely on the relationship test alone
will divest the regular courts of their jurisdiction for the sole reason
that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or
minimizing the value of the nature of the transactions which gives
rise to the dispute.
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. 22 The controversy
must not only be rooted in the existence of an intra-corporate
relationship, but must as well pertain to the enforcement of the
parties correlative rights and obligations under the Corporation
Code and the internal and intra-corporate regulatory rules of the
corporation. If the relationship and its incidents are merely
incidental to the controversy or if there will still be conflict even if
the relationship does not exist, then no intra-corporate controversy
exists.

The Court then combined the two tests and declared that
jurisdiction should be determined by considering not only the status
or relationship of the parties, but also the nature of the question
under controversy.23 This two-tier test was adopted in the recent
case of Speed Distribution, Inc. v. Court of Appeals:24
To determine whether a case involves an intra-corporate
controversy, and is to be heard and decided by the branches of the
RTC specifically designated by the Court to try and decide such
cases, two elements must concur: (a) the status or relationship of
the parties; and (2) the nature of the question that is the subject of
their controversy.
The first element requires that the controversy must arise out of
intra-corporate or partnership relations between any or all of the
parties and the corporation, partnership, or association of which
they are stockholders, members or associates; between any or all
of them and the corporation, partnership, or association of which
they are stockholders, members, or associates, respectively; and
between such corporation, partnership, or association and the State
insofar as it concerns their individual franchises. The second
element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. If the nature of
the controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate
controversy.
Given these standards, we now tackle the question posed for our
determination under the specific circumstances of this case:
Application of the Relationship Test
Is there an intra-corporate relationship between the parties that
would characterize the case as an intra-corporate dispute?
We point out at the outset that while Rodrigo holds shares of stock
in Zenith, he holds them in two capacities: in his own right with
respect to the 4,250 shares registered in his name, and as one of
the heirs of Anastacia Reyes with respect to the 136,598 shares
registered in her name. What is material in resolving the issues of
this case under the allegations of the complaint is Rodrigos interest
as an heir since the subject matter of the present controversy
centers on the shares of stocks belonging to Anastacia, not on
Rodrigos personally-owned shares nor on his personality as
shareholder owning these shares. In this light, all reference to
shares of stocks in this case shall pertain to the shareholdings of
the deceased Anastacia and the parties interest therein as her
heirs.
Article 777 of the Civil Code declares that the successional rights
are transmitted from the moment of death of the decedent.
Accordingly, upon Anastacias death, her children acquired legal
title to her estate (which title includes her shareholdings in Zenith),
and they are, prior to the estates partition, deemed co-owners
thereof.25 This status as co-owners, however, does not immediately
and necessarily make them stockholders of the corporation. Unless
and until there is compliance with Section 63 of the Corporation
Code on the manner of transferring shares, the heirs do not
become registered stockholders of the corporation. Section 63
provides:
Section 63. Certificate of stock and transfer of shares. The capital
stock of stock corporations shall be divided into shares for which

certificates
signed
by
the
president
or
vice-president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names
of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates, and the number of shares
transferred. [Emphasis supplied.]
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
Simply stated, the transfer of title by means of succession, though
effective and valid between the parties involved (i.e., between the
decedents estate and her heirs), does not bind the corporation and
third parties. The transfer must be registered in the books of the
corporation to make the transferee-heir a stockholder entitled to
recognition as such both by the corporation and by third parties. 26
We note, in relation with the above statement, that in Abejo v.
Dela Cruz27 and TCL Sales Corporation v. Court of Appeals 28 we did
not require the registration of the transfer before considering the
transferee a stockholder of the corporation (in effect upholding the
existence of an intra-corporate relation between the parties and
bringing the case within the jurisdiction of the SEC as an intracorporate controversy). A marked difference, however, exists
between these cases and the present one.
In Abejo and TCL Sales, the transferees held definite and
uncontested titles to a specific number of shares of the corporation;
after the transferee had established prima facie ownership over the
shares of stocks in question, registration became a mere formality
in confirming their status as stockholders. In the present case,
each of Anastacias heirs holds only an undivided interest in the
shares. This interest, at this point, is still inchoate and subject to
the outcome of a settlement proceeding; the right of the heirs to
specific, distributive shares of inheritance will not be determined
until all the debts of the estate of the decedent are paid. In short,
the heirs are only entitled to what remains after payment of the
decedents debts;29 whether there will be residue remains to be
seen. Justice Jurado aptly puts it as follows:
No succession shall be declared unless and until a liquidation of the
assets and debts left by the decedent shall have been made and all
his creditors are fully paid. Until a final liquidation is made and all
the debts are paid, the right of the heirs to inherit remains
inchoate. This is so because under our rules of procedure,
liquidation is necessary in order to determine whether or not the
decedent has left any liquid assets which may be transmitted to his
heirs.30 [Emphasis supplied.]
Rodrigo must, therefore, hurdle two obstacles before he can be
considered a stockholder of Zenith with respect to the
shareholdings originally belonging to Anastacia. First, he must
prove that there are shareholdings that will be left to him and his
co-heirs, and this can be determined only in a settlement of the
decedents estate. No such proceeding has been commenced to

