G.R. No.

L-23145

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS,

deceased. RENATO D. TAYAG, ancillary administratorappellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administratorappellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositorappellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the
domiciliary administrator, the County Trust Company of
New York, United States of America, of the estate of the
deceased Idonah Slade Perkins, who died in New York
City on March 27, 1960, to surrender to the ancillary
administrator in the Philippines the stock certificates
owned by her in a Philippine corporation, Benguet
Consolidated, Inc., to satisfy the legitimate claims of
local creditors, the lower court, then presided by the
Honorable Arsenio Santos, now retired, issued on May
18, 1964, an order of this tenor: "After considering the
motion of the ancillary administrator, dated February
11, 1964, as well as the opposition filed by the Benguet
Consolidated, Inc., the Court hereby (1) considers as
lost for all purposes in connection with the
administration and liquidation of the Philippine estate
of Idonah Slade Perkins the stock certificates covering
the 33,002 shares of stock standing in her name in the
books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation
to issue new certificates in lieu thereof, the same to be
delivered by said corporation to either the incumbent
ancillary administrator or to the Probate Division of this
Court."1
From such an order, an appeal was taken to this Court
not by the domiciliary administrator, the County Trust
Company of New York, but by the Philippine
corporation, the Benguet Consolidated, Inc. The appeal
cannot possibly prosper. The challenged order
represents a response and expresses a policy, to
paraphrase Frankfurter, arising out of a specific
problem, addressed to the attainment of specific ends
by the use of specific remedies, with full and ample
support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of
appellant Benguet Consolidated, Inc., Idonah Slade
Perkins, who died on March 27, 1960 in New York City,
left among others, two stock certificates covering
33,002 shares of appellant, the certificates being in the
possession of the County Trust Company of New York,
which as noted, is the domiciliary administrator of the
estate of the deceased.2 Then came this portion of the
appellant's brief: "On August 12, 1960, Prospero
Sanidad instituted ancillary administration proceedings
in the Court of First Instance of Manila; Lazaro A.
Marquez was appointed ancillary administrator, and on
January 22, 1963, he was substituted by the appellee
Renato D. Tayag. A dispute arose between the
domiciary administrator in New York and the ancillary
administrator in the Philippines as to which of them
was entitled to the possession of the stock certificates
in question. On January 27, 1964, the Court of First
Instance of Manila ordered the domiciliary

administrator, County Trust Company, to "produce and

deposit" them with the ancillary administrator or with
the Clerk of Court. The domiciliary administrator did
not comply with the order, and on February 11, 1964,
the ancillary administrator petitioned the court to
"issue an order declaring the certificate or certificates
of stocks covering the 33,002 shares issued in the
name of Idonah Slade Perkins by Benguet
Consolidated, Inc., be declared [or] considered as
lost."3
It is to be noted further that appellant Benguet
Consolidated, Inc. admits that "it is immaterial" as far
as it is concerned as to "who is entitled to the
possession of the stock certificates in question;
appellant opposed the petition of the ancillary
administrator because the said stock certificates are in
existence, they are today in the possession of the
domiciliary administrator, the County Trust Company,
in New York, U.S.A...."4
It is its view, therefore, that under the circumstances,
the stock certificates cannot be declared or considered
as lost. Moreover, it would allege that there was a
failure to observe certain requirements of its by-laws
before new stock certificates could be issued. Hence,
its appeal.
As was made clear at the outset of this opinion, the
appeal lacks merit. The challenged order constitutes an
emphatic affirmation of judicial authority sought to be
emasculated by the wilful conduct of the domiciliary
administrator in refusing to accord obedience to a
court decree. How, then, can this order be stigmatized
as illegal?
As is true of many problems confronting the judiciary,
such a response was called for by the realities of the
situation. What cannot be ignored is that conduct
bordering on wilful defiance, if it had not actually
reached it, cannot without undue loss of judicial
prestige, be condoned or tolerated. For the law is not
so lacking in flexibility and resourcefulness as to
preclude such a solution, the more so as deeper
reflection would make clear its being buttressed by
indisputable principles and supported by the strongest
policy considerations.
It can truly be said then that the result arrived at
upheld and vindicated the honor of the judiciary no less
than that of the country. Through this challenged order,
there is thus dispelled the atmosphere of contingent
frustration brought about by the persistence of the
domiciliary administrator to hold on to the stock
certificates after it had, as admitted, voluntarily
submitted itself to the jurisdiction of the lower court by
entering its appearance through counsel on June 27,
1963, and filing a petition for relief from a previous
order of March 15, 1963.
Thus did the lower court, in the order now on appeal,
impart vitality and effectiveness to what was decreed.
For without it, what it had been decided would be set
at naught and nullified. Unless such a blatant disregard
by the domiciliary administrator, with residence
abroad, of what was previously ordained by a court
order could be thus remedied, it would have entailed,
insofar as this matter was concerned, not a partial but
a well-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute

the power of the appellee ancillary administrator to
gain control and possession of all assets of the
decedent within the jurisdiction of the Philippines. Nor
could it. Such a power is inherent in his duty to settle
her estate and satisfy the claims of local creditors. 5 As
Justice Tuason speaking for this Court made clear, it is
a "general rule universally recognized" that
administration, whether principal or ancillary, certainly
"extends to the assets of a decedent found within the
state or country where it was granted," the corollary
being "that an administrator appointed in one state or
country has no power over property in another state or
country."6
It is to be noted that the scope of the power of the
ancillary administrator was, in an earlier case, set forth
by Justice Malcolm. Thus: "It is often necessary to have
more than one administration of an estate. When a
person dies intestate owning property in the country of
his domicile as well as in a foreign country,
administration is had in both countries. That which is
granted in the jurisdiction of decedent's last domicile is
termed the principal administration, while any other
administration is termed the ancillary administration.
The reason for the latter is because a grant of
administration does not ex proprio vigore have any
effect beyond the limits of the country in which it is
granted. Hence, an administrator appointed in a
foreign state has no authority in the [Philippines]. The
ancillary administration is proper, whenever a person
dies, leaving in a country other than that of his last
domicile, property to be administered in the nature of
assets of the deceased liable for his individual debts or
to be distributed among his heirs."7
It would follow then that the authority of the probate
court to require that ancillary administrator's right to
"the stock certificates covering the 33,002 shares ...
standing in her name in the books of [appellant]
Benguet Consolidated, Inc...." be respected is equally
beyond question. For appellant is a Philippine
corporation owing full allegiance and subject to the
unrestricted jurisdiction of local courts. Its shares of
stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector
of Internal Revenue8 finds application. "In the instant
case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled [here]." To
the force of the above undeniable proposition, not even
appellant is insensible. It does not dispute it. Nor could
it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that
argue in a rather conclusive fashion for the legality of
the challenged order, how does appellant, Benguet
Consolidated, Inc. propose to carry the extremely
heavy burden of persuasion of precisely demonstrating
the contrary? It would assign as the basic error
allegedly committed by the lower court its "considering
as lost the stock certificates covering 33,002 shares of
Benguet belonging to the deceased Idonah Slade
Perkins, ..."9 More specifically, appellant would stress
that the "lower court could not "consider as lost" the
stock certificates in question when, as a matter of fact,
his Honor the trial Judge knew, and does know, and it is
admitted by the appellee, that the said stock
certificates are in existence and are today in the

possession of the domiciliary administrator in New

York."10
There may be an element of fiction in the above view
of the lower court. That certainly does not suffice to
call for the reversal of the appealed order. Since there
is a refusal, persistently adhered to by the domiciliary
administrator in New York, to deliver the shares of
stocks of appellant corporation owned by the decedent
to the ancillary administrator in the Philippines, there
was nothing unreasonable or arbitrary in considering
them as lost and requiring the appellant to issue new
certificates in lieu thereof. Thereby, the task incumbent
under the law on the ancillary administrator could be
discharged and his responsibility fulfilled.
Any other view would result in the compliance to a
valid judicial order being made to depend on the
uncontrolled discretion of the party or entity, in this
case domiciled abroad, which thus far has shown the
utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in
all seriousness that a judicial decree could be treated
as a mere scrap of paper, the court issuing it being
powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as
found by the lower court did not correspond exactly
with the facts. To be more blunt, the quality of truth
may be lacking in such a conclusion arrived at. It is to
be remembered however, again to borrow from
Frankfurter, "that fictions which the law may rely upon
in the pursuit of legitimate ends have played an
important part in its development."11
Speaking of the common law in its earlier period,
Cardozo could state fictions "were devices to advance
the ends of justice, [even if] clumsy and at times
offensive."12 Some of them have persisted even to the
present, that eminent jurist, noting "the quasi contract,
the adopted child, the constructive trust, all of
flourishing vitality, to attest the empire of "as if"
today."13 He likewise noted "a class of fictions of
another order, the fiction which is a working tool of
thought, but which at times hides itself from view till
reflection and analysis have brought it to the light." 14
What cannot be disputed, therefore, is the at times
indispensable role that fictions as such played in the
law. There should be then on the part of the appellant a
further refinement in the catholicity of its
condemnation of such judicial technique. If ever an
occasion did call for the employment of a legal fiction
to put an end to the anomalous situation of a valid
judicial order being disregarded with apparent
impunity, this is it. What is thus most obvious is that
this particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to
bolster the above contention by its invoking one of the
provisions of its by-laws which would set forth the
procedure to be followed in case of a lost, stolen or
destroyed stock certificate; it would stress that in the
event of a contest or the pendency of an action
regarding ownership of such certificate or certificates
of stock allegedly lost, stolen or destroyed, the
issuance of a new certificate or certificates would await
the "final decision by [a] court regarding the ownership
[thereof]."15

Such reliance is misplaced. In the first place, there is

no such occasion to apply such by-law. It is admitted
that the foreign domiciliary administrator did not
appeal from the order now in question. Moreover, there
is likewise the express admission of appellant that as
far as it is concerned, "it is immaterial ... who is
entitled to the possession of the stock certificates ..."
Even if such were not the case, it would be a legal
absurdity to impart to such a provision conclusiveness
and finality. Assuming that a contrariety exists between
the above by-law and the command of a court decree,
the latter is to be followed.
It is understandable, as Cardozo pointed out, that the
Constitution overrides a statute, to which, however, the
judiciary must yield deference, when appropriately
invoked and deemed applicable. It would be most
highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order
that a court must not only take note of it but yield to its
alleged controlling force.
The fear of appellant of a contingent liability with which
it could be saddled unless the appealed order be set
aside for its inconsistency with one of its by-laws does
not impress us. Its obedience to a lawful court order
certainly constitutes a valid defense, assuming that
such apprehension of a possible court action against it
could possibly materialize. Thus far, nothing in the
circumstances as they have developed gives substance
to such a fear. Gossamer possibilities of a future
prejudice to appellant do not suffice to nullify the
lawful exercise of judicial authority.
4. What is more the view adopted by appellant
Benguet Consolidated, Inc. is fraught with implications
at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a
corporation is an artificial being created by operation of
law...."16 It owes its life to the state, its birth being
purely dependent on its will. As Berle so aptly stated:
"Classically, a corporation was conceived as an
artificial person, owing its existence through creation
by a sovereign power."17As a matter of fact, the
statutory language employed owes much to Chief
Justice Marshall, who in the Dartmouth College decision
defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation
of law."18
The well-known authority Fletcher could summarize the
matter thus: "A corporation is not in fact and in reality
a person, but the law treats it as though it were a
person by process of fiction, or by regarding it as an
artificial person distinct and separate from its
individual stockholders.... It owes its existence to law. It
is an artificial person created by law for certain specific
purposes, the extent of whose existence, powers and
liberties is fixed by its charter."19 Dean Pound's terse
summary, a juristic person, resulting from an
association of human beings granted legal personality
by the state, puts the matter neatly.20
There is thus a rejection of
Gierke's genossenchaft theory, the basic theme of
which to quote from Friedmann, "is the reality of the
group as a social and legal entity, independent of state
recognition and concession."21 A corporation as known
to Philippine jurisprudence is a creature without any

existence until it has received the imprimatur of the

state according to law. It is logically inconceivable
therefore that it will have rights and privileges of a
higher priority than that of its creator. More than that,
it cannot legitimately refuse to yield obedience to acts
of its state organs, certainly not excluding the judiciary,
whenever called upon to do so.
As a matter of fact, a corporation once it comes into
being, following American law still of persuasive
authority in our jurisdiction, comes more often within
the ken of the judiciary than the other two coordinate
branches. It institutes the appropriate court action to
enforce its right. Correlatively, it is not immune from
judicial control in those instances, where a duty under
the law as ascertained in an appropriate legal
proceeding is cast upon it.
To assert that it can choose which court order to follow
and which to disregard is to confer upon it not
autonomy which may be conceded but license which
cannot be tolerated. It is to argue that it may, when so
minded, overrule the state, the source of its very
existence; it is to contend that what any of its
governmental organs may lawfully require could be
ignored at will. So extravagant a claim cannot possibly
merit approval.
5. One last point. In Viloria v. Administrator of Veterans
Affairs,22 it was shown that in a guardianship
proceedings then pending in a lower court, the United
States Veterans Administration filed a motion for the
refund of a certain sum of money paid to the minor
under guardianship, alleging that the lower court had
previously granted its petition to consider the
deceased father as not entitled to guerilla benefits
according to a determination arrived at by its main
office in the United States. The motion was denied. In
seeking a reconsideration of such order, the
Administrator relied on an American federal statute
making his decisions "final and conclusive on all
questions of law or fact" precluding any other American
official to examine the matter anew, "except a judge or
judges of the United States court."23 Reconsideration
was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the
lower court. Thus: "We are of the opinion that the
appeal should be rejected. The provisions of the U.S.
Code, invoked by the appellant, make the decisions of
the U.S. Veterans' Administrator final and conclusive
when made on claims property submitted to him for
resolution; but they are not applicable to the present
case, where the Administrator is not acting as a judge
but as a litigant. There is a great difference between
actions against the Administrator (which must be filed
strictly in accordance with the conditions that are
imposed by the Veterans' Act, including the exclusive
review by United States courts), and those actions
where the Veterans' Administrator seeks a remedy
from our courts and submits to their jurisdiction by
filing actions therein. Our attention has not been called
to any law or treaty that would make the findings of
the Veterans' Administrator, in actions where he is a
party, conclusive on our courts. That, in effect, would
deprive our tribunals of judicial discretion and render
them mere subordinate instrumentalities of the
Veterans' Administrator."
It is bad enough as the Viloria decision made patent for
our judiciary to accept as final and conclusive,

determinations made by foreign governmental

agencies. It is infinitely worse if through the absence of
any coercive power by our courts over juridical persons
within our jurisdiction, the force and effectivity of their
orders could be made to depend on the whim or
caprice of alien entities. It is difficult to imagine of a
situation more offensive to the dignity of the bench or
the honor of the country.
Yet that would be the effect, even if unintended, of the
proposition to which appellant Benguet Consolidated
seems to be firmly committed as shown by its failure to
accept the validity of the order complained of; it seeks
its reversal. Certainly we must at all pains see to it that
it does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the
necessity of negative response from us. That is what
appellant will get.
That is all then that this case presents. It is obvious
why the appeal cannot succeed. It is always easy to
conjure extreme and even oppressive possibilities. That
is not decisive. It does not settle the issue. What
carries weight and conviction is the result arrived at,
the just solution obtained, grounded in the soundest of
legal doctrines and distinguished by its correspondence
with what a sense of realism requires. For through the
appealed order, the imperative requirement of justice
according to law is satisfied and national dignity and
honor maintained.
WHEREFORE, the appealed order of the Honorable
Arsenio Santos, the Judge of the Court of First Instance,
dated May 18, 1964, is affirmed. With costs against
oppositor-appelant Benguet Consolidated, Inc.