date. Second, he must register the transfer of the shares allotted to

him to make it binding against the corporation. He cannot demand
that this be done unless and until he has established his specific
allotment (and prima facie ownership) of the shares. Without the
settlement of Anastacias estate, there can be no definite partition
and distribution of the estate to the heirs. Without the partition and
distribution, there can be no registration of the transfer. And
without the registration, we cannot consider the transferee-heir a
stockholder who may invoke the existence of an intra-corporate
relationship as premise for an intra-corporate controversy within
the jurisdiction of a special commercial court.
In sum, we find that insofar as the subject shares of stock (i.e.,
Anastacias shares) are concerned Rodrigo cannot be considered
a stockholder of Zenith. Consequently, we cannot declare that an
intra-corporate relationship exists that would serve as basis to
bring this case within the special commercial courts jurisdiction
under Section 5(b) of PD 902-A, as amended. Rodrigos complaint,
therefore, fails the relationship test.
Application of the Nature of Controversy Test
The body rather than the title of the complaint determines the
nature of an action.31 Our examination of the complaint yields the
conclusion that, more than anything else, the complaint is about
the protection and enforcement of successional rights. The
controversy it presents is purely civil rather than corporate,
although it is denominated as a "complaint for accounting of all
corporate funds and assets."
Contrary to the findings of both the trial and appellate courts, we
read only one cause of action alleged in the complaint. The
"derivative suit for accounting of the funds and assets of the
corporation which are in the control, custody, and/or possession of
the respondent [herein petitioner Oscar]" does not constitute a
separate cause of action but is, as correctly claimed by Oscar, only
an incident to the "action for determination of the shares of stock
of deceased spouses Pedro and Anastacia Reyes allegedly taken by
respondent, its accounting and the corresponding delivery of these
shares to the parties brothers and sisters." There can be no
mistake of the relationship between the "accounting" mentioned in
the complaint and the objective of partition and distribution when
Rodrigo claimed in paragraph 10.1 of the complaint that:
10.1 By refusal of the respondent to account of [sic] his
shareholdings in the company, he illegally and fraudulently
transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated
and/or distributed equally amongst the children including the
complainant Rodrigo C. Reyes herein to their damage and
prejudice.
We particularly note that the complaint contained no sufficient
allegation that justified the need for an accounting other than to
determine the extent of Anastacias shareholdings for purposes of
distribution.
Another significant indicator that points us to the real nature of the
complaint are Rodrigos repeated claims of illegal and fraudulent
transfers of Anastacias shares by Oscar to the prejudice of the
other heirs of the decedent; he cited these allegedly fraudulent acts
as basis for his demand for the collation and distribution of

Anastacias shares to the heirs. These claims tell us unequivocally

that the present controversy arose from the parties relationship as
heirs of Anastacia and not as shareholders of Zenith. Rodrigo, in
filing the complaint, is enforcing his rights as a co-heir and not as a
stockholder of Zenith. The injury he seeks to remedy is one
suffered by an heir (for the impairment of his successional rights)
and not by the corporation nor by Rodrigo as a shareholder on
record.
More than the matters of injury and redress, what Rodrigo clearly
aims to accomplish through his allegations of illegal acquisition by
Oscar is the distribution of Anastacias shareholdings without a
prior settlement of her estate an objective that, by law and
established jurisprudence, cannot be done. The RTC of Makati,
acting as a special commercial court, has no jurisdiction to settle,
partition, and distribute the estate of a deceased. A relevant
provision Section 2 of Rule 90 of the Revised Rules of Court
that contemplates properties of the decedent held by one of the
heirs declares:
Questions as to advancement made or alleged to have been made
by the deceased to any heir may be heard and determined by the
court having jurisdiction of the estate proceedings; and the final
order of the court thereon shall be binding on the person raising
the questions and on the heir. [Emphasis supplied.]
Worth noting are this Courts statements in the case of Natcher v.
Court of Appeals:32
Matters which involve settlement and distribution of the estate of
the decedent fall within the exclusive province of the probate court
in the exercise of its limited jurisdiction.
xxxx
It is clear that trial courts trying an ordinary action cannot resolve
to perform acts pertaining to a special proceeding because it is
subject to specific prescribed rules. [Emphasis supplied.]
That an accounting of the funds and assets of Zenith to determine
the extent and value of Anastacias shareholdings will be
undertaken by a probate court and not by a special commercial
court is completely consistent with the probate courts limited
jurisdiction. It has the power to enforce an accounting as a
necessary means to its authority to determine the properties
included in the inventory of the estate to be administered, divided
up, and distributed. Beyond this, the determination of title or
ownership over the subject shares (whether belonging to Anastacia
or Oscar) may be conclusively settled by the probate court as a
question of collation or advancement. We had occasion to recognize
the courts authority to act on questions of title or ownership in a
collation or advancement situation in Coca v. Pangilinan33 where we
ruled:
It should be clarified that whether a particular matter should be
resolved by the Court of First Instance in the exercise of its general
jurisdiction or of its limited probate jurisdiction is in reality not a
jurisdictional question. In essence, it is a procedural question
involving a mode of practice "which may be waived."
As a general rule, the question as to title to property should not be
passed upon in the testate or intestate proceeding. That question
should be ventilated in a separate action. That general rule has
qualifications or exceptions justified by expediency and

convenience.
Thus, the probate court may provisionally pass upon in an intestate
or testate proceeding the question of inclusion in, or exclusion
from, the inventory of a piece of property without prejudice to its
final determination in a separate action.
Although generally, a probate court may not decide a question of
title or ownership, yet if the interested parties are all heirs, or the
question is one of collation or advancement, or the parties consent
to the assumption of jurisdiction by the probate court and the
rights of third parties are not impaired, the probate court is
competent to decide the question of ownership. [Citations omitted.
Emphasis supplied.]
In sum, we hold that the nature of the present controversy is not
one which may be classified as an intra-corporate dispute and is
beyond the jurisdiction of the special commercial court to resolve.
In short, Rodrigos complaint also fails the nature of the
controversy test.
DERIVATIVE SUIT
Rodrigos bare claim that the complaint is a derivative suit will not
suffice to confer jurisdiction on the RTC (as a special commercial
court) if he cannot comply with the requisites for the existence of a
derivative suit. These requisites are:
a. the party bringing suit should be a shareholder during the time
of the act or transaction complained of, the number of shares not
being material;
b. the party 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. 34
Based on these standards, we hold that the allegations of the
present complaint do not amount to a derivative suit.
First, as already discussed above, Rodrigo is not a shareholder with
respect to the shareholdings originally belonging to Anastacia; he
only stands as a transferee-heir whose rights to the share are
inchoate and unrecorded. With respect to his own individually-held
shareholdings, Rodrigo has not alleged any individual cause or
basis as a shareholder on record to proceed against Oscar.
Second, in order that a stockholder may show a right to sue on
behalf of the corporation, he must allege with some particularity in
his complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the directors or
other officers for appropriate relief with the expressed intent to sue
if relief is denied.35 Paragraph 8 of the complaint hardly satisfies
this requirement since what the rule contemplates is the
exhaustion of remedies within the corporate setting:
8. As members of the same family, complainant Rodrigo C. Reyes
has resorted [to] and exhausted all legal means of resolving the
dispute with the end view of amicably settling the case, but the
dispute between them ensued.
Lastly, we find no injury, actual or threatened, alleged to have been
done to the corporation due to Oscars acts. If indeed he illegally
and fraudulently transferred Anastacias shares in his own name,
then the damage is not to the corporation but to his co-heirs; the