G.R. No. L-17295

July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendantappellee.
Felicisimo E. Escaran for plaintiffs-appellants.
Office of the Solicitor General for defendant-appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of First
Instance of Iloilo by Ang Pue & Company, Ang Pue and
Tan Siong against the Secretary of Commerce and
Industry to secure judgment "declaring that plaintiffs
could extend for five years the term of the partnership
pursuant to the provisions of plaintiffs' Amendment to
the Article of Co-partnership."
The answer filed by the defendant alleged, in
substance, that the extension for another five years of
the term of the plaintiffs' partnership would be in
violation of the provisions of Republic Act No. 1180.
It appears that on May 1, 1953, Ang Pue and Tan Siong,
both Chinese citizens, organized the partnership Ang
Pue & Company for a term of five years from May 1,
1953, extendible by their mutual consent. The purpose
of the partnership was "to maintain the business of
general merchandising, buying and selling at wholesale
and retail, particularly of lumber, hardware and other

construction materials for commerce, either native or

foreign." The corresponding articles of partnership
(Exhibit B) were registered in the Office of the
Securities & Exchange Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted
to regulate the retail business. It provided, among
other things, that, after its enactment, a partnership
not wholly formed by Filipinos could continue to
engage in the retail business until the expiration of its
term.
On April 15, 1958 prior to the expiration of the fiveyear term of the partnership Ang Pue & Company, but
after the enactment of the Republic Act 1180, the
partners already mentioned amended the original
articles of part ownership (Exhibit B) so as to extend
the term of life of the partnership to another five years.
When the amended articles were presented for
registration in the Office of the Securities & Exchange
Commission on April 16, 1958, registration was refused
upon the ground that the extension was in violation of
the aforesaid Act.
From the decision of the lower court dismissing the
action, with costs, the plaintiffs interposed this appeal.
The question before us is too clear to require an
extended discussion. To organize a corporation or a
partnership that could claim a juridical personality of
its own and transact business as such, is not a matter
of absolute right but a privilege which may be enjoyed
only under such terms as the State may deem
necessary to impose. That the State, through Congress,
and in the manner provided by law, had the right to
enact Republic Act No. 1180 and to provide therein that
only Filipinos and concerns wholly owned by Filipinos
may engage in the retail business can not be seriously
disputed. That this provision was clearly intended to
apply to partnership already existing at the time of the
enactment of the law is clearly showing by its provision
giving them the right to continue engaging in their
retail business until the expiration of their term or life.
To argue that because the original articles of
partnership provided that the partners could extend
the term of the partnership, the provisions of Republic
Act 1180 cannot be adversely affect appellants herein,
is to erroneously assume that the aforesaid provision
constitute a property right of which the partners can
not be deprived without due process or without their
consent. The agreement contain therein must be
deemed subject to the law existing at the time when
the partners came to agree regarding the extension. In
the present case, as already stated, when the partners
amended the articles of partnership, the provisions of
Republic Act 1180 were already in force, and there can
be not the slightest doubt that the right claimed by
appellants to extend the original term of their
partnership to another five years would be in violation
of the clear intent and purpose of the law aforesaid.
WHEREFORE, the judgment appealed from is affirmed,
with costs.

G.R. No. 125469 October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND,
INC., respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the
government agency, under the direct general
supervision of the Office of the President, 1 with the
immense task of enforcing the Revised Securities Act,
and all other duties assigned to it by pertinent laws.
Among its inumerable functions, and one of the most
important, is the supervision of all corporations,
partnerships or associations, who are grantees of
primary franchise and/or a license or permit issued by
the government to operate in the Philippines. 2 Just
how far this regulatory authority extends, particularly,
with regard to the Petitioner Philippine Stock Exchange,
Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner
assails the resolution of the respondent Court of
Appeals, dated June 27, 1996, which affirmed the
decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc.
to be listed in its stock market, thus paving the way for
the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby
restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real
estate corporation, had sought to offer its shares to the
public in order to raise funds allegedly to develop its
properties and pay its loans with several banking
institutions. In January, 1995, PALI was issued a Permit
to Sell its shares to the public by the Securities and
Exchange Commission (SEC). To facilitate the trading of
its shares among investors, PALI sought to course the
trading of its shares through the Philippine Stock
Exchange, Inc. (PSE), for which purpose it filed with the
said stock exchange an application to list its shares,
with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE,
upon a perusal of PALI's application, recommended to
the PSE's Board of Governors the approval of PALI's
listing application.
On February 14, 1996, before it could act upon PALI's
application, the Board of Governors of the PSE received
a letter from the heirs of Ferdinand E. Marcos, claiming
that the late President Marcos was the legal and
beneficial owner of certain properties forming part of
the Puerto Azul Beach Hotel and Resort Complex which
PALI claims to be among its assets and that the Ternate
Development Corporation, which is among the
stockholders of PALI, likewise appears to have been
held and continue to be held in trust by one Rebecco
Panlilio for then President Marcos and now, effectively
for his estate, and requested PALI's application to be
deferred. PALI was requested to comment upon the
said letter.

PALI's answer stated that the properties forming part of

the Puerto Azul Beach Hotel and Resort Complex were
not claimed by PALI as its assets. On the contrary, the
resort is actually owned by Fantasia Filipina Resort, Inc.
and the Puerto Azul Country Club, entities distinct from
PALI. Furthermore, the Ternate Development
Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also
asserting legal and beneficial ownership of other
properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman
Magtanggol Gunigundo of the Presidential Commission
on Good Government (PCGG) requesting for comments
on the letters of the PALI and the Marcoses. On March
4, 1996, the PSE was informed that the Marcoses
received a Temporary Restraining Order on the same
date, enjoining the Marcoses from, among others,
"further impeding, obstructing, delaying or interfering
in any manner by or any means with the consideration,
processing and approval by the PSE of the initial public
offering of PALI." The TRO was issued by Judge Martin
S. Villarama, Executive Judge of the RTC of Pasig City in
Civil Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the
Board of Governors of the PSE reached its decision to
reject PALI's application, citing the existence of serious
claims, issues and circumstances surrounding PALI's
ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC
addressed to the then Acting Chairman, Perfecto R.
Yasay, Jr., bringing to the SEC's attention the action
taken by the PSE in the application of PALI for the
listing of its shares with the PSE, and requesting that
the SEC, in the exercise of its supervisory and
regulatory powers over stock exchanges under Section
6(j) of P.D. No. 902-A, review the PSE's action on PALI's
listing application and institute such measures as are
just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote
to the PSE, attaching thereto the letter of PALI and
directing the PSE to file its comments thereto within
five days from its receipt and for its authorized
representative to appear for an "inquiry" on the matter.
On April 22, 1996, the PSE submitted a letter to the
SEC containing its comments to the April 11, 1996
letter of PALI.
On April 24, 1996, the SEC rendered its Order,
reversing the PSE's decision. The dispositive portion of
the said order reads:
WHEREFORE, premises considered, and
invoking the Commissioner's authority
and jurisdiction under Section 3 of the
Revised Securities Act, in conjunction
with Section 3, 6(j) and 6(m) of
Presidential Decree No. 902-A, the
decision of the Board of Governors of
the Philippine Stock Exchange denying
the listing of shares of Puerto Azul
Land, Inc., is hereby set aside, and the
PSE is hereby ordered to immediately
cause the listing of the PALI shares in

the Exchange, without prejudice to its

authority to require PALI to disclose
such other material information it
deems necessary for the protection of
the investigating public.
This Order shall take effect
immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order
on April 29, 1996, which was, however denied by the
Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the
Commission finds no compelling reason
to reconsider its order dated April 24,
1996, and in the light of recent
developments on the adverse claim
against the PALI properties, PSE should
require PALI to submit full disclosure of
material facts and information to
protect the investing public. In this
regard, PALI is hereby ordered to
amend its registration statements filed
with the Commission to incorporate the
full disclosure of these material facts
and information.
Dissatisfied with this ruling, the PSE filed with the Court
of Appeals on May 17, 1996 a Petition for Review (with
Application for Writ of Preliminary Injunction and
Temporary Restraining Order), assailing the above
mentioned orders of the SEC, submitting the following
as errors of the SEC:
I. SEC COMMITTED
SERIOUS ERROR AND
GRAVE ABUSE OF
DISCRETION IN ISSUING
THE ASSAILED ORDERS
WITHOUT POWER,
JURISDICTION, OR
AUTHORITY; SEC HAS
NO POWER TO ORDER
THE LISTING AND SALE
OF SHARES OF PALI
WHOSE ASSETS ARE
SEQUESTERED AND TO
REVIEW AND
SUBSTITUTE DECISIONS
OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED
SERIOUS ERROR AND
GRAVE ABUSE OF
DISCRETION IN
FINDING THAT PSE
ACTED IN AN
ARBITRARY AND
ABUSIVE MANNER IN
DISAPPROVING PALI'S
LISTING APPLICATION;
III. THE ASSAILED
ORDERS OF SEC ARE
ILLEGAL AND VOID FOR
ALLOWING FURTHER

DISPOSITION OF
PROPERTIES IN
CUSTODIA LEGIS AND
WHICH FORM PART OF
NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL
DISCLOSURE OF THE
SEC WAS NOT
PROPERLY
PROMULGATED AND
ITS IMPLEMENTATION
AND APPLICATION IN
THIS CASE VIOLATES
THE DUE PROCESS
CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition
for Review and subsequently, a Comment and Motion
to Dismiss. On June 10, 1996, PSE fled its Reply to
Comment and Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its
Resolution dismissing the PSE's Petition for Review.
Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the decision of
the petitioner PSE, pursuant to Section 3 3 of the
Revised Securities Act in relation to Section 6(j) and
6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the
Revised Securities Act, and for the purpose of ensuring
fair administration of the exchange. Both as a
corporation and as a stock exchange, the petitioner is
subject to public respondent's jurisdiction, regulation
and control. Accepting the argument that the public
respondent has the authority merely to supervise or
regulate, would amount to serious consequences,
considering that the petitioner is a stock exchange
whose business is impressed with public interest.
Abuse is not remote if the public respondent is left
without any system of control. If the securities act
vested the public respondent with jurisdiction and
control over all corporations; the power to authorize
the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to
alter and supplement rules of the exchange in the
listing or delisting of securities, then the law certainly
granted to the public respondent the plenary authority
over the petitioner; and the power of review
necessarily comes within its authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SEC's
ruling to the effect that:
. . . the Philippine Stock Exchange has
acted in an arbitrary and abusive
manner in disapproving the application
of PALI for listing of its shares in the
face of the following considerations:
1. PALI has clearly and admittedly
complied with the Listing Rules and full
disclosure requirements of the
Exchange;

2. In applying its clear and reasonable

standards on the suitability for listing of
shares, PSE has failed to justify why it
acted differently on the application of
PALI, as compared to the IPOs of other
companies similarly situated that were
allowed listing in the Exchange;
3. It appears that the claims and issues
on the title to PALI's properties were
even less serious than the claims
against the assets of the other
companies in that, the assertions of the
Marcoses that they are owners of the
disputed properties were not
substantiated enough to overcome the
strength of a title to properties issued
under the Torrens System as evidence
of ownership thereof;
4. No action has been filed in any court
of competent jurisdiction seeking to
nullify PALI's ownership over the
disputed properties, neither has the
government instituted recovery
proceedings against these properties.
Yet the import of PSE's decision in
denying PALI's application is that it
would be PALI, not the Marcoses, that
must go to court to prove the legality
of its ownership on these properties
before its shares can be listed.
In addition, the argument that the PALI properties
belong to the Military/Naval Reservation does not
inspire belief. The point is, the PALI properties are now
titled. A property losses its public character the
moment it is covered by a title. As a matter of fact, the
titles have long been settled by a final judgment; and
the final decree having been registered, they can no
longer be re-opened considering that the one year
period has already passed. Lastly, the determination of
what standard to apply in allowing PALI's application
for listing, whether the discretion method or the
system of public disclosure adhered to by the SEC,
should be addressed to the Securities Commission, it
being the government agency that exercises both
supervisory and regulatory authority over all
corporations.
On August 15, 19961 the PSE, after it was granted an
extension, filed the instant Petition for Review
on Certiorari, taking exception to the rulings of the SEC
and the Court of Appeals. Respondent PALI filed its
Comment to the petition on October 17, 1996. On the
same date, the PCGG filed a Motion for Leave to file a
Petition for Intervention. This was followed up by the
PCGG's Petition for Intervention on October 21, 1996. A
supplemental Comment was filed by PALI on October
25, 1997. The Office of the Solicitor General,
representing the SEC and the Court of Appeals, likewise
filed its Comment on December 26, 1996. In answer to
the PCGG's motion for leave to file petition for
intervention, PALI filed its Comment thereto on January
17, 1997, whereas the PSE filed its own Comment on
January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated
Reply to the comments of respondent PALI (October 17,
1996) and the Solicitor General (December 26, 1996).

On May 16, 1997, PALI filed its Rejoinder to the said

consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling
that the SEC had authority to order the PSE to list the
shares of PALI in the stock exchange. Under
presidential decree No. 902-A, the powers of the SEC
over stock exchanges are more limited as compared to
its authority over ordinary corporations. In connection
with this, the powers of the SEC over stock exchanges
under the Revised Securities Act are specifically
enumerated, and these do not include the power to
reverse the decisions of the stock exchange.
Authorities are in abundance even in the United States,
from which the country's security policies are
patterned, to the effect of giving the Securities
Commission less control over stock exchanges, which
in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock
to the public through the stock exchange. This is in
accord with the "business judgment rule" whereby the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. the said rule precludes the
reversal of the decision of the PSE to deny PALI's listing
application, absent a showing of bad faith on the part
of the PSE. Under the listing rules of the PSE, to which
PALI had previously agreed to comply, the PSE retains
the discretion to accept or reject applications for
listing. Thus, even if an issuer has complied with the
PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer's listing
application if the PSE determines that the listing shall
not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction
over sequestered corporations, nor with corporations
whose properties are under sequestration. A reading of
Republic of the Philippines vs. Sadiganbayan, G.R. No.
105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol
Development Corporation (MSDC). are under
sequestration by the PCGG, and subject of forfeiture
proceedings in the Sandiganbayan. This ruling of the
Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the
assets of these corporations were sequestered by the
PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals'
sanction that PALI's ownership over its properties can
no longer be questioned, since certificates of title have
been issued to PALI and more than one year has since
lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title
issued under the Torrens System is a conclusive
evidence of ownership is not an absolute rule and
admits certain exceptions. It is fundamental that forest
lands or military reservations are non-alienable. Thus,
when a title covers a forest reserve or a government
reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of
Appeals reliance on the alleged policy of "full
disclosure" to uphold the listing of PALI's shares with
the PSE, in the absence of a clear mandate for the
effectivity of such policy. As it is, the case records
reveal the truth that PALI did not comply with the
listing rules and disclosure requirements. In fact, PALI's
documents supporting its application contained

misrepresentations and misleading statements, and

concealed material information. The matter of
sequestration of PALI's properties and the fact that the
same form part of military/naval/forest reservations
were not reflected in PALI's application.

stock exchange. This is in line with the SEC's mission to

ensure proper compliance with the laws, such as the
Revised Securities Act and to regulate the sale and
disposition of securities in the country. 9 As the
appellate court explains:

It is undeniable that the petitioner PSE is not an

ordinary corporation, in that although it is clothed with
the markings of a corporate entity, it functions as the
primary channel through which the vessels of capital
trade ply. The PSE's relevance to the continued
operation and filtration of the securities transactions in
the country gives it a distinct color of importance such
that government intervention in its affairs becomes
justified, if not necessarily. Indeed, as the only
operational stock exchange in the country today, the
PSE enjoys a monopoly of securities transactions, and
as such, it yields an immense influence upon the
country's economy.

Paramount policy also supports the

authority of the public respondent to
review petitioner's denial of the listing.
Being a stock exchange, the petitioner
performs a function that is vital to the
national economy, as the business is
affected with public interest. As a
matter of fact, it has often been said
that the economy moves on the basis
of the rise and fall of stocks being
traded. By its economic power, the
petitioner certainly can dictate which
and how many users are allowed to sell
securities thru the facilities of a stock
exchange, if allowed to interpret its
own rules liberally as it may please.
Petitioner can either allow or deny the
entry to the market of securities. To
repeat, the monopoly, unless
accompanied by control, becomes
subject to abuse; hence, considering
public interest, then it should be
subject to government regulation.