wrongful transfer did not affect the capital stock or the assets of
Zenith. As already mentioned, neither has Rodrigo alleged any
particular cause or wrongdoing against the corporation that he can
champion in his capacity as a shareholder on record.36
In summary, whether as an individual or as a derivative suit, the
RTC sitting as special commercial court has no jurisdiction to
hear Rodrigos complaint since what is involved is the determination
and distribution of successional rights to the shareholdings of
Anastacia
Reyes.
Rodrigos
proper
remedy,
under
the
circumstances, is to institute a special proceeding for the
settlement of the estate of the deceased Anastacia Reyes, a move
that is not foreclosed by the dismissal of his present complaint.
WHEREFORE, we hereby GRANT the petition and REVERSE the
decision of the Court of Appeals dated May 26, 2004 in CA-G.R. SP
No. 74970. The complaint before the Regional Trial Court, Branch
142, Makati, docketed as Civil Case No. 00-1553, is ordered
DISMISSED for lack of jurisdiction.
SO ORDERED.and equipment, namely, his agreement to the
deduction of their value from his capital contribution due him in the
buy-out of his interests in NLII. Yamamotos allegation that he
agreed to the condition 35 remained just that, no proof thereof
having been presented.
The machineries and equipment, which comprised Yamamotos
investment in NLII,36 thus remained part of the capital property of
the corporation.37
It is settled that the property of a corporation is not the property of
its stockholders or members. 38 Under the trust fund doctrine, the
capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors
which are preferred over the stockholders in the distribution of
corporate assets.39 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 unless the
indispensable conditions and procedures for the protection of
corporate creditors are followed.40
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.

WHEREFORE, premises considered, this Petition is hereby

DISMISSED. However, public respondent is hereby DIRECTED to
instruct his Clerk of Court to compute the proper docket fees and
thereafter, to order the private respondent to pay the same
IMMEDIATELY.
SO ORDERED.7

SECOND DIVISION
G.R. No. 168863
June 23, 2009
HI-YIELD REALTY, INCORPORATED, Petitioner,
vs.
HON. COURT OF APPEALS, HON. CESAR O. UNTALAN,
in his capacity as PRESIDING JUDGE OF RTC-MAKATI,
BRANCH 142, HONORIO TORRES & SONS, INC., and
ROBERTO H. TORRES, Respondents.

DECISION
QUISUMBING, J.:
This is a special civil action for certiorari seeking to nullify and set
aside the Decision1 dated March 10, 2005 and Resolution 2 dated
May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919.
The appellate court had dismissed the petition for certiorari and
prohibition filed by petitioner and denied its reconsideration.
The antecedent facts of the case are undisputed.
On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of
Honorio Torres & Sons, Inc. (HTSI), filed a Petition for Annulment
of Real Estate Mortgage and Foreclosure Sale 3 over two parcels of
land located in Marikina and Quezon City. The suit was filed against
Leonora, Ma. Theresa, Glenn and Stephanie, all surnamed Torres,
the Register of Deeds of Marikina and Quezon City, and petitioner
Hi-Yield Realty, Inc. (Hi-Yield). It was docketed as Civil Case No.
03-892 with Branch 148 of the Regional Trial Court (RTC) of Makati
City.
On September 15, 2003, petitioner moved to dismiss the petition
on grounds of improper venue and payment of insufficient docket
fees. The RTC denied said motion in an Order4 dated January 22,
2004. The trial court held that the case was, in nature, a real action
in the form of a derivative suit cognizable by a special commercial
court pursuant to Administrative Matter No. 00-11-03-SC. 5
Petitioner sought reconsideration, but its motion was denied in an
Order6 dated April 27, 2004.
Thereafter, petitioner filed a petition for certiorari and prohibition
before the Court of Appeals. In a Decision dated March 10, 2005,
the appellate court agreed with the RTC that the case was a
derivative suit. It further ruled that the prayer for annulment of
mortgage and foreclosure proceedings was merely incidental to the
main action. The dispositive portion of said decision reads:

Petitioners motion for reconsideration8 was denied in a Resolution

dated May 26, 2005.
Hence, this petition which raises the following issues:
I.
WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED
ITS DISCRETION IN NOT DISMISSING THE CASE AGAINST HIYIELD FOR IMPROPER VENUE DESPITE FINDINGS BY THE TRIAL
COURT THAT THE ACTION IS A REAL ACTION.
II.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT
DISMISSING THE COMPLAINT AS AGAINST HI-YIELD EVEN IF THE
JOINDER OF PARTIES IN THE COMPLAINT VIOLATED THE RULES
ON VENUE.
III.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT THE ANNULMENT OF REAL ESTATE MORTGAGE AND
FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL
[TO] THE DERIVATIVE SUIT.9
The pivotal issues for resolution are as follows: (1) whether venue
was properly laid; (2) whether there was proper joinder of parties;
and (3) whether the action to annul the real estate mortgage and
foreclosure sale is a mere incident of the derivative suit.
Petitioner imputes grave abuse of discretion on the Court of
Appeals for not dismissing the case against it even as the trial court
found the same to be a real action. It explains that the rule on
venue under the Rules of Court prevails over the rule prescribing
the venue for intra-corporate controversies; hence, HTSI erred
when it filed its suit only in Makati when the lands subjects of the
case are in Marikina and Quezon City. Further, petitioner argues
that the appellate court erred in ruling that the action is mainly a
derivative suit and the annulment of real estate mortgage and
foreclosure sale is merely incidental thereto. It points out that the
caption of the case, substance of the allegations, and relief prayed
for revealed that the main thrust of the action is to recover the
lands. Lastly, petitioner asserts that it should be dropped as a party
to the case for it has been wrongly impleaded as a non-stockholder
defendant in the intra-corporate dispute.
On the other hand, respondents maintain that the action is
primarily a derivative suit to redress the alleged unauthorized acts
of its corporate officers and major stockholders in connection with
the lands. They postulate that the nullification of the mortgage and
foreclosure sale would just be a logical consequence of a decision
adverse to said officers and stockholders.
After careful consideration, we are in agreement that the petition
must be dismissed.

A petition for certiorari is proper if a tribunal, board or officer

exercising judicial or quasi-judicial functions acted without or in
excess of jurisdiction or with grave abuse of discretion amounting
to lack or excess of jurisdiction and there is no appeal, or any plain,
speedy and adequate remedy in the ordinary course of law.10
Petitioner sought a review of the trial courts Orders dated January
22, 2004 and April 27, 2004 via a petition for certiorari before the
Court of Appeals. In rendering the assailed decision and resolution,
the Court of Appeals was acting under its concurrent jurisdiction to
entertain petitions for certiorari under paragraph 2, 11 Section 4 of
Rule 65 of the Rules of Court. Thus, if erroneous, the decision and
resolution of the appellate court should properly be assailed by
means of a petition for review on certiorari under Rule 45 of the
Rules of Court. The distinction is clear: a petition for certiorari
seeks to correct errors of jurisdiction while a petition for review on
certiorari seeks to correct errors of judgment committed by the
court a quo.12 Indeed, this Court has often reminded members of
the bench and bar that a special civil action for certiorari under
Rule 65 lies only when there is no appeal nor plain, speedy and
adequate remedy in the ordinary course of law.13 In the case at
hand, petitioner impetuously filed a petition for certiorari before us
when a petition for review was available as a speedy and adequate
remedy. Notably, petitioner filed the present petition 58 14 days after
it received a copy of the assailed resolution dated May 26, 2005. To
our mind, this belated action evidences petitioners effort to
substitute for a lost appeal this petition for certiorari.
For the extraordinary remedy of certiorari to lie by reason of grave
abuse of discretion, the abuse of discretion must be so patent and
gross as to amount to an evasion of positive duty, or a virtual
refusal to perform the duty enjoined or to act in contemplation of
law, or where the power is exercised in an arbitrary and despotic
manner by reason of passion and personal hostility.15 We find no
grave abuse of discretion on the part of the appellate court in this
case.
Simply, the resolution of the issues posed by petitioner rests on a
determination of the nature of the petition filed by respondents in
the RTC. Both the RTC and Court of Appeals ruled that the action is
in the form of a derivative suit although captioned as a petition for
annulment of real estate mortgage and foreclosure sale.
A derivative action is a suit by a shareholder to enforce a corporate
cause of action.16 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 on behalf of the corporation
in order to protect or vindicate corporate rights whenever the