Due to this special nature of stock exchanges, the

country's lawmakers has seen it wise to give special
treatment to the administration and regulation of stock
exchanges. 6
These provisions, read together with the general grant
of jurisdiction, and right of supervision and control over
all corporations under Sec. 3 of P.D. 902-A, give the
SEC the special mandate to be vigilant in the
supervision of the affairs of stock exchanges so that
the interests of the investing public may be fully
safeguard.
Section 3 of Presidential Decree 902-A, standing alone,
is enough authority to uphold the SEC's challenged
control authority over the petitioner PSE even as it
provides that "the Commission shall have absolute
jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the
grantees of primary franchises and/or a license or
permit issued by the government to operate in the
Philippines. . ." The SEC's regulatory authority over
private corporations encompasses a wide margin of
areas, touching nearly all of a corporation's concerns.
This authority springs from the fact that a corporation
owes its existence to the concession of its corporate
franchise from the state.
The SEC's power to look into the subject ruling of the
PSE, therefore, may be implied from or be considered
as necessary or incidental to the carrying out of the
SEC's express power to insure fair dealing in securities
traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise,
observed that the principal function of the SEC is the
supervision and control over corporations, partnerships
and associations with the end in view that investment
in these entities may be encouraged and protected,
and their activities for the promotion of economic
development. 8
Thus, it was in the alleged exercise of this authority
that the SEC reversed the decision of the PSE to deny
the application for listing in the stock exchange of the
private respondent PALI. The SEC's action was affirmed
by the Court of Appeals.
We affirm that the SEC is the entity with the primary
say as to whether or not securities, including shares of
stock of a corporation, may be traded or not in the

The role of the SEC in our national economy cannot be

minimized. The legislature, through the Revised
Securities Act, Presidential Decree No. 902-A, and other
pertinent laws, has entrusted to it the serious
responsibility of enforcing all laws affecting
corporations and other forms of associations not
otherwise vested in some other government office. 10
This is not to say, however, that the PSE's
management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation
authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE's
main concerns, as such, is still the generation of profit
for its stockholders. Moreover, the PSE has all the
rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to
enter (or not to enter) into contracts with third persons,
and to perform all other legal acts within its allocated
express or implied powers.
A corporation is but an association of individuals,
allowed to transact under an assumed corporate name,
and with a distinct legal personality. In organizing itself
as a collective body, it waives no constitutional
immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions,
therefore, the state will generally not interfere with the
same. Questions of policy and of management are left
to the honest decision of the officers and directors of a
corporation, and the courts are without authority to
substitute their judgment for the judgment of the board
of directors. The board is the business manager of the
corporation, and so long as it acts in good faith, its
orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC
over the PSE, and the resultant authority to reverse the
PSE's decision in matters of application for listing in the
market, the SEC may exercise such power only if the
PSE's judgment is attended by bad faith. In Board of

Liquidators vs. Kalaw, 13 it was held that bad faith does

not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity
and conscious doing of wrong. It means a breach of a
known duty through some motive or interest of ill will,
partaking of the nature of fraud.
In reaching its decision to deny the application for
listing of PALI, the PSE considered important facts,
which, in the general scheme, brings to serious
question the qualification of PALI to sell its shares to
the public through the stock exchange. During the time
for receiving objections to the application, the PSE
heard from the representative of the late President
Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the
Marcos estate. In time, the PCGG confirmed this claim.
In fact, an order of sequestration has been issued
covering the properties of PALI, and suit for
reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were
effectively transferred, despite the sequestration order,
from the TDC and MSDC to Rebecco Panlilio, and to the
private respondent PALI, in only a short span of time,
are not yet explained to the Court, but it is clear that
such circumstances give rise to serious doubt as to the
integrity of PALI as a stock issuer. The petitioner was in
the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the
general public. The purpose of the Revised Securities
Act, after all, is to give adequate and effective
protection to the investing public against fraudulent
representations, or false promises, and the imposition
of worthless ventures. 14
It is to be observed that the U.S. Securities Act
emphasized its avowed protection to acts detrimental
to legitimate business, thus:
The Securities Act, often referred to as
the "truth in securities" Act, was
designed not only to provide investors
with adequate information upon which
to base their decisions to buy and sell
securities, but also to protect
legitimate business seeking to obtain
capital through honest presentation
against competition from crooked
promoters and to prevent fraud in the
sale of securities. (Tenth Annual Report,
U.S. Securities & Exchange
Commission, p. 14).
As has been pointed out, the effects of
such an act are chiefly (1) prevention
of excesses and fraudulent
transactions, merely by requirement of
that their details be revealed; (2)
placing the market during the early
stages of the offering of a security a
body of information, which operating
indirectly through investment services
and expert investors, will tend to
produce a more accurate appraisal of a
security, . . . Thus, the Commission
may refuse to permit a registration
statement to become effective if it
appears on its face to be incomplete or
inaccurate in any material respect, and
empower the Commission to issue a
stop order suspending the

effectiveness of any registration

statement which is found to include
any untrue statement of a material fact
or to omit to state any material fact
required to be stated therein or
necessary to make the statements
therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has
established its name and goodwill, and it has the right
to protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to
transact through its facilities. It was reasonable for the
PSE, therefore, to exercise its judgment in the manner
it deems appropriate for its business identity, as long
as no rights are trampled upon, and public welfare is
safeguarded.
In this connection, it is proper to observe that the
concept of government absolutism is a thing of the
past, and should remain so.
The observation that the title of PALI over its properties
is absolute and can no longer be assailed is of no
moment. At this juncture, there is the claim that the
properties were owned by TDC and MSDC and were
transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the claim
of the Marcoses that such properties belong to the
Marcos estate, and were held only in trust by Rebecco
Panlilio. It is also alleged by the petitioner that these
properties belong to naval and forest reserves, and
therefore beyond private dominion. If any of these
claims is established to be true, the certificates of title
over the subject properties now held by PALI map be
disregarded, as it is an established rule that a
registration of a certificate of title does not confer
ownership over the properties described therein to the
person named as owner. The inscription in the registry,
to be effective, must be made in good faith. The
defense of indefeasibility of a Torrens Title does not
extend to a transferee who takes the certificate of title
with notice of a flaw.
In any case, for the purpose of determining whether
PSE acted correctly in refusing the application of PALI,
the true ownership of the properties of PALI need not
be determined as an absolute fact. What is material is
that the uncertainty of the properties' ownership and
alienability exists, and this puts to question the
qualification of PALI's public offering. In sum, the Court
finds that the SEC had acted arbitrarily in arrogating
unto itself the discretion of approving the application
for listing in the PSE of the private respondent PALI,
since this is a matter addressed to the sound discretion
of the PSE, a corporation entity, whose business
judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied
upon in approving the registration and sale of
securities in the SEC is not for the Court to determine,
but is left to the sound discretion of the Securities and
Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in
performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives
the SEC the power to promulgate such rules and
regulations as it may consider appropriate in the public
interest for the enforcement of the said laws. The
second paragraph of Section 4 of the said law, on the
other hand, provides that no security, unless exempt

by law, shall be issued, endorsed, sold, transferred or

in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for
the protection of investors by the Commission.
Presidential Decree No. 902-A, on the other hand,
provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over
the securities market as a whole, and as such, is given
ample authority in determining appropriate policies.
Pursuant to this regulatory authority, the SEC has
manifested that it has adopted the policy of "full
material disclosure" where all companies, listed or
applying for listing, are required to divulge truthfully
and accurately, all material information about
themselves and the securities they sell, for the
protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In
connection with this, a fact is deemed material if it
tends to induce or otherwise effect the sale or
purchase of its securities. 15 While the employment of
this policy is recognized and sanctioned by the laws,
nonetheless, the Revised Securities Act sets substantial
and procedural standards which a proposed issuer of
securities must satisfy. 16 Pertinently, Section 9 of the
Revised Securities Act sets forth the possible Grounds
for the Rejection of the registration of a security:
The Commission may reject a
registration statement and refuse to
issue a permit to sell the securities
included in such registration statement
if it finds that
(1) The registration statement is on its
face incomplete or inaccurate in any
material respect or includes any untrue
statement of a material fact or omits to
state a material fact required to be
stated therein or necessary to make
the statements therein not misleading;
or
(2) The issuer or registrant
(i) is not solvent or not
in sound financial
condition;
(ii) has violated or has
not complied with the
provisions of this Act,
or the rules
promulgated pursuant
thereto, or any order of
the Commission;
(iii) has failed to
comply with any of the
applicable
requirements and
conditions that the
Commission may, in
the public interest and
for the protection of
investors, impose
before the security can
be registered;

(iv) has been engaged

or is engaged or is
about to engage in
fraudulent transaction;
(v) is in any way
dishonest or is not of
good repute; or
(vi) does not conduct
its business in
accordance with law or
is engaged in a
business that is illegal
or contrary to
government rules and
regulations.
(3) The enterprise or the business of
the issuer is not shown to be sound or
to be based on sound business
principles;
(4) An officer, member of the board of
directors, or principal stockholder of
the issuer is disqualified to be such
officer, director or principal
stockholder; or
(5) The issuer or registrant has not
shown to the satisfaction of the
Commission that the sale of its security
would not work to the prejudice of the
public interest or as a fraud upon the
purchasers or investors. (Emphasis
Ours)
A reading of the foregoing grounds reveals the
intention of the lawmakers to make the registration
and issuance of securities dependent, to a certain
extent, on the merits of the securities themselves, and
of the issuer, to be determined by the Securities and
Exchange Commission. This measure was meant to
protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is
mandated by law to safeguard these interests,
following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the
registration of securities is, therefore, untenable. As it
is, the Court finds that the private respondent PALI, on
at least two points (nos. 1 and 5) has failed to support
the propriety of the issue of its shares with unfailing
clarity, thereby lending support to the conclusion that
the PSE acted correctly in refusing the listing of PALI in
its stock exchange. This does not discount the
effectivity of whatever method the SEC, in the exercise
of its vested authority, chooses in setting the standard
for public offerings of corporations wishing to do so.
However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities
Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with
justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on
its part. Its action in refusing to allow the listing of PALI
in the stock exchange is justified by the law and by the
circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations,

the Court hereby GRANTS the Petition for Review
onCertiorari. The Decisions of the Court of Appeals and
the Securities and Exchange Commission dated July 27,
1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is
hereby ENTERED, affirming the decision of the
Philippine Stock Exchange to deny the application for
listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED.
G.R. No. L-67626 April 18, 1989
JOSE REMO, JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B.
MARCHA TRANSPORT COMPANY, INC., represented by
APIFANIO B. MARCHA, respondents.
Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.

GANCAYCO, J.:
A corporation is an entity separate and distinct from its
stockholders. While not in fact and in reality a person,
the law treats a corporation as though it were a person
by process of fiction or by regarding it as an artificial
person distinct and separate from its individual
stockholders. 1
However, the corporate fiction or the notion of legal
entity may be disregarded when it "is used to defeat
public convenience, justify wrong, protect fraud, or
defend crime" in which instances "the law will regard
the corporation as an association of persons, or in case
of two corporations, will merge them into one." The
corporate fiction may also be disregarded when it is
the "mere alter ego or business conduit of a
person." 2 There are many occasions when this Court
pierced the corporate veil because of its use to protect
fraud and to justify wrong. 3 The herein petition for
review of a. resolution of the Intermediate Appellate
Court dated February 8, 1984 seeking the reversal
thereof and the reinstatement of its earlier decision
dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for
the application of the foregoing principles.
In the latter part of December, 1977 the board of
directors of Akron Customs Brokerage Corporation
(hereinafter referred to as Akron), composed of
petitioner Jose Remo, Jr., Ernesto Baares, Feliciano
Coprada, Jemina Coprada, and Dario Punzalan with
Lucia Lacaste as Secretary, adopted a resolution
authorizing the purchase of thirteen (13) trucks for use
in its business to be paid out of a loan the corporation
may secure from any lending institution. 5
Feliciano Coprada, as President and Chairman of Akron,
purchased thirteen trucks from private respondent on
January 25, 1978 for and in consideration of
P525,000.00 as evidenced by a deed of absolute
sale. 6 In a side agreement of the same date, the
parties agreed on a downpayment in the amount of
P50,000.00 and that the balance of P475,000.00 shall
be paid within sixty (60) days from the date of the
execution of the agreement. The parties also agreed
that until said balance is fully paid, the down payment

of P50,000.00 shall accrue as rentals of the 13 trucks;

and that if Akron fails to pay the balance within the
period of 60 days, then the balance shall constitute as
a chattel mortgage lien covering said cargo trucks and
the parties may allow an extension of 30 days and
thereafter private respondent may ask for a revocation
of the contract and the reconveyance of all said
trucks. 7
The obligation is further secured by a promissory note
executed by Coprada in favor of Akron. It is stated in
the promissory note that the balance shall be paid from
the proceeds of a loan obtained from the Development
Bank of the Philippines (DBP) within sixty (60)
days. 8 After the lapse of 90 days, private respondent
tried to collect from Coprada but the latter promised to
pay only upon the release of the DBP loan. Private
respondent sent Coprada a letter of demand dated May
10, 1978. 9 In his reply to the said letter, Coprada
reiterated that he was applying for a loan from the DBP
from the proceeds of which payment of the obligation
shall be made. 10
Meanwhile, two of the trucks were sold under a pacto
de retro sale to a certain Mr. Bais of the Perpetual
Loans and Savings Bank at Baclaran. The sale was
authorized by a board resolution made in a meeting
held on March 15, 1978. 11
Upon inquiry, private respondent found that no loan
application was ever filed by Akron with DBP. 12
In the meantime, Akron paid rentals of P500.00 a day
pursuant to a subsequent agreement, from April 27,
1978 (the end of the 90-day period to pay the balance)
to May 31, 1978. Thereafter, no more rental payments
were made.
On June 17, 1978, Coprada wrote private respondent
begging for a grace period of until the end of the
month to pay the balance of the purchase price; that
he will update the rentals within the week; and in case
he fails, then he will return the 13 units should private
respondent elect to get back the same. 13 Private
respondent, through counsel, wrote Akron on August 1,
1978 demanding the return of the 13 trucks and the
payment of P25,000.00 back rentals covering the
period from June 1 to August 1, 1978. 14
Again, Coprada wrote private respondent on August 8,
1978 asking for another grace period of up to August
31, 1978 to pay the balance, stating as well that he is
expecting the approval of his loan application from a
certain financing company, and that ten (10) trucks
have been returned to Bagbag, Novaliches. 15 On
December 9, 1978, Coprada informed private
respondent anew that he had returned ten (10) trucks
to Bagbag and that a resolution was passed by the
board of directors confirming the deed of assignment
to private respondent of P475,000 from the proceeds of
a loan obtained by Akron from the State Investment
House, Inc. 16
In due time, private respondent filed a compliant for
the recovery of P525,000.00 or the return of the 13
trucks with damages against Akron and its officers and
directors, Feliciano Coprada, Dario D. Punzalan, Jemina
Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la
Cruz, Francisco Clave, Vicente Martinez, Pacifico
Dollario and petitioner with the then Court of First

Instance of Rizal. Only petitioner answered the

complaint denying any participation in the transaction
and alleging that Akron has a distinct corporate
personality. He was, however, declared in default for
his failure to attend the pre-trial.

of the personality of the corporation

with that of the petitioner when the
latter was held liable for the corporate
debts. 18
We reverse.

In the meanwhile, petitioner sold all his shares in Akron

to Coprada. It also appears that Akron amended its
articles of incorporation thereby changing its name to
Akron Transport International, Inc. which assumed the
liability of Akron to private respondent.
After an ex parte reception of the evidence of the
private respondent, a decision was rendered on
October 28, 1980, the dispositive part of which reads
as follows:
Finding the evidence sufficient to prove the case of the
plaintiff, judgment is hereby rendered in favor of the
plaintiff and against the defendants, ordering them
jointly and severally to pay;
a the purchase price of the trucks in
the amount of P525,000.00 with ...
legal rate (of interest) from the filing of
the complaint until the full amount is
paid;
b rentals of Bagbag property at
P1,000.00 a month from August 1978
until the premises is cleared of the said
trucks;
c attorneys fees of P10,000.00, and
d costs of suit.
The P50,000.00 given as down payment shall pertain
as rentals of the trucks from June 1 to August 1, 1978
which is P25,000.00 (see demand letter of Atty. Aniano
Exhibit "T") and the remaining P25,000.00 shall be
from August 1, 1978 until the trucks are removed
totally from the place." 17
A motion for new trial filed by petitioner was denied so
he appealed to the then Intermediate Appellate Court
(IAC) wherein in due course a decision was rendered on
June 30, 1 983 setting aside the said decision as far as
petitioner is concemed. However, upon a motion for
reconsideration filed by private respondent dent, the
IAC, in a resolution dated February 8,1984, set aside
the decision dated June 30, 1983. The appellate court
entered another decision affirming the appealed
decision of the trial court, with costs against petitioner.
Hence, this petition for review wherein petitioner raises
the following issues:
I. The Intermediate Appellate Court
(IAC) erred in disregarding the
corporate fiction and in holding the
petitioner personally liable for the
obligation of the Corporation which
decision is patently contrary to law and
the applicable decision thereon.
II. The Intermediate Appellate Court
(IAC) committed grave error of law in
its decision by sanctioning the merger

The environmental facts of this case show that there is

no cogent basis to pierce the corporate veil of Akron
and hold petitioner personally liable for its obligation to
private respondent. While it is true that in December,
1977 petitioner was still a member of the board of
directors of Akron and that he participated in the
adoption of a resolution authorizing the purchase of 13
trucks for the use in the brokerage business of Akron to
be paid out of a loan to be secured from a lending
institution, it does not appear that said resolution was
intended to defraud anyone and more particularly
private respondent. It was Coprada, President and
Chairman of Akron, who negotiated with said
respondent for the purchase of 13 cargo trucks on
January 25, 1978. It was Coprada who signed a
promissory note to guarantee the payment of the
unpaid balance of the purchase price out of the
proceeds of a loan he supposedly sought from the DBP.
The word "WE' in the said promissory note must refer
to the corporation which Coprada represented in the
execution of the note and not its stockholders or
directors. Petitioner did not sign the said promissory
note so he cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that
was foisted on private respondent in that there was a
forthcoming loan from the DBP when it fact there was
none, it is Coprada who should account for the same
and not petitioner.
As to the sale through pacto de retro of the two units to
a third person by the corporation by virtue of a board
resolution, petitioner asserts that he never signed said
resolution. Be that as it may, the sale is not inherently
fraudulent as the 13 units were sold through a deed of
absolute sale to Akron so that the corporation is free to
dispose of the same. Of course, it was stipulated that in
case of default in payment to private respondent of the
balance of the consideration, a chattel mortgage lien
shag be constituted on the 13 units. Nevertheless, said
mortgage is a prior lien as against the pacto de
retro sale of the 2 units.
As to the amendment of the articles of incorporation of
Akron thereby changing its name to Akron Transport
International, Inc., petitioner alleges that the change of
corporate name was in order to include trucking and
container yard operations in its customs brokerage of
which private respondent was duly informed in a
letter. 19Indeed, the new corporation confirmed and
assumed the obligation of the old corporation. There is
no indication of an attempt on the part of Akron to
evade payment of its obligation to private respondent.
There is the fact that petitioner sold his shares in Akron
to Coprada during the pendency of the case. Since
petitioner has no personal obligation to private
respondent, it is his inherent right as a stockholder to
dispose of his shares of stock anytime he so desires.
Mention is also made of the alleged "dumping" of 10
units in the premises of private respondent at Bagbag,
Novaliches which to the mind of the Court does not

prove fraud and instead appears to be an attempt on

the part of Akron to attend to its obligations as regards
the said trucks. Again petitioner has no part in this.
If the private respondent is the victim of fraud in this
transaction, it has not been clearly shown that
petitioner had any part or participation in the
perpetration of the same. Fraud must be established by
clear and convincing evidence. If at all, the principal
character on whom fault should be attributed is
Feliciano Coprada, the President of Akron, whom
private respondent dealt with personally all through
out. Fortunately, private respondent obtained a
judgment against him from the trial court and the said
judgment has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned
resolution of the Intermediate Appellate Court dated
February 8,1984 is hereby set aside and its decision
dated June 30,1983 setting aside the decision of the
trial court dated October 28, 1980 insofar as petitioner
is concemed is hereby reinstated and affirmed, without
costs.
SO ORDERED.

G.R. No. 129459 September 29, 1998

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

PANGANIBAN, J.:
May corporate treasurer, by herself and without any
authorization from he board of directors, validly sell a
parcel of land owned by the corporation?. May the veil
of corporate fiction be pierced on the mere ground that
almost all of the shares of stock of the corporation are
owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this
Court in resolving the Petition for Review
on Certioraribefore us, assailing the March 18, 1997
Decision 1 of the Court of Appeals 2 in CA GR CV No.
46801 which, in turn, modified the July 18, 1994
Decision of the Regional Trial Court of Makati, Metro
Manila, Branch 63 3 in Civil Case No. 89-3511. The RTC
dismissed both the Complaint and the Counterclaim
filed by the parties. On the other hand, the Court of
Appeals ruled:
WHEREFORE, premises considered, the
appealed decision is AFFIRMED WITH
MODIFICATION ordering defendantappellee Nenita Lee Gruenberg to
REFUND or return to plaintiff-appellant
the downpayment of P100,000.00
which she received from plaintiff-

appellant. There is no pronouncement

as to costs. 4
The petition also challenges the June 10, 1997 CA
Resolution denying reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as
follows:
Plaintiff-appellant San Juan Structural
and Steel Fabricators, Inc.'s amended
complaint alleged that on 14 February
1989, plaintiff-appellant entered into
an agreement with defendant-appellee
Motorich Sales Corporation for the
transfer to it of a parcel of land
identified as Lot 30, Block 1 of the
Acropolis Greens Subdivision located in
the District of Murphy, Quezon City.
Metro Manila, containing an area of
Four Hundred Fourteen (414) square
meters, covered by TCT No. (362909)
2876: that as stipulated in the
Agreement of 14 February 1989,
plaintiff-appellant paid the
downpayment in the sum of One
Hundred Thousand (P100,000.00)
Pesos, the balance to be paid on or
before March 2, 1989; that on March 1,
1989. Mr. Andres T. Co, president of
plaintiff-appellant corporation, wrote a
letter to defendant-appellee Motorich
Sales Corporation requesting for a
computation of the balance to be paid:
that said letter was coursed through
defendant-appellee's broker. Linda
Aduca, who wrote the computation of
the balance: that on March 2, 1989,
plaintiff-appellant was ready with the
amount corresponding to the balance,
covered by Metrobank Cashier's Check
No. 004223, payable to defendantappellee Motorich Sales Corporation;
that plaintiff-appellant and defendantappellee Motorich Sales Corporation
were supposed to meet in the office of
plaintiff-appellant but defendantappellee's treasurer, Nenita Lee
Gruenberg, did not appear; that
defendant-appellee Motorich Sales
Corporation despite repeated demands
and in utter disregard of its
commitments had refused to execute
the Transfer of Rights/Deed of
Assignment which is necessary to
transfer the certificate of title; that
defendant ACL Development Corp. is
impleaded as a necessary party since
Transfer Certificate of Title No.
(362909) 2876 is still in the name of
said defendant; while defendant JNM
Realty & Development Corp. is likewise
impleaded as a necessary party in view
of the fact that it is the transferor of
right in favor of defendant-appellee
Motorich Sales Corporation: that on
April 6, 1989, defendant ACL
Development Corporation and Motorich
Sales Corporation entered into a Deed

of Absolute Sale whereby the former

transferred to the latter the subject
property; that by reason of said
transfer, the Registry of Deeds of
Quezon City issued a new title in the
name of Motorich Sales Corporation,
represented by defendant-appellee
Nenita Lee Gruenberg and Reynaldo L.
Gruenberg, under Transfer Certificate
of Title No. 3571; that as a result of
defendants-appellees Nenita Lee
Gruenberg and Motorich Sales
Corporation's bad faith in refusing to
execute a formal Transfer of
Rights/Deed of Assignment, plaintiffappellant suffered moral and nominal
damages which may be assessed
against defendants-appellees in the
sum of Five Hundred Thousand
(500,000.00) Pesos; that as a result of
defendants-appellees Nenita Lee
Gruenberg and Motorich Sales
Corporation's unjustified and
unwarranted failure to execute the
required Transfer of Rights/Deed of
Assignment or formal deed of sale in
favor of plaintiff-appellant, defendantsappellees should be assessed
exemplary damages in the sum of One
Hundred Thousand (P100,000.00)
Pesos; that by reason of defendantsappellees' bad faith in refusing to
execute a Transfer of Rights/Deed of
Assignment in favor of plaintiffappellant, the latter lost the
opportunity to construct a residential
building in the sum of One Hundred
Thousand (P100,000.00) Pesos; and
that as a consequence of defendantsappellees Nenita Lee Gruenberg and
Motorich Sales Corporation's bad faith
in refusing to execute a deed of sale in
favor of plaintiff-appellant, it has been
constrained to obtain the services of
counsel at an agreed fee of One
Hundred Thousand (P100,000.00)
Pesos plus appearance fee for every
appearance in court hearings.
In its answer, defendants-appellees
Motorich Sales Corporation and Nenita
Lee Gruenberg interposed as
affirmative defense that the President
and Chairman of Motorich did not sign
the agreement adverted to in par. 3 of
the amended complaint; that Mrs.
Gruenberg's signature on the
agreement (ref: par. 3 of Amended
Complaint) is inadequate to bind
Motorich. The other signature, that of
Mr. Reynaldo Gruenberg, President and
Chairman of Motorich, is required: that
plaintiff knew this from the very
beginning as it was presented a copy of
the Transfer of Rights (Annex B of
amended complaint) at the time the
Agreement (Annex B of amended
complaint) was signed; that plaintiffappellant itself drafted the Agreement
and insisted that Mrs. Gruenberg
accept the P100,000.00 as earnest

money; that granting, without

admitting, the enforceability of the
agreement, plaintiff-appellant
nonetheless failed to pay in legal
tender within the stipulated period (up
to March 2, 1989); that it was the
understanding between Mrs.
Gruenberg and plaintiff-appellant that
the Transfer of Rights/Deed of
Assignment will be signed only upon
receipt of cash payment; thus they
agreed that if the payment be in check,
they will meet at a bank designated by
plaintiff-appellant where they will
encash the check and sign the Transfer
of Rights/Deed. However, plaintiffappellant informed Mrs. Gruenberg of
the alleged availability of the check, by
phone, only after banking hours.
On the basis of the evidence, the
court a quo rendered the judgment
appealed from[,] dismissing plaintiffappellant's complaint, ruling that:
The issue to be
resolved is: whether
plaintiff had the right to
compel defendants to
execute a deed of
absolute sale in
accordance with the
agreement of February
14, 1989: and if so,
whether plaintiff is
entitled to damage.
As to the first question,
there is no evidence to
show that defendant
Nenita Lee Gruenberg
was indeed authorized
by defendant
corporation. Motorich
Sales, to dispose of
that property covered
by T.C.T. No. (362909)
2876. Since the
property is clearly
owned by the
corporation. Motorich
Sales, then its
disposition should be
governed by the
requirement laid down
in Sec. 40. of the
Corporation Code of
the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to
the provisions of existing laws on illegal combination
and monopolies, a corporation may by a majority vote
of its board of directors . . . sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets including its
goodwill . . . when authorized by the vote of the
stockholders representing at least two third (2/3) of the
outstanding capital stock . . .
No such vote was obtained by defendant Nenita Lee
Gruenberg for that proposed sale[;] neither was there

evidence to show that the supposed transaction was

ratified by the corporation. Plaintiff should have been
on the look out under these circumstances. More so,
plaintiff himself [owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise,
does not find substantial evidence to hold defendant
Nenita Lee Gruenberg liable considering that she did
not in anyway misrepresent herself to be authorized by
the corporation to sell the property to plaintiff (tsn
dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders
judgment DISMISSING the complaint at instance for
lack of merit.
"Defendants" counterclaim is also DISMISSED for lack
of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is
reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered
into by and between:
MOTORICH SALES CORPORATION, a corporation duly
organized and existing under and by virtue of
Philippine Laws, with principal office address at 5510
South Super Hi-way cor. Balderama St., Pio del Pilar.
Makati, Metro Manila, represented herein by its
Treasurer, NENITA LEE GRUENBERG, hereinafter
referred to as the TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a
corporation duly organized and existing under and by
virtue of the laws of the Philippines, with principal
office address at Sumulong Highway, Barrio
Mambungan, Antipolo, Rizal, represented herein by its
President, ANDRES T. CO, hereinafter referred to as the
TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of
land identified as Lot 30 Block 1 of the ACROPOLIS
GREENS SUBDIVISION located at the District of Murphy,
Quezon City, Metro Manila, containing an area of FOUR
HUNDRED FOURTEEN (414) SQUARE METERS, covered
by a TRANSFER OF RIGHTS between JNM Realty & Dev.
Corp. as the Transferor and Motorich Sales Corp. as the
Transferee;
NOW, THEREFORE, for and in consideration of the
foregoing premises, the parties have agreed as follows:
1. That the purchase price shall be at FIVE THOUSAND
TWO HUNDRED PESOS (P5,200.00) per square meter;
subject to the following terms:
a. Earnest money amounting to ONE HUNDRED
THOUSAND PESOS (P100,000.00), will be paid upon the

execution of this agreement and shall form part of the

total purchase price;
b. Balance shall be payable on or before March 2,
1989;
2. That the monthly amortization for the month of
February 1989 shall be for the account of the
Transferor; and that the monthly amortization starting
March 21, 1989 shall be for the account of the
Transferee;
The transferor warrants that he [sic] is the lawful owner
of the above-described property and that there [are] no
existing liens and/or encumbrances of whatsoever
nature;
In case of failure by the Transferee to pay the balance
on the date specified on 1, (b), the earnest money shall
be forfeited in favor of the Transferor.
That upon full payment of the balance, the
TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the
TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set
their hands this 14th day of February, 1989 at
Greenhills, San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN
STRUCTURAL & STEEL FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.]
[SGD.]

6
In its recourse before the Court of Appeals, petitioner
insisted:
1. Appellant is entitled
to compel the
appellees to execute a
Deed of Absolute Sale
in accordance with the
Agreement of February
14, 1989,
2. Plaintiff is entitled to
damages. 7
As stated earlier, the Court of Appeals debunked
petitioner's arguments and affirmed the Decision of the
RTC with the modification that Respondent Nenita Lee
Gruenberg was ordered to refund P100,000 to

petitioner, the amount remitted as "downpayment" or

"earnest money." Hence, this petition before us. 8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the
doctrine of piercing the
veil of corporate fiction
is applicable in the
instant case
II. Whether or not the
appellate court may
consider matters which
the parties failed to
raise in the lower court
III. Whether or not
there is a valid and
enforceable contract
between the petitioner
and the respondent
corporation
IV. Whether or not the
Court of Appeals erred
in holding that there is
a valid
correction/substitution
of answer in the
transcript of
stenographic note[s].
V. Whether or not
respondents are liable
for damages and
attorney's fees 9
The Court synthesized the foregoing and will thus
discuss them seriatim as follows:
1. Was there a valid
contract of sale
between petitioner and
Motorich?
2. May the doctrine of
piercing the veil of
corporate fiction be
applied to Motorich?
3. Is the alleged
alteration of
Gruenberg's testimony
as recorded in the
transcript of
stenographic notes
material to the
disposition of this case?
4. Are respondents
liable for damages and
attorney's fees?
The Court's Ruling
The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators,
Inc. alleges that on February 14, 1989, it entered
through its president, Andres Co, into the disputed
Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented
by its treasurer, Nenita Lee Gruenberg. Petitioner
insists that "[w]hen Gruenberg and Co affixed their
signatures on the contract they both consented to be
bound by the terms thereof." Ergo, petitioner contends
that the contract is binding on the two corporations.
We do not agree.
True, Gruenberg and Co signed on February 14, 1989,
the Agreement, according to which a lot owned by
Motorich Sales Corporation was purportedly sold. Such
contract, however, cannot bind Motorich, because it
never authorized or ratified such sale.
A corporation is a juridical person separate and distinct
from its stockholders or members. Accordingly, the
property of the corporation is not the property of its
stockholders or members and may not be sold by the
stockholders or members without express authorization
from the corporation's board of directors. 10 Section 23
of BP 68, otherwise known as the Corporation Code of
the Philippines, provides;
Sec. 23. The Board of Directors or
Trustees. Unless otherwise provided
in this Code, the corporate powers of
all corporations formed under this Code
shall be exercised, all business
conducted and all property of such
corporations controlled and held by the
board of directors or trustees to be
elected from among the holders of
stocks, or where there is no stock, from
among the members of the
corporation, who shall hold office for
one (1) year and until their successors
are elected and qualified.
Indubitably, a corporation may act only through its
board of directors or, when authorized either by its
bylaws or by its board resolution, through its officers or
agents in the normal course of business. The general
principles of agency govern the relation between the
corporation and its officers or agents, subject to the
articles of incorporation, bylaws, or relevant provisions
of law. 11 Thus, this Court has held that "a corporate
officer or agent may represent and bind the
corporation in transactions with third persons to the
extent that the authority to do so has been conferred
upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the
usual course of the particular business, are incidental
to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and
such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that
it has conferred." 12
Furthermore, the Court has also recognized the rule
that "persons dealing with an assumed agent, whether
the assumed agency be a general or special one bound
at their peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the

nature and extent of authority, and in case either is

controverted, the burden of proof is upon them to
establish it (Harry Keeler v. Rodriguez, 4 Phil.
19)." 13 Unless duly authorized, a treasurer, whose
powers are limited, cannot bind the corporation in a
sale of its assets. 14

As a general rule, the acts of corporate officers within

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

In the case at bar, Respondent Motorich categorically

denies that it ever authorized Nenita Gruenberg, its
treasurer, to sell the subject parcel of
land. 15 Consequently, petitioner had the burden of
proving that Nenita Gruenberg was in fact authorized
to represent and bind Motorich in the transaction.
Petitioner failed to discharge this burden. Its offer of
evidence before the trial court contained no proof of
such authority. 16 It has not shown any provision of said
respondent's articles of incorporation, bylaws or board
resolution to prove that Nenita Gruenberg possessed
such power.

In this case, there is a clear absence of proof that

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

That Nenita Gruenberg is the treasurer of Motorich

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

Art. 1318 of the Civil Code lists the requisites of a valid

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

Neither was such real estate sale shown to be a normal

business activity of Motorich. The primary purpose of
Motorich is marketing, distribution, export and import
in relation to a general merchandising
business. 18 Unmistakably, its treasurer is not cloaked
with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope
of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines
provides:
Art. 1874. When a sale of a piece of
land or any interest therein is through
an agent, the authority of the latter
shall be in writing: otherwise, the sale
shall be void.
Art. 1878. Special powers of attorney
are necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the
ownership of an immovable is
transmitted or acquired either
gratuitously or for a valuable
consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich
has ratified said contract of sale because of its
"acceptance of benefits," as evidenced by the receipt
issued by Respondent Gruenberg. 19 Petitioner is
clutching at straws.

Because Motorich had never given a written

authorization to Respondent Gruenberg to sell its
parcel of land, we hold that the February 14, 1989
Agreement entered into by the latter with petitioner is
void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract
cannot be ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction
of Motorich should be pierced, because the latter is a
close corporation. Since "Spouses Reynaldo L.
Gruenberg and Nenita R. Gruenberg owned all or
almost all or 99.866% to be accurate, of the subscribed
capital stock" 25 of Motorich, petitioner argues that
Gruenberg needed no authorization from the board to
enter into the subject contract. 26 It adds that, being
solely owned by the Spouses Gruenberg, the company
can treated as a close corporation which can be bound
by the acts of its principal stockholder who needs no
specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue
belatedly, 27 not having done so during the trial, but
only when it filed its sur-rejoinder before the Court of
Appeals. 28 Thus, this Court cannot entertain said issue
at this late stage of the proceedings. It is well-settled
the points of law, theories and arguments not brought
to the attention of the trial court need not be, and
ordinarily will not be, considered by a reviewing court,
as they cannot be raised for the first time on
appeal. 29Allowing petitioner to change horses in
midstream, as it were, is to run roughshod over the
basic principles of fair play, justice and due process.

Second, even if the above mentioned argument were

to be addressed at this time, the Court still finds no
reason to uphold it. True, one of the advantages of a
corporate form of business organization is the
limitation of an investor's liability to the amount of the
investment. 30 This feature flows from the legal theory
that a corporate entity is separate and distinct from its
stockholders. However, the statutorily granted
privilege of a corporate veil may be used only for
legitimate purposes. 31 On equitable considerations, the
veil can be disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a
mere alter ego or business conduit of a person or an
instrumentality, agency or adjunct of another
corporation. 32
Thus, the Court has consistently ruled that "[w]hen the
fiction is used as a means of perpetrating a fraud or an
illegal act or as vehicle for the evasion of an existing
obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally
the perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation from
the members or stockholders who compose it will be
lifted to allow for its consideration merely as an
aggregation of individuals." 33
We stress that the corporate fiction should be set aside
when it becomes a shield against liability for fraud,
illegality or inequity committed on third persons. The
question of piercing the veil of corporate fiction is
essentially, then, a matter of proof. In the present case,
however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner
utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of
shielding any alleged fraudulent or illegal activities of
its officers or stockholders; or that the said veil was
used to conceal fraud, illegality or inequity at the
expense of third persons like petitioner.
Petitioner claims that Motorich is a close corporation.
We rule that it is not. Section 96 of the Corporation
Code defines a close corporation as follows:
Sec. 96. Definition and Applicability of
Title. A close corporation, within the
meaning of this Code, is one whose
articles of incorporation provide that:
(1) All of the corporation's issued stock
of all classes, exclusive of treasury
shares, shall be held of record by not
more than a specified number of
persons, not exceeding twenty (20); (2)
All of the issued stock of all classes
shall be subject to one or more
specified restrictions on transfer
permitted by this Title; and (3) The
corporation shall not list in any stock
exchange or make any public offering
of any of its stock of any class.
Notwithstanding the foregoing, a
corporation shall be deemed not a
close corporation when at least twothirds (2/3) of its voting stock or voting
rights is owned or controlled by
another corporation which is not a
close corporation within the meaning of
this Code. . . . .

The articles of incorporation 34 of Motorich Sales

Corporation does not contain any provision stating that
(1) the number of stockholders shall not exceed 20, or
(2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its
stocks in any stock exchange or making a public
offering of such stocks is prohibited. From its articles, it
is clear that Respondent Motorich is not a close
corporation. 35 Motorich does not become one either,
just because Spouses Reynaldo and Nenita Gruenberg
owned 99.866% of its subscribed capital stock. The
"[m]ere ownership by a single stockholder or by
another corporation of all or capital stock of a
corporation is not of itself sufficient ground for
disregarding the separate corporate
personalities." 36 So, too, a narrow distribution of
ownership does not, by itself, make a close
corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v.
Court of Appeals 37 wherein the Court ruled that ". . .
petitioner corporation is classified as a close
corporation and, consequently, a board resolution
authorizing the sale or mortgage of the subject
property is not necessary to bind the corporation for
the action of its president." 38 But the factual milieu
in Dulay is not on all fours with the present case.
In Dulay, the sale of real property was contracted by
the president of a close corporation with the knowledge
and acquiescence of its board of directors. 39 In the
present case, Motorich is not a close corporation, as
previously discussed, and the agreement was entered
into by the corporate treasurer without the knowledge
of the board of directors.
The Court is not unaware that there are exceptional
cases where "an action by a director, who singly is the
controlling stockholder, may be considered as a
binding corporate act and a board action as nothing
more than a mere formality." 40 The present case,
however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita
Gruenberg own "almost 99.866%" of Respondent
Motorich.41 Since Nenita is not the sole controlling
stockholder of Motorich, the aforementioned exception
does not apply. Grantingarguendo that the corporate
veil of Motorich is to be disregarded, the subject parcel
of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired
during their marriage. There being no indication that
said spouses, who appear to have been married before
the effectivity of the Family Code, have agreed to a
different property regime, their property relations
would be governed by conjugal partnership of
gains. 42 As a consequence, Nenita Gruenberg could not
have effected a sale of the subject lot because "[t]here
is no co-ownership between the spouses in the
properties of the conjugal partnership of gains. Hence,
neither spouse can alienate in favor of another his or
interest in the partnership or in any property belonging
to it; neither spouse can ask for a partition of the
properties before the partnership has been legally
dissolved." 43
Assuming further, for the sake of argument, that the
spouses' property regime is the absolute community of
property, the sale would still be invalid. Under this
regime, "alienation of community property must have
the written consent of the other spouse or he authority
of the court without which the disposition or

encumbrance is void." 44 Both requirements are

manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN
Immaterial
Petitioner calls our attention to the following excerpt of
the transcript of stenographic notes (TSN):
Q Did you ever
represent to Mr. Co that
you were authorized by
the corporation to sell
the property?
A Yes, sir.

45

Petitioner claims that the answer "Yes" was crossed

out, and, in its place was written a "No" with an initial
scribbled above it. 46 This, however, is insufficient to
prove that Nenita Gruenberg was authorized to
represent Respondent Motorich in the sale of its
immovable property. Said excerpt be understood in the
context of her whole testimony. During her crossexamination. Respondent Gruenberg testified:
Q So, you signed in
your capacity as the
treasurer?
[A] Yes, sir.
Q Even then you
kn[e]w all along that
you [were] not
authorized?
A Yes, sir.
Q You stated on direct
examination that you
did not represent that
you were authorized to
sell the property?
A Yes, sir.
Q But you also did not
say that you were not
authorized to sell the
property, you did not
tell that to Mr. Co, is
that correct?
A That was not asked
of me.
Q Yes, just answer it.
A I just told them that I
was the treasurer of
the corporation and it
[was] also the
president who [was]
also authorized to sign
on behalf of the
corporation.

Q You did not say that

you were not
authorized nor did you
say that you were
authorized?
A Mr. Co was very
interested to purchase
the property and he
offered to put up a
P100,000.00 earnest
money at that time.
That was our first
meeting. 47
Clearly then, Nenita Gruenberg did not testify that
Motorich had authorized her to sell its property. On the
other hand, her testimony demonstrates that the
president of Petitioner Corporation, in his great desire
to buy the property, threw caution to the wind by
offering and paying the earnest money without first
verifying Gruenberg's authority to sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's
fees, alleging that "[i]n an utter display of malice and
bad faith, respondents attempted and succeeded in
impressing on the trial court and [the] Court of Appeals
that Gruenberg did not represent herself as authorized
by Respondent Motorich despite the receipt issued by
the former specifically indicating that she was signing
on behalf of Motorich Sales Corporation. Respondent
Motorich likewise acted in bad faith when it claimed it
did not authorize Respondent Gruenberg and that the
contract [was] not binding, [insofar] as it [was]
concerned, despite receipt and enjoyment of the
proceeds of Gruenberg's act." 48Assuming that
Respondent Motorich was not a party to the alleged
fraud, petitioner maintains that Respondent Gruenberg
should be held liable because she "acted fraudulently
and in bad faith [in] representing herself as duly
authorized by [R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the
trial and the appellate courts that the foregoing
allegations lack factual bases. Hence, an award of
damages or attorney's fees cannot be justified. The
amount paid as "earnest money" was not proven to
have redounded to the benefit of Respondent Motorich.
Petitioner claims that said amount was deposited to
the account of Respondent Motorich, because "it was
deposited with the account of Aren Commercial c/o
Motorich Sales Corporation." 50 Respondent Gruenberg,
however, disputes the allegations of petitioner. She
testified as follows:
Q You voluntarily
accepted the
P100,000.00, as a
matter of fact, that was
encashed, the check
was encashed.
A Yes. sir, the check
was paid in my name
and I deposit[ed] it.
Q In your account?

A Yes, sir.

51

In any event, Gruenberg offered to return the

amount to petitioner ". . . since the sale did not
push through." 52
Moreover, we note that Andres Co is not a neophyte in
the world of corporate business. He has been the
president of Petitioner Corporation for more than ten
years and has also served as chief executive of two
other corporate entities. 53 Co cannot feign ignorance
of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his
duty to ascertain the scope of Gruenberg's
authorization to enter into a contract to sell a parcel of
land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is
unsubstantiated and fails to persuade the Court.
Indubitably, petitioner appears to be the victim of its
own officer's negligence in entering into a contract with
and paying an unauthorized officer of another
corporation.
As correctly ruled by the Court of Appeals, however,
Nenita Gruenberg should be ordered to return to
petitioner the amount she received as earnest money,
as "no one shall enrich himself at the expense of
another." 54 a principle embodied in Article 2154 of Civil
Code. 55 Although there was no binding relation
between them, petitioner paid Gruenberg on the
mistaken belief that she had the authority to sell the
property of Motorich. 56 Article 2155 of Civil Code
provides that "[p]ayment by reason of a mistake in the
contruction or application of a difficult question of law
may come within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the
assailed Decision is AFFIRMED.
SO ORDERED.

G.R. No. 67125 August 24 1990

PHILIPPINE VETERANS BANK EMPLOYEES UNION-NUBE,
DOMINGO C. LOPEZ, HERMAN B. PASILIAO FELIZARDO
B. SARAPAT, LADY LYDIA B. CORNISTA, ELIZABETH S.
KARASIG, EDUARDO C. NIEVERA, NORMAN T. BAYODA,
REGINO V. TAGUIAM, ROMULO G. GARCIA, MANUEL A.
LAMAN, EDUARDO SJ. BELMONTE, HERNANI B.
LIWANAG, EDUARDO P. CRUZ, DANILO N. MENDOZA,
ELSA J. SILVERIO, REGINO V. TAGUIAM, JR., ALBERT G.
MALAPIT, MANUEL B. GARCIA, and the Bank Employees
listed in Annex "A" of this Petition, petitioners,
vs.
THE PHILIPPINE VETERANS BANK Now renamed
PHILIPPINE MILITARY AND VETERANS BANK, GENERAL
FABIAN VER in his capacity as Chairman of the Board of
Directors of the Philippine Veterans Bank, and of the
Board of Trustees of the Armed Forces of the
Philippines Retirement and Separation Benefits System,
and RAFAEL ARNALDO in his capacity as President of
the Philippine Veterans Bank,respondents.

G.R. No. 82337 August 24,1990

SIMEON C. MEDALLA, GREGORIO VENTURANZA, JOSE P.

JUANILLO, RAMON P. MIRANDA, ENRIQUE H.R. ABILA,
PEDRO ACIERTO, SILVINO AGUDO, SANTIAGO
FERNANDEZ, JUAN P. ROSETE, MAXIMO G. AQUINO,
GREGORIO C. DARROLES, ISMAEL T. ESPIRITU,
ERNESTO Y. GUEVARRA, MARIANO F. INFANTE,
VENERANDO E. MANZO, VICENTE G. VILLADOLID,
GUILLERMO A. CRUZ, JORGE MARIANO, PASCUAL
SARMIENTO, RAMON P. MENDOZA, PEDRO GABRIEL,
ANTONIO A. LIM, MIGUEL T. MARCOS, TOMAS T.
NUFABLE, MARIANO ORTIZ, DOMINGO C. OCTAVO,
MANUEL R. RAMOS, LEONCIO MANALO, DAYAN S.
MAMACO, CORNELIO D. CAUNAR, MAURO DE LA CRUZ,
FIDEL T. VIZMANOS, FELIPE L. VICENCIO, DAMIAN S.
VITO CRUZ, JUAN LOMBREDAS, MARINA BAUTISTA,
SEGUNDO M. ROSALES, CECLONDO CIEGO, CECILIO
MIRANDA, FERNANDO APOSTOL, ANICETO R. NARCA,
CARLOS B. LASMARIAS, RICARTE G. REYES, P.D.
DELLOSON, LORETO BANTONIO ERNESTO D. LLAGUNO,
CONSTANCIO SEBASTIAN, ELEUTERIO R. VALENZUELA,
ISIDRO A. BATHAN, LEON G. NOLLIDO, in representation
of the remainder of the 510,000 veterans or their heirs,
as defined in R.A. 3518, and the PHILIPPINE VETERANS
BANK, petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, LIQUIDATOR OF
THE PHILIPPINE VETERANS BANK, THE LIQUIDATION
COURT (RTC, BRANCH 39, MANILA), SECRETARY OF THE
BUDGET and THE NATIONAL TREASURER, respondents.

CRUZ, J.:
The Philippine Veterans Bank was created in 1963 with
the hope that it would ensure the economic future and
perhaps even prosperity of the hundreds of thousands
of war veterans who were to be its stockholders. For a
while the vision grew, but in time it dimmed and finally
faded as the Bank found itself enmeshed in financial
difficulties that threatened its very survival. Now the
dream is in tatters. Efforts are at present being taken
to piece together its severed sinews but it is doubtful if
the Bank will ever be whole again.
I
The trouble began when on April 10, 1983, the Bank
was placed under receivership by virtue of Resolution
No. 334 of the Monetary Board of the Central Bank. The
reason was the precarious condition of the Bank. A
year later, on April 26, 1984, the Philippine Veterans
Bank Employees Union questioned the retrenchment
and reorganization program of the Bank and, on the
ground of security of tenure, prayed that the said
program be prohibited. In its petition, which was
docketed as G.R. No. 67125, the Union also asked for a
temporary restraining order, which was issued on May
9, 1984. Subsequently, while the case was pending,
the Monetary Board ordered the liquidation of the Bank
by Resolution No. 612 dated June 7, 1985, after finding
that the Bank had incurred an outstanding liability of
P540,835,860.79. This order was opposed by the Union
in a supplemental petition for prohibition with
preliminary injunction filed on September 25, 1985. On
November 26,1985, the Veterans Federation of the
Philippines entered the picture and filed with leave of
court a petition in intervention which, besides echoing
the original petition in opposing the liquidation,
asserted the additional claim that it was in the process
of formulating plans for the rehabilitation and eventual

expansion of the Bank. This was followed by an

ancillary petition for the immediate payment of the
wage or salary increase ordered by the NLRC in its
resolution dated September 17,1985. On March
26,1987, a writ of preliminary injunction was issued by
this Court reading as follows:
NOW THEREFORE, effective immediately and until
further orders from this Court, you (Respondent Central
Bank of the Philippines, and PVB Liquidator), your
agents, representatives, and/or any person or persons
acting upon your orders or in your place or stead, are
hereby ENJOINED from liquidating the Phil. Veterans
Bank and from taking or pursuing any act or
transaction in pursuance of such liquidation, including
sales or other disposal of properties of whatever kind,
or disbursing PVB funds, except those incurred in the
course of ordinary administration of the affairs of the
bank, including payment of accrued and unpaid claims
of PVB Employees under the 1982-1985 CBA, all of
which should be subject to the prior approval of the
respondent liquidation court.
On March 18,1988, an original petition for restitution
and for extraordinary and equitable writs was filed by
Simeon Medalla et al. in their own right and "on behalf
of the remaining 510,000 World War II veterans or their
heirs." It sought inter alia a judicial declaration that the
petitioners were entitled to the ownership, possession
and control of the Bank and an order restraining the
Central Bank from disposing of the assets of the Bank
or making any disbursements therefrom except for
ordinary administrative expenses and for the payment
of accrued wages and other benefits of personnel as
approved by the liquidator court. This petition was
docketed as G.R. No. 82337 and consolidated with G.R.
No. 67125.
Earlier, on June 11, 1987, then Judge Abelardo M.
Dayrit of the Regional Trial Court of Manila had ordered
the payment of the claims of the employees amounting
to P37,920,310.82. This was followed on October 21,
1988, by another order issued by the same court for
the payment of retirement benefits to two former
board members of the Bank, namely, Agustin Marking
and Jaime S. Mejia. Upon the representations of the
petitioners, however, we prevented enforcement of this
order with our temporary restraining order dated
January 12, 1989.
On December 15, 1988, the writ of preliminary
injunction dated March 26,1987, was amended "to
exclude from its coverage the sale or disposal by the
Central Bank or the Bank Liquidator of the acquired
assets of the PVB." This was done in response to
petitions filed by several persons seeking to redeem or
repurchase the properties which had earlier been
purchased by the Bank through foreclosure sales. 1
On August 25, 1989, another ancillary petition was
filed for the immediate payment of backwages of the
Bank personnel on the regular payroll as of June 1985
equivalent to five months' gross salary. On May 25,
1990, the City Government of Davao filed a motion to
lift the preliminary injunction dated March 26, 1987,
with respect to its deposit of P3,700,000, which it
wanted to withdraw to finance several programs and
projects. And on June 11, 1990, Dolores V. Molina filed
her own motion to withdraw her deposit of
P1,l00,000.00.

II
The Court has purposely delayed resolution of these
cases in the hope that it would not be necessary to do
so in view of the efforts being taken by the Executive
Department for the rehabilitation of the Bank. The
agency in charge of this matter is the Special
Presidential Committee on the Philippine Veterans
Bank, which was created by Adm. Order No. 29 dated
July 10, 1987, and renewed by Adm. Order No. 62
dated February 23, 1988 and by Adm. Order No. 90
dated September 2, 1988, to study the financial
condition of the Bank and determine the feasibility of
its rehabilitation. However, although we may assume
that the Committee has been assiduously pursuing its
objectives and while there are optimistic statements
every now and then that the Bank will be reopening
soon, that prospect does not really seem to be in sight
yet. We have therefore decided to finally resolve these
cases, applying a judicial solution which, when all is
said and done, will still be less acceptable than a
practical administrative settlement.
III
The basic issue in these petitions is whether the
Central Bank has the power to liquidate the Philippine
Veterans Bank.
The petitioners dispute this authority. In G.R. No.
67125, they claim that as the Bank was created by a
special law, a contractual relationship now exists
between the Government and the stockholders of the
Bank that cannot be disturbed without violation of the
impairment clause. The acceptance of the benefits of
that law by the petitioners had conferred a vested right
on them that cannot now be withdrawn without their
consent as this would constitute a deprivation of their
property without due process of law. Assuming that
such benefits could be validly revoked, this cannot be
done by the Central Bank only but by the legislature
itself which conferred the franchise on the Bank in the
first place. Moreover, the Central Bank cannot exercise
any authority over the Bank because the latter is itself
also a government bank with the same status as the
Development Bank of the Philippines, the Land Bank of
the Philippines, and the Philippine National Bank. The
Central Bank has no control over these government
lending institutions.
We sustain the position of the respondents that these
arguments are not well-taken.
The mere fact that the Bank was created by special law
does not confer upon it extraordinary privileges over
and above those granted similar charters like the
Development Bank of the Philippines and the Land
Bank of the Philippines. As a lending institution, it is
part of the banking system and therefore covered by
the regulatory power exercised over such entities by
the Central Bank. Such authority is expressly provided
for in the Central Bank Act, as follows:
Sec. 25. Creation of the appropriate
departments. In order to assure the
observance of this Act and of other
pertinent laws, and of the rules and
regulations of the Monetary Board, the
Central Bank shall have appropriate
supervising and examining

departments which shall be charged

with the supervision and periodic or
special examinations of banking
institutions operating in the Philippines,
including all Government credit
institutions, including their subsidiaries
and affiliates of non-bank financial
intermediaries, and subsidiaries and
affiliates of non-bank financial
intermediaries performing quasibanking functions: . . . The supervising
and/or examining departments shall
discharge their responsibilities in
accordance with the instructions of the
Monetary Board.
The department heads and the
examiners of the supervising and/or
examining departments are hereby
authorized to administer oaths to any
director, officer, or employee of any
institution under their respective
supervision or subject to their
examination and to compel the
presentation of all books, documents,
papers or records necessary in their
judgment to ascertain the facts relative
to the true condition of any institution
as well as the books and records of
persons and entities relative to or in
connection with the operations,
activities or transactions of the
institution under examination.
No restraining order or injunction shall
be issued by the court enjoining the
Central Bank from examining any
institution subject to supervision or
examination by the Central Bank,
unless there is convincing proof that
the action of the Central Bank is plainly
arbitrary and made in bad faith and the
petitioner or plaintiff files with the clerk
or judge of the court in which the
action is pending a bond executed, in
favor of the Central Bank, in an amount
to be fixed by the court. The restraining
order or injunction shall be refused or,
if granted, shall be dissolved upon
filing by the Central Bank of a bond,
which shall be in the form of cash or
Central Bank cashier's check, in an
amount twice the amount of the bond
of the petitioner or plaintiff conditioned
that it will pay the damages which the
petitioner or plaintiff may suffer by the
refusal or the dissolution of the
injunction. The provisions of Rule 58 of
the New Rules of Court insofar as they
are applicable and not inconsistent
with the provisions of this Section shall
govern the issuance and dissolution of
the restraining order or injunction
contemplated in this Section.
SEC. 25-A. The department heads
and the examiners of the supervising
and examining departments, in the
conduct of the periodic or special
examination of banking institutions
may be specifically authorized by the

Monetary Board to examine, inquire or

look into all deposits of whatever
nature with banking institutions in the
Philippines including investments in
debt instruments issued by the
Government of the Philippines, its
political subdivisions and its
instrumentalities, after being satisfied
that there is reasonable ground to
believe that a bank fraud or serious
irregularity has been or is being
committed and that it is necessary to
look into the deposit to establish such
fraud or irregularity.
SEC. 28. Examination and fees. It
shall be the duty of the head of the
appropriate supervising and examining
department, personally or by deputy,
at least once in every twelve months,
and at such other times as either he or
the Monetary Board may deem
expedient, to make an examination of
the books of every banking institution
within the purview of this Act and make
a report on the same to the Monetary
Board.
Every such institution shall afford to
the head of the appropriate supervising
and examining departments and to his
authorized deputies full opportunity to
examine its books, cash and available
assets and general condition at any
time when requested so to do by the
Central Bank: Provided, however, That
none of the reports and other papers
relative to such examinations shall be
open to inspection by the public except
insofar as such publicity is incidental to
the proceeding hereinafter authorized
or is necessary for the prosecution of
violations n connection with the
business of such institutions. . . .
SEC. 28-A. Appointment of conservator.
Whenever, on the basis of a report
submitted by the appropriate
supervising or examining department,
the Monetary Board finds that a bank
or a non-bank financial intermediary
performing quasi-banking functions is
in a state of continuing inability or
unwillingness to maintain a condition of
liquidity deemed adequate to protect
the interest of depositors and creditors,
the Monetary Board may appoint a
conservator to take charge of the
assets, liabilities, and the management
of that institution, collect all monies
and debts due said institution and
exercise all powers necessary to
preserve the assets of the institution,
reorganize the management thereof,
and restore its viability. He shall have
the power to overrule or revoke the
actions of the previous management
and board of directors of the bank or
non-bank financial intermediary
performing quasi-banking functions,
any provision of law to the contrary

notwithstanding, and such other

powers as the Monetary Board shall
deem necessary.
As much as practicable, the
conservator should not be connected
with the Central Bank but should be
competent and knowledgeable in bank
operations and management. . . . He
shall report and be responsible to the
Monetary Board until such time as the
Monetary Board is satisfied that the
institution can continue to operate on
its own and the conservatorship is no
longer necessary. The conservatorship
shall likewise be terminated should the
Monetary Board, on the basis of the
report of the conservator or of its own
findings, determine that the
continuance in business of the
institution would involve probable loss
to its depositors or creditors, in which
case the provision of Section 29 shall
apply.
SEC. 29. Proceedings upon insolvency.
Whenever, upon examination by the
head of the appropriate supervising or
examining department or his
examiners or agents into the condition
of any bank or non-bank financial
intermediary performing quasi-banking
functions, it shall be disclosed that the
condition of the same is one of
insolvency, or that its continuance in
business would involve probable loss to
its depositors or creditors, it shall be
the duty of the department head
concerned forthwith, in writing, to
inform the Monetary Board of the facts.
The Board may, upon finding the
statements of the department head to
be true, forbid the institution to do
business in the Philippines and
designate an official of the Central
Bank or a person of recognized
competence in banking or finance as
receiver to immediately take charge of
its assets and liabilities, as
expeditiously as possible collect and
gather all the assets and administer
the same for the benefit of its creditors,
and represent the bank personally or
through counsel as he may retain in all
actions or proceedings for or against
the institution, exercising all the
powers necessary for these purposes
including, but not limited to, bringing
and foreclosing mortgages in the name
of the bank or non-bank financial
intermediary performing quasi-banking
functions.
The Monetary Board shall thereupon
determine within sixty days whether
the institution may be recognized or
otherwise placed in such a condition so
that it may be permitted to resume
business with safety to its depositors
and creditors and the general public
and shall prescribe the conditions

under which such resumption of

business shall take place as well as the
time for fulfillment of such conditions.
In such case, the expenses and fees in
the collection and administration of the
assets of the institution shall be
determined by the Board and shall be
paid to the Central Bank out of the
assets of such institution.
If the Monetary Board shall determine
and confirm within the said period that
the bank or non-bank financial
intermediary performing quasi-banking
functions is insolvent or cannot resume
business with safety to its depositors,
creditors and the general public, it
shall, if the public interest requires,
order its liquidation, indicate the
manner of its liquidation and approve a
liquidation plan which may, when
warranted, involve disposition of any or
all assets in consideration for the
assumption of equivalent liabilities. The
liquidator designated as hereunder
provided shall, by the Solicitor General,
file a petition in the regional trial court
reciting the proceedings which have
been taken and praying the assistance
of the court in the liquidation of such
institution. The court shall have
jurisdiction in the same proceedings to
assist in the adjudication of the
disputed claims against the bank or
non-bank financial intermediary
performing quasi-banking functions
and in the enforcement of individual
liabilities of the stockholders and do all
that is necessary to preserve the
assets of such institution and to
implement the liquidation plan
approved by the Monetary Board. The
Monetary Board shall designate an
official of the Central Bank or a person
of recognized competence in banking
or finance, as liquidator who shall take
over and continue the functions of the
receiver previously appointed by the
Monetary Board under this Section. The
liquidator shall, with all convenient
speed, convert the assets of the
banking institution or non-bank
financial intermediary performing
quasi-banking functions to money or
sell, assign or otherwise dispose of the
same to creditors and other parties for
the purpose of paying the debts of
such institution and he may, in the
name of the bank or non-bank financial
intermediary performing quasi- banking
functions and with the assistance of
counsel as he may retain, institute
such actions as may be necessary in
the appropriate court to collect and
recover accounts and assets of such
institution or defend any action filed
against the institution: Provided,
however, That after having reasonably
established all claims against the
institution, the liquidator may, with the
approval of the court, effect partial

payments of such claims for assets of

the institution in accordance with their
legal priority.
The assets of an institution under
receivership or liquidation shall be
deemed in custodia legis in the hands
of the receiver or liquidator and shall,
from the moment of such receivership
or liquidation, be exempt from any
order of garnishment, levy,
attachment, or execution.
The provisions of any law to the
contrary notwithstanding, the actions
of the Monetary Board under this
Section, Section 28-A, and the second
paragraph of Section 34 of this Act
shall be final and executory, and can
be set aside by a court only if there is
convincing proof, after hearing, that
the action is plainly arbitrary and made
in bad faith: Provided, That the same is
raised in an appropriate pleading filed
by the stockholders of record
representing the majority of the capital
stock within ten (10) days from the
date the receiver takes charge of the
assets and liabilities of the bank or
non-bank financial intermediary
performing quasi-banking functions or,
in case of conservatorship or
liquidation, within ten (10) days from
receipt of notice by the said majority
stockholders of said bank or non-bank
financial intermediary of the order of its
placement under conservatorship or
liquidation. No restraining order or
injunction shall be issued by any court
enjoining the Central Bank from
implementing its actions under this
Section and the second paragraph of
Section 34 of this Act in the absence of
any convincing proof that the action of
the Monetary Board is plainly arbitrary
and made in bad faith and the
petitioner or plaintiff files a bond,
executed in favor of the Central Bank,
in an amount to be fixed by the court.
The restraining order or injunction shall
be refused or, if granted, shall be
dissolved upon filing by the Central
Bank of a bond, which shall be in the
form of cash or Central Bank cashier's
check, in an amount twice the amount
of the bond of the petitioner or plaintiff
conditioned that it will pay the
damages which the petitioner or
plaintiff may suffer by the refusal or
the dissolution of the injunction. The
provisions of Rule 58 of the New Rules
of Court insofar as they are applicable
and not inconsistent with the
provisions of this Section shall govern
the issuance and dissolution of the
restraining order or injunction
contemplated in this Section.
Insolvency, under this Act, shall be
understood to mean that the realizable
assets of a bank or a non-bank

financial intermediary performing

quasi-banking functions as determined
by the Central Bank are insufficient to
meet its liabilities.
The appointment of a conservator
under Section 28-A of this Act or the
appointment of a receiver or liquidator
under this Section shall be vested
exclusively with the Monetary Board,
the provision of any law, general or
special, to the contrary
notwithstanding.
It is stressed that in Section 25 of the said Act, the
Department of Supervision and Examination is charged
with the supervision and periodic examination of all
banking institutions operating in the Philippines,
including all government credit institutions. Assuming
for the moment that the Bank is owned or controlled by
the government, it is nevertheless not exempt from but
in fact expressly placed under the jurisdiction of the
Central Bank.
More to the point, R.A. No. 3518 itself, which created
the Philippine Veterans Bank, provides in its Section 14
that the Bank shall be subject to the authority of the
Department of Supervision and Examination.
The said Section 14 reads as follows:
Sec. 14. Inspection by Department of
Supervision and Examination of the
Central Bank. The Veterans Bank
shall be subject to inspection by the
Department of Supervision and
Examination of the Central Bank in
accordance with Republic Act
Numbered Two hundred sixty-five and
Republic Act Numbered Three hundred
thirty-seven.
The purpose of these provisions is to enable the
Central Bank, as the entity charged with the
responsibility of maintaining the stability of the
banking and monetary systems of the country, to take
the necessary steps against any banking institution
whose continued operation may cause prejudice to its
depositors and creditors, and the general public as
well.
Even if it be conceded that the charter of the Rank
constitutes a contract between the Government and
the stockholders of the Bank, it would not follow that
the relationship cannot be altered without violating the
impairment clause. This is a too simplistic conclusion
that loses sight of the vulnerability of this "precious
little clause," as it is called, to the inherent powers of
the State when the public interest demands their
exercise. The clause, according to Corwin, "is lately of
negligible importance, and might well be stricken from
the Constitution. For most practical purposes, in fact, it
has been." 2
The undeniable fact is that the notion of public interest
has made such considerable inroads into the
constitutional guaranty that one could validly say now
that it has become the exception rather than the rule.
The impact of the modern society upon hitherto private
agreements has left the clause in a shambles, as it

were, making practically every contract susceptible to

change on behalf of the public. The modern
understanding is that the contract is protected by the
guaranty only if it does not affect public interest, but
there is hardly any contract now that does not
somehow or other affect public interest as not to come
under the powers of the State. Part of that
understanding therefore is that, conversely, the
contract may be altered validly if it involves the public
interest, to which private interests must "yield as a
postulate of the existing social order."
In the landmark case of Norman v. Baltimore, 3 the U.S.
Supreme Court stressed that every contract involving
the public interest suffers a congenital infirmity, and
that is its susceptibility to change whenever required
by the public interest. The police power can be validly
asserted to make that change to meet any one of the
several great public needs, such as, in that case,
regulation of the value of money. In upholding a
legislative enactment providing for the payment of
existing debts dollar for dollar in the current legal
tender, as against contracts calling for such payment
in gold coin of specified weight and fineness the
decision stressed:
Contracts, however express, cannot
fetter the constitutional authority of the
Congress. Contracts may create rights
of property, but when contracts deal
with a subject matter which lies within
the control of the Congress, they have
a congenital infirmity. Parties cannot
remove their transactions from the
reach of dominant constitutional power
by making contracts about them.
The need in the case at bar is no less compelling, to
wit, the preservation of the integrity and stability of our
banking system. Unless adequate and determined
efforts are taken by the government against distressed
and mismanaged banks, public faith in the banking
system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses
suffered by the bank depositors, creditors, and
stockholders, who all deserve the protection of the
government. The government cannot simply cross its
arms while the assets of a bank are being depleted
through mismanagement or irregularities. It is the duty
of the Central Bank in such an event to step in and
salvage the remaining resources of the bank so that
they may not continue to be dissipated or plundered by
those entrusted with their management.
The petitioners' argument that by accepting the stocks
granted to them by the law, the same have become
their inalienable and irrevocable property is clearly
untenable. These stockholdings do not enjoy any
special immunity over and above shares of stock in any
other corporation, which are always subject to the
vicissitudes of business. Their value may appreciate or
decline or the stocks may become worthless
altogether. Like any other property, they do not have a
fixed but a fluctuating price. Certainly, the mere
acceptance of these shares of stock by the petitioners
did not create any legal assurance from the
Government that their original value would be
preserved and that the owners could not be deprived
of such property under any circumstance no matter
how justified.

Nor is the charter subject to revocation only by the

legislature, as the petitioners also erroneously contend.
The mere circumstance that the charter was granted
directly by Congress does not signify that only
Congress can modify or abrogate it by another
enactment. In fact, the charter itself says that the Bank
shall be subject to regulation by the Central Bank
which is empowered inter alia, by express provision of
law, to order its liquidation. Also, by its own terms, the
charter will automatically becomefunctus officio after
fifty years and the Bank itself will cease to exist unless
its life is extended by positive act of the legislature. It
may also be noted that quo warranto proceedings may
be filed against the Bank by the Solicitor General on
behalf of the Republic of the Philippines pursuant to the
Rules of Court on any of the grounds enumerated in
Rule 66 thereof. All these can be done without the
necessity of direct legislative action and, no less
importantly, without violation of the legislative will.
There is also the practical difficulty of Congress itself
decreeing liquidation, presumably to be made after
examination of the financial condition of the Bank. In
effect, the legislature, through its corresponding
appropriate committees, will be undertaking the
function purposely assigned by law to the Department
of Examination and Supervision of the Central Bank.
This is an intricate administrative function wisely
entrusted by Congress to the said body, from which the
petitioners would now recall it for its direct exercise by
the lawmaking body. Such a procedure would bring us
back to square one, so to speak, and revoke the
authority confided by Congress to the Central Bank in
recognition of its established expertise in the
regulation of banks.
Coming now to the ownership of the Bank, we find it is
not a government bank, as claimed by the petitioners.
The fact is that under Section 3(b) of its charter, while
51% of the capital stock of the Bank was initially fully
subscribed by the Republic of the Philippines for and in
behalf of the veterans, their widows, orphans or
compulsory heirs, the corresponding shares of stock
were to be turned over within 5 years from the
organization by the Bank to the said beneficiaries who
would thereafter have the right to vote such common
shares. The balance of about 49% was to be divided
into preferred shares which would be opened for
subscription by any recognized veteran, widow,
orphans or compulsory heirs of said veteran at the rate
of one preferred share per veteran, on the condition
that in case of failure of any particular veteran to
subscribe for any preferred share of stock so offered to
him within thirty (30) days from the date of receipt of
notice, said share of stock shall be available for
subscription to other veterans in accordance with such
rules or regulations as may be promulgated by the
Board of Directors. Moreover, under Sec. 6(a), the
affairs of the Bank are managed by a board of directors
composed of eleven members, three of whom are ex
officio members, with the other eight being elected
annually by the stockholders in the manner prescribed
by the Corporation Law. Significantly, Sec. 28 also
provides as follows:
Sec. 28. Articles of incorporation.
This Act, upon its approval, shall be
deemed and accepted to all legal
intents and purposes as the statutory
articles of incorporation or Charter of
the Philippine Veterans' Bank; and that,

notwithstanding the provisions of any

existing law to the contrary, said Bank
shall be deemed registered and duly
authorized to do business and operate
as a commercial bank as of the date of
approval of this Act.
This point is important because the Constitution
provides in its Article IX-B, Section 2(1) that "the Civil
Service embraces all branches, subdivisions,
instrumentalities, and agencies of the Government,
including government-owned or controlled corporations
with original charters." As the Bank is not owned or
controlled by the Government although it does have an
original charter in the form of R.A. No. 3518, it clearly
does not fall under the Civil Service and should be
regarded as an ordinary commercial corporation.
Section 28 of the said law so provides. The
consequence is that the relations of the Bank with its
employees should be governed by the labor laws,
under which in fact they have already been paid some
of their claims.
Applying the Labor Code, the Court rules that the
petitioners' claim for back wages must be rejected. The
reason is that the employees making this claim have
not been illegally dismissed but lawfully separated as a
result of the liquidation of the Bank on orders of higher
authority. This move was not the decision of the Bank;
it was forced upon it by the resolution of the Monetary
Board of the Central Bank. Back pay is awarded for
work that could have been performed by the employee
except that he was prevented from doing so because of
his illegal dismissal by the employer. It is clearly not
due in the case at bar to the employees whose services
were terminated as a result of the forcible closure of
the Bank.
As regards the claims of Marking and Mejia for the
payment of their retirement benefits, which we
restrained temporarily on January 12, 1989, we find
with the public respondents that such payment is in
order. We so hold, considering that although the said
retirees are members of the board of directors, they
are nevertheless covered by the Retirement Plan of the
Bank per the following pertinent provisions:
Article II, Section 1. The following
words and phrases, as used herein
shall have the meaning indicated,
unless a different meaning is plainly
required by the text:
...
c) "Employee" means any person who
is employed by the Bank on a regular
and permanent basis, including
officers; and such members of the
Board of Director and other hired
workers not employed on a regular and
permanent basis but who, because of
their extended service, would qualify
under the retirement categories under
Article IV hereof and who for purposes
of this Plan, shall be deemed
employees.
Article III, Section 1 Eligibility at
Effective Date

All employees as herein defined shall

automatically be eligible to participate
in the Plan, as of its effective date.
(Emphasis supplied)
However, for purposes of the application of Article 110
of the Labor Code, the said directors must be
considered managerial employees, or officers, and so
not entitled to the preference of claims granted
thereunder to workers in general or the rank-and-file
employees. The claims of these workers must be
accorded priority over all other claims, including those
of the said directors, and indeed even of the
Government itself." This provision, as amended by
Republic Act No. 6715, reads as follows:
Article 110. Worker preference in case
of bankruptcy. In the event of
bankruptcy or liquidation of an
employer's business, his workers shall
enjoy first preference as regards their
unpaid wages and other monetary
claims, any provision of law to the
contrary notwithstanding. Such unpaid
wages and monetary claims shall be
paid in full before the claims of the
Government and other creditors may
be paid. (Amendments italicized).
Focusing now on G.R. No. 82337, the Court notes that
the petitioners therein are asking that the ownership
and management of the Bank be turned over to them
in accordance with R.A. No. 3518. They point out that
the deficit incurred by the Bank when its liquidation
was ordered by the Central Bank in 1985 is not
imputable to them and suggest they can do better in
rehabilitating the Bank, given the proper support from
the Government. For this reason, they ask the Court to
order inter alia the Central Bank to grant them the
necessary loans and other facilities, the Secretary of
the Budget to certify as appropriated the amount
needed to fully pay all common and preferred shares of
the Bank, and the National Treasurer to release such
amounts to the Bank.
We agree with the Solicitor General that there is a
procedural flaw in the petition, in thatThe Rules of Court, the Judiciary
Reorganization Act of 1980 and the
Interim Rules of Court quite clearly
delineate the jurisdiction of the
Supreme Court in civil cases as
encompassing a review on appeal only
on questions of law as well as original
petitions in certain special civil actions
like certiorari, prohibition and
mandamus.
The present petition does not come
under any of the above. Obviously, the
petition is not an appeal from the
decision of any lower court or quasijudicial body, as in fact, the same is
indeed an original petition for
restitution. Also, the present petition is
certainly not one for certiorari,
prohibition or mandamus because
there is no tribunal, board or officer
that has acted without or in excess of

jurisdiction or with grave abuse of

discretion, or has neglected the
performance of an act which the law
enjoins as a duty, and from-whose acts
or negligence the petitioners were
supposed to have been aggrieved
thereby. On the basis alone of
jurisdiction, the petition at bar should
be dismissed.

SMITH, BELL & COMPANY (LTD.), petitioner,

vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of
Cebu, respondent.

A reading of the instant petition would

show, however, that the same partakes
of the nature of mandamus because it
seeks judgment directing and
commanding the Secretary of Budget,
the National Treasurer, the CB, the
Monetary Board and the PVB Liquidator
to do certain specific acts.
Unfortunately, the facts hereof do not
present a case where such offices and
officials are, by law, mandated to do
the adverted acts, even less, that they
have neglected to perform them.

A writ of mandamus is prayed for by Smith, Bell & Co.

(Ltd.), against Joaquin Natividad, Collector of Customs
of the port of Cebu, Philippine Islands, to compel him to
issue a certificate of Philippine registry to the petitioner
for its motor vessel Bato. The Attorney-General, acting
as counsel for respondent, demurs to the petition on
the general ground that it does not state facts
sufficient to constitute a cause of action. While the
facts are thus admitted, and while, moreover, the
pertinent provisions of law are clear and
understandable, and interpretative American
jurisprudence is found in abundance, yet the issue
submitted is not lightly to be resolved. The question,
flatly presented, is, whether Act. No. 2761 of the
Philippine Legislature is valid or, more directly
stated, whether the Government of the Philippine
Islands, through its Legislature, can deny the registry
of vessels in its coastwise trade to corporations having
alien stockholders.

Moreover, from what has already been said of the

power of the Central Bank to regulate commercial
banks, and to order their liquidation whenever
warranted, it would seem that the affairs of the Bank
are best entrusted to the liquidator court at this time
rather than managed directly by the petitioners. This is
no reflection on their competence and sincerity, not to
mention their genuine concern for the Bank, of which
they are the intended beneficiaries and owners. It is
only that, considering the expertise of the Central Bank
oh this matter, and the familiarity of the liquidator
court with the ramifications of the problem at hand, we
feel it is advisable that they be allowed, as long as the
administration has not yet adopted its own plans, to
devise the proper steps to relieve the Bank of its
present difficulties.
III
The Court reiterates its hope that the administrative
authorities may still find a way to rehabilitate the Bank
even at this late hour. This is still possible even with
this decision, for all we are saying here is that the
Central Bank has the power to liquidate the Bank under
existing laws and that, in the present circumstances,
its liquidation may be undertaken under the control of
the liquidator court in accordance with the procedure
prescribed by R.A. No. 265 and the guidelines herein
laid down. Such rehabilitation may still be ordered by
the President of the Philippines if she sees fit, without
violation of the import of this decision or of the
pertinent laws here interpreted and applied.
WHEREFORE, judgment is hereby rendered: (a)
DISMISSING the petitions in G.R. Nos. 67125 and
82337; and (b) LIFTING the writ of preliminary
injunction dated March 26, 1987, and the temporary
restraining order dated January 21, 1989. Costs against
the petitioners.
SO ORDERED.

G.R. No. 15574

September 17, 1919

Ross and Lawrence for petitioner.

Attorney-General Paredes for respondent.
MALCOLM, J.:

FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and
existing under the laws of the Philippine Islands. A
majority of its stockholders are British subjects. It is the
owner of a motor vessel known as the Bato built for it
in the Philippine Islands in 1916, of more than fifteen
tons gross The Bato was brought to Cebu in the
present year for the purpose of transporting plaintiff's
merchandise between ports in the Islands. Application
was made at Cebu, the home port of the vessel, to the
Collector of Customs for a certificate of Philippine
registry. The Collector refused to issue the certificate,
giving as his reason that all the stockholders of Smith,
Bell & Co., Ltd., were not citizens either of the United
States or of the Philippine Islands. The instant action is
the result.
LAW.
The Act of Congress of April 29, 1908, repealing the
Shipping Act of April 30, 1906 but reenacting a portion
of section 3 of this Law, and still in force, provides in its
section 1:
That until Congress shall have authorized the
registry as vessels of the United States of
vessels owned in the Philippine Islands, the
Government of the Philippine Islands is hereby
authorized to adopt, from time to time, and
enforce regulations governing the
transportation of merchandise and passengers
between ports or places in the Philippine
Archipelago. (35 Stat. at L., 70; Section 3912,
U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly
known as the Jones Law, still in force, provides in
section 3, (first paragraph, first sentence), 6, 7, 8, 10,
and 31, as follows.

SEC. 3. That no law shall be enacted in said

Islands which shall deprive any person of life,
liberty, or property without due process of law,
or deny to any person therein the equal
protection of the laws. . . .
SEC. 6. That the laws now in force in the
Philippines shall continue in force and effect,
except as altered, amended, or modified
herein, until altered, amended, or repealed by
the legislative authority herein provided or by
Act of Congress of the United States.
SEC. 7. That the legislative authority herein
provided shall have power, when not
inconsistent with this Act, by due enactment to
amend, alter modify, or repeal any law, civil or
criminal, continued in force by this Act as it
may from time to time see fit
This power shall specifically extend with the
limitation herein provided as to the tariff to all
laws relating to revenue provided as to the
tariff to all laws relating to revenue and
taxation in effect in the Philippines.
SEC. 8. That general legislative power, except
as otherwise herein provided, is hereby
granted to the Philippine Legislature,
authorized by this Act.
SEC. 10. That while this Act provides that the
Philippine government shall have the authority
to enact a tariff law the trade relations
between the islands and the United States shall
continue to be governed exclusively by laws of
the Congress of the United States: Provided,
That tariff acts or acts amendatory to the tariff
of the Philippine Islands shall not become law
until they shall receive the approval of the
President of the United States, nor shall any act
of the Philippine Legislature affecting
immigration or the currency or coinage laws of
the Philippines become a law until it has been
approved by the President of the United
States: Provided further, That the President
shall approve or disapprove any act mentioned
in the foregoing proviso within six months from
and after its enactment and submission for his
approval, and if not disapproved within such
time it shall become a law the same as if it had
been specifically approved.
SEC. 31. That all laws or parts of laws
applicable to the Philippines not in conflict with
any of the provisions of this Act are hereby
continued in force and effect." (39 Stat at L.,
546.)
On February 23, 1918, the Philippine Legislature
enacted Act No. 2761. The first section of this law
amended section 1172 of the Administrative Code to
read as follows:
SEC. 1172. Certificate of Philippine register.
Upon registration of a vessel of domestic
ownership, and of more than fifteen tons gross,
a certificate of Philippine register shall be
issued for it. If the vessel is of domestic
ownership and of fifteen tons gross or less, the

taking of the certificate of Philippine register

shall be optional with the owner.
"Domestic ownership," as used in this section,
means ownership vested in some one or more
of the following classes of persons: (a) Citizens
or native inhabitants of the Philippine Islands;
(b) citizens of the United States residing in the
Philippine Islands; (c) any corporation or
company composed wholly of citizens of the
Philippine Islands or of the United States or of
both, created under the laws of the United
States, or of any State thereof, or of thereof, or
the managing agent or master of the vessel
resides in the Philippine Islands
Any vessel of more than fifteen gross tons
which on February eighth, nineteen hundred
and eighteen, had a certificate of Philippine
register under existing law, shall likewise be
deemed a vessel of domestic ownership so
long as there shall not be any change in the
ownership thereof nor any transfer of stock of
the companies or corporations owning such
vessel to person not included under the last
preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections
1176 and 1202 of the Administrative Code to read as
follows:
SEC. 1176. Investigation into character of
vessel. No application for a certificate of
Philippine register shall be approved until the
collector of customs is satisfied from an
inspection of the vessel that it is engaged or
destined to be engaged in legitimate trade
and that it is of domestic ownership as such
ownership is defined in section eleven hundred
and seventy-two of this Code.
The collector of customs may at any time
inspect a vessel or examine its owner, master,
crew, or passengers in order to ascertain
whether the vessel is engaged in legitimate
trade and is entitled to have or retain the
certificate of Philippine register.
SEC. 1202. Limiting number of foreign officers
and engineers on board vessels. No
Philippine vessel operating in the coastwise
trade or on the high seas shall be permitted to
have on board more than one master or one
mate and one engineer who are not citizens of
the United States or of the Philippine Islands,
even if they hold licenses under section one
thousand one hundred and ninety-nine hereof.
No other person who is not a citizen of the
United States or of the Philippine Islands shall
be an officer or a member of the crew of such
vessel. Any such vessel which fails to comply
with the terms of this section shall be required
to pay an additional tonnage tax of fifty
centavos per net ton per month during the
continuance of said failure.
ISSUES.
Predicated on these facts and provisions of law, the
issues as above stated recur, namely, whether Act No

2761 of the Philippine Legislature is valid in whole or in

part whether the Government of the Philippine
Islands, through its Legislature, can deny the registry
of vessel in its coastwise trade to corporations having
alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can
exist no measure of doubt as to the power of the
Philippine Legislature to enact Act No. 2761. The Act of
Congress of April 29, 1908, with its specific delegation
of authority to the Government of the Philippine Islands
to regulate the transportation of merchandise and
passengers between ports or places therein, the liberal
construction given to the provisions of the Philippine
Bill, the Act of Congress of July 1, 1902, by the courts,
and the grant by the Act of Congress of August 29,
1916, of general legislative power to the Philippine
Legislature, are certainly superabundant authority for
such a law. While the Act of the local legislature may in
a way be inconsistent with the Act of Congress
regulating the coasting trade of the Continental United
States, yet the general rule that only such laws of the
United States have force in the Philippines as are
expressly extended thereto, and the abnegation of
power by Congress in favor of the Philippine Islands
would leave no starting point for convincing argument.
As a matter of fact, counsel for petitioner does not
assail legislative action from this direction (See U.
S. vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport
[1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that
counsel argues against the constitutionality of Act No.
2761. The first paragraph of the Philippine Bill of Rights
of the Philippine Bill, repeated again in the first
paragraph of the Philippine Bill of Rights as set forth in
the Jones Law, provides "That no law shall be enacted
in said Islands which shall deprive any person of life,
liberty, or property without due process of law, or deny
to any person therein the equal protection of the laws."
Counsel says that Act No. 2761 denies to Smith, Bell &
Co., Ltd., the equal protection of the laws because it, in
effect, prohibits the corporation from owning vessels,
and because classification of corporations based on the
citizenship of one or more of their stockholders is
capricious, and that Act No. 2761 deprives the
corporation of its properly without due process of law
because by the passage of the law company was
automatically deprived of every beneficial attribute of
ownership in the Bato and left with the naked title to a
boat it could not use .
The guaranties extended by the Congress of the United
States to the Philippine Islands have been used in the
same sense as like provisions found in the United
States Constitution. While the "due process of law and
equal protection of the laws" clause of the Philippine
Bill of Rights is couched in slightly different words than
the corresponding clause of the Fourteenth
Amendment to the United States Constitution, the first
should be interpreted and given the same force and
effect as the latter. (Kepner vs. U.S. [1904], 195 U. S.,
100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs.
Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth
Amendment has been announced in classic decisions
of the United States Supreme Court. Even at the
expense of restating what is so well known, these basic
principles must again be set down in order to serve as
the basis of this decision.

The guaranties of the Fourteenth Amendment and so of

the first paragraph of the Philippine Bill of Rights, are
universal in their application to all person within the
territorial jurisdiction, without regard to any differences
of race, color, or nationality. The word "person"
includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S.,
356; Truaxvs. Raich [1915], 239 U. S., 33.) Private
corporations, likewise, are "persons" within the scope
of the guaranties in so far as their property is
concerned. (Santa Clara County vs. Southern Pac. R. R.
Co. [1886], 118.U. S., 394; Pembina Mining
Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington
& L. Turnpike Road Co. vs. Sandford [1896], 164 U. S.,
578.) Classification with the end in view of providing
diversity of treatment may be made among
corporations, but must be based upon some
reasonable ground and not be a mere arbitrary
selection (Gulf, Colorado & Santa Fe Railway
Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws
held unconstitutional because of unlawful
discrimination against aliens could be cited. Generally,
these decisions relate to statutes which had attempted
arbitrarily to forbid aliens to engage in ordinary kinds
of business to earn their living. (Statevs. Montgomery
[1900], 94 Maine, 192, peddling but see.
Commonwealth vs. Hana [1907], 195 Mass., 262;
Templar vs. Board of Examiners of Barbers [1902], 131
Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U.
S.,.356, discrimination against Chinese; Truax vs. Raich
[1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481;
Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257;
Juniata Limestone Co. vs. Fagley [1898], 187 Penn.,
193, all relating to the employment of aliens by private
corporations.)
A literal application of general principles to the facts
before us would, of course, cause the inevitable
deduction that Act No. 2761 is unconstitutional by
reason of its denial to a corporation, some of whole
members are foreigners, of the equal protection of the
laws. Like all beneficient propositions, deeper research
discloses provisos. Examples of a denial of rights to
aliens notwithstanding the provisions of the Fourteenth
Amendment could be cited. (Tragesser vs. Gray [1890],
73 Md., 250, licenses to sell spirituous liquors denied to
persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262,
excluding aliens from the right to peddle;
Patsone vs. Commonwealth of Pennsylvania [1914],
232 U. S. , 138, prohibiting the killing of any wild bird
or animal by any unnaturalized foreign-born
resident; Ex parte Gilleti [1915], 70 Fla., 442,
discriminating in favor of citizens with reference to the
taking for private use of the common property in fish
and oysters found in the public waters of the State;
Heim vs. McCall [1915], 239 U. S.,.175, and
Crane vs. New York [1915], 239 U. S., 195, limiting
employment on public works by, or for, the State or a
municipality to citizens of the United States.)
One of the exceptions to the general rule, most
persistent and far reaching in influence is, that neither
the Fourteenth Amendment to the United States
Constitution, broad and comprehensive as it is, nor any
other amendment, "was designed to interfere with the
power of the State, sometimes termed its `police
power,' to prescribe regulations to promote the health,
peace, morals, education, and good order of the
people, and legislate so as to increase the industries of
the State, develop its resources and add to its wealth
and prosperity. From the very necessities of society,

legislation of a special character, having these objects

in view, must often be had in certain districts."
(Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans
Gas Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.)
This is the same police power which the United States
Supreme Court say "extends to so dealing with the
conditions which exist in the state as to bring out of
them the greatest welfare in of its people."
(Bacon vs. Walker [1907], 204 U.S., 311.) For quite
similar reasons, none of the provision of the Philippine
Organic Law could could have had the effect of denying
to the Government of the Philippine Islands, acting
through its Legislature, the right to exercise that most
essential, insistent, and illimitable of powers, the
sovereign police power, in the promotion of the general
welfare and the public interest. (U. S. vs. Toribio [1910],
15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32
Phil., 580; Rubi vs. Provincial Board of Mindoro [1919],
39 Phil., 660.) Another notable exception permits of the
regulation or distribution of the public domain or the
common property or resources of the people of the
State, so that use may be limited to its citizens. (Ex
parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia
[1876], 94 U. S., 391; Patsone vs. Commonwealth of
Pennsylvania [1914], 232U. S., 138.) Still another
exception permits of the limitation of employment in
the construction of public works by, or for, the State or
a municipality to citizens of the United States or of the
State. (Atkin vs. Kansas [1903],191 U. S., 207;
Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New
York [1915], 239 U. S., 195.) Even as to classification, it
is admitted that a State may classify with reference to
the evil to be prevented; the question is a practical
one, dependent upon experience.
(Patsone vs. Commonwealth of Pennsylvania [1914],
232 U. S., 138.)
To justify that portion of Act no. 2761 which permits
corporations or companies to obtain a certificate of
Philippine registry only on condition that they be
composed wholly of citizens of the Philippine Islands or
of the United States or both, as not infringing Philippine
Organic Law, it must be done under some one of the
exceptions here mentioned This must be done,
moreover, having particularly in mind what is so often
of controlling effect in this jurisdiction our local
experience and our peculiar local conditions.
To recall a few facts in geography, within the confines
of Philippine jurisdictional limits are found more than
three thousand islands. Literally, and absolutely,
steamship lines are, for an Insular territory thus
situated, the arteries of commerce. If one be severed,
the life-blood of the nation is lost. If on the other hand
these arteries are protected, then the security of the
country and the promotion of the general welfare is
sustained. Time and again, with such conditions
confronting it, has the executive branch of the
Government of the Philippine Islands, always later with
the sanction of the judicial branch, taken a firm stand
with reference to the presence of undesirable
foreigners. The Government has thus assumed to act
for the all-sufficient and primitive reason of the benefit
and protection of its own citizens and of the selfpreservation and integrity of its dominion. (In
re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco,
Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S.,
549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats
owned by foreigners, particularly by such solid and
reputable firms as the instant claimant, might indeed
traverse the waters of the Philippines for ages without

doing any particular harm. Again, some evilminded

foreigner might very easily take advantage of such
lavish hospitality to chart Philippine waters, to obtain
valuable information for unfriendly foreign powers, to
stir up insurrection, or to prejudice Filipino or American
commerce. Moreover, under the Spanish portion of
Philippine law, the waters within the domestic
jurisdiction are deemed part of the national domain,
open to public use. (Book II, Tit. IV, Ch. I, Civil Code;
Spanish Law of Waters of August 3, 1866, arts 1, 2, 3.)
Common carriers which in the Philippines as in the
United States and other countries are, as Lord Hale
said, "affected with a public interest," can only be
permitted to use these public waters as a privilege and
under such conditions as to the representatives of the
people may seem wise. (See De Villata vs. Stanley
[1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913],
232 U.S., 138), a case herein before mentioned, Justice
Holmes delivering the opinion of the United States
Supreme Court said:
This statute makes it unlawful for any
unnaturalized foreign-born resident to kill any
wild bird or animal except in defense of person
or property, and `to that end' makes it unlawful
for such foreign-born person to own or be
possessed of a shotgun or rifle; with a penalty
of $25 and a forfeiture of the gun or guns. The
plaintiff in error was found guilty and was
sentenced to pay the abovementioned fine.
The judgment was affirmed on successive
appeals. (231 Pa., 46; 79 Atl., 928.) He brings
the case to this court on the ground that the
statute is contrary to the 14th Amendment and
also is in contravention of the treaty between
the United States and Italy, to which latter
country the plaintiff in error belongs .
Under the 14th Amendment the objection is
twofold; unjustifiably depriving the alien of
property, and discrimination against such
aliens as a class. But the former really depends
upon the latter, since it hardly can be disputed
that if the lawful object, the protection of wild
life (Geer vs. Connecticut, 161 U.S., 519; 40 L.
ed., 793; 16 Sup. Ct. Rep., 600), warrants the
discrimination, the, means adopted for making
it effective also might be adopted. . . .
The discrimination undoubtedly presents a
more difficult question. But we start with
reference to the evil to be prevented, and that
if the class discriminated against is or
reasonably might be considered to define those
from whom the evil mainly is to be feared, it
properly may be picked out. A lack of abstract
symmetry does not matter. The question is a
practical one, dependent upon experience. . . .
The question therefore narrows itself to
whether this court can say that the legislature
of Pennsylvania was not warranted in assuming
as its premise for the law that resident
unnaturalized aliens were the peculiar source
of the evil that it desired to prevent.
(Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed.,
1050, 1052; 33 Sup. Ct. Rep., 692.)

Obviously the question, so stated, is one of

local experience, on which this court ought to
be very slow to declare that the state
legislature was wrong in its facts
(Adams vs. Milwaukee, 228 U.S., 572, 583; 57
L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we
might trust popular speech in some states it
was right; but it is enough that this court has
no such knowledge of local conditions as to be
able to say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co.
Ltd., a corporation having alien stockholders, is entitled
to the protection afforded by the due-process of law
and equal protection of the laws clause of the
Philippine Bill of Rights, nevertheless, Act No. 2761 of
the Philippine Legislature, in denying to corporations
such as Smith, Bell &. Co. Ltd., the right to register
vessels in the Philippines coastwise trade, does not
belong to that vicious species of class legislation which
must always be condemned, but does fall within
authorized exceptions, notably, within the purview of
the police power, and so does not offend against the
constitutional provision.
This opinion might well be brought to a close at this
point. It occurs to us, however, that the legislative
history of the United States and the Philippine Islands,
and, probably, the legislative history of other countries,
if we were to take the time to search it out, might
disclose similar attempts at restriction on the right to
enter the coastwise trade, and might thus furnish
valuable aid by which to ascertain and, if possible,
effectuate legislative intention.
3. The power to regulate commerce, expressly
delegated to the Congress by the Constitution,
includes the power to nationalize ships built
and owned in the United States by registries
and enrollments, and the recording of the
muniments of title of American vessels. The
Congress "may encourage or it may entirely
prohibit such commerce, and it may regulate in
any way it may see fit between these two
extremes." (U.S.vs. Craig [1886], 28 Fed., 795;
Gibbons vs. Ogden [1824], 9 Wheat., 1; The
Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first
Congress of the United States had not been long
convened before it enacted on September 1, 1789, "An
Act for Registering and Clearing Vessels, Regulating the
Coasting Trade, and for other purposes." Section 1 of
this law provided that for any ship or vessel to obtain
the benefits of American registry, it must belong wholly
to a citizen or citizens of the United States "and no
other." (1 Stat. at L., 55.) That Act was shortly after
repealed, but the same idea was carried into the Acts
of Congress of December 31, 1792 and February 18,
1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of
1792 provided that in order to obtain the registry of
any vessel, an oath shall be taken and subscribed by
the owner, or by one of the owners thereof, before the
officer authorized to make such registry, declaring,
"that there is no subject or citizen of any foreign prince
or state, directly or indirectly, by way of trust,
confidence, or otherwise, interested in such vessel, or
in the profits or issues thereof." Section 32 of the Act of
1793 even went so far as to say "that if any licensed

ship or vessel shall be transferred to any person who is

not at the time of such transfer a citizen of and
resident within the United States, ... every such vessel
with her tackle, apparel, and furniture, and the cargo
found on board her, shall be forefeited." In case of
alienation to a foreigner, Chief Justice Marshall said
that all the privileges of an American bottom were ipso
facto forfeited. (U.S. vs. Willings and Francis [1807], 4
Cranch, 48.) Even as late as 1873, the AttorneyGeneral of the United States was of the opinion that
under the provisions of the Act of December 31, 1792,
no vessel in which a foreigner is directly or indirectly
interested can lawfully be registered as a vessel of the
United. States. (14 Op. Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest,
although possibly the Act of March 3, 1825, may have
affected them, until amended by the Act of May 28,
1896 (29 Stat. at L., 188) which extended the
privileges of registry from vessels wholly owned by a
citizen or citizens of the United States to corporations
created under the laws of any of the states thereof. The
law, as amended, made possible the deduction that a
vessel belonging to a domestic corporation was
entitled to registry or enrollment even though some
stock of the company be owned by aliens. The right of
ownership of stock in a corporation was thereafter
distinct from the right to hold the property by the
corporation (Humphreys vs. McKissock [1890], 140
U.S., 304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29
Op. Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new
government found a substantive law in operation in the
Islands with a civil law history which it wisely continued
in force Article fifteen of the Spanish Code of
Commerce permitted any foreigner to engage in
Philippine trade if he had legal capacity to do so under
the laws of his nation. When the Philippine Commission
came to enact the Customs Administrative Act (No.
355) in 1902, it returned to the old American policy of
limiting the protection and flag of the United States to
vessels owned by citizens of the United States or by
native inhabitants of the Philippine Islands (Sec. 117.)
Two years later, the same body reverted to the existing
Congressional law by permitting certification to be
issued to a citizen of the United States or to a
corporation or company created under the laws of the
United States or of any state thereof or of the
Philippine Islands (Act No. 1235, sec. 3.) The two
administration codes repeated the same provisions
with the necessary amplification of inclusion of citizens
or native inhabitants of the Philippine Islands (Adm.
Code of 1916, sec. 1345; Adm. Code of 1917, sec.
1172). And now Act No. 2761 has returned to the
restrictive idea of the original Customs Administrative
Act which in turn was merely a reflection of the
statutory language of the first American Congress.
Provisions such as those in Act No. 2761, which deny to
foreigners the right to a certificate of Philippine
registry, are thus found not to be as radical as a first
reading would make them appear.
Without any subterfuge, the apparent purpose of the
Philippine Legislature is seen to be to enact an antialien shipping act. The ultimate purpose of the
Legislature is to encourage Philippine ship-building.
This, without doubt, has, likewise, been the intention of
the United States Congress in passing navigation or
tariff laws on different occasions. The object of such a

law, the United States Supreme Court once said, was to

encourage American trade, navigation, and shipbuilding by giving American ship-owners exclusive
privileges. (Old Dominion Steamship Co. vs. Virginia
[1905], 198 U.S., 299; Kent's Commentaries, Vol. 3, p.
139.)
In the concurring opinion of Justice Johnson in
Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the
following:
Licensing acts, in fact, in legislation, are
universally restraining acts; as, for example,
acts licensing gaming houses, retailers of
spirituous liquors, etc. The act, in this instance,
is distinctly of that character, and forms part of
an extensive system, the object of which is to
encourage American shipping, and place them
on an equal footing with the shipping of other
nations. Almost every commercial nation
reserves to its own subjects a monopoly of its
coasting trade; and a countervailing privilege
in favor of American shipping is contemplated,
in the whole legislation of the United States on
this subject. It is not to give the vessel an
American character, that the license is
granted; that effect has been correctly
attributed to the act of her enrollment. But it is
to confer on her American privileges, as
contradistinguished from foreign; and to
preserve the. Government from fraud by
foreigners, in surreptitiously intruding
themselves into the American commercial
marine, as well as frauds upon the revenue in
the trade coastwise, that this whole system is
projected.
The United States Congress in assuming its grave
responsibility of legislating wisely for a new country did
so imbued with a spirit of Americanism. Domestic
navigation and trade, it decreed, could only be carried
on by citizens of the United States. If the
representatives of the American people acted in this
patriotic manner to advance the national policy, and if
their action was accepted without protest in the courts,
who can say that they did not enact such beneficial
laws under the all-pervading police power, with the
prime motive of safeguarding the country and of
promoting its prosperity? Quite similarly, the Philippine
Legislature made up entirely of Filipinos, representing
the mandate of the Filipino people and the guardian of
their rights, acting under practically autonomous
powers, and imbued with a strong sense of
Philippinism, has desired for these Islands safety from
foreign interlopers, the use of the common property
exclusively by its citizens and the citizens of the United
States, and protection for the common good of the
people. Who can say, therefore, especially can a court,
that with all the facts and circumstances affecting the
Filipino people before it, the Philippine Legislature has
erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected
to live apart from active life, in monastic seclusion
amidst dusty tomes and ancient records, but, as keen
spectators of passing events and alive to the dictates
of the general the national welfare, can incline the
scales of their decisions in favor of that solution which
will most effectively promote the public policy. All the
presumption is in favor of the constitutionally of the
law and without good and strong reasons, courts

should not attempt to nullify the action of the

Legislature. "In construing a statute enacted by the
Philippine Commission (Legislature), we deem it our
duty not to give it a construction which would be
repugnant to an Act of Congress, if the language of the
statute is fairly susceptible of another construction