officials of the corporation refuse to sue, or are the ones to be

sued, or hold control of the corporation. In such actions, the
corporation is the real party-in-interest while the suing stockholder,
on behalf of the corporation, is only a nominal party.17
In the case of Filipinas Port Services, Inc. v. Go, 18 we enumerated
the foregoing requisites before a stockholder can file a derivative
suit:
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. 19
Even then, not every suit filed on behalf of the corporation is a
derivative suit. For a derivative suit to prosper, the minority
stockholder suing for and on behalf of the corporation must allege
in his complaint that he is suing on a derivative cause of action on
behalf of the corporation and all other stockholders similarly
situated who may wish to join him in the suit. 20 The Court finds that
Roberto had satisfied this requirement in paragraph five (5) of his
petition which reads:
5. Individual petitioner, being a minority stockholder, is instituting
the instant proceeding by way of a derivative suit to redress
wrongs done to petitioner corporation and vindicate corporate
rights due to the mismanagement and abuses committed against it
by its officers and controlling stockholders, especially by
respondent Leonora H. Torres (Leonora, for brevity) who, without
authority from the Board of Directors, arrogated upon herself the
power to bind petitioner corporation from incurring loan obligations
and later allow company properties to be foreclosed as hereinafter
set forth;21
Further, while it is true that the complaining stockholder must
satisfactorily show that he has exhausted all means to redress his
grievances within the corporation; such remedy is no longer
necessary where the corporation itself is under the complete
control of the person against whom the suit is being filed. 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.221avvphi1
Here, Roberto alleged in his petition that earnest efforts were made

to reach a compromise among family members/stockholders before

he filed the case. He also maintained that Leonora Torres held 55%
of the outstanding shares while Ma. Theresa, Glenn and Stephanie
excluded him from the affairs of the corporation. Even more glaring
was the fact that from June 10, 1992, when the first mortgage
deed was executed until July 23, 2002, when the properties
mortgaged were foreclosed, the Board of Directors of HTSI did
nothing to rectify the alleged unauthorized transactions of Leonora.
Clearly, Roberto could not expect relief from the board.
Derivative suits are governed by a special set of rules under A.M.
No. 01-2-04-SC23 otherwise known as the Interim Rules of
Procedure Governing Intra-Corporate Controversies under Republic
Act No. 8799.24 Section 1,25 Rule 1 thereof expressly lists derivative
suits among the cases covered by it.
As regards the venue of derivative suits, Section 5, Rule 1 of A.M.
No. 01-2-04-SC states:
SEC. 5. Venue. - All actions covered by these Rules shall be
commenced and tried in the Regional Trial Court which has
jurisdiction over the principal office of the corporation, partnership,
or association concerned. Where the principal office of the
corporation, partnership or association is registered in the
Securities and Exchange Commission as Metro Manila, the action
must be filed in the city or municipality where the head office is
located.
Thus, the Court of Appeals did not commit grave abuse of
discretion when it found that respondents correctly filed the
derivative suit before the Makati RTC where HTSI had its principal
office.
There being no showing of any grave abuse of discretion on the
part of the Court of Appeals the other alleged errors will no longer
be passed upon as mere errors of judgment are not proper subjects
of a petition for certiorari.
WHEREFORE, the instant petition is hereby DISMISSED. The
Decision dated March 10, 2005 and the Resolution dated May 26,
2005 of the Court of Appeals in CA-G.R. SP. No. 83919 are
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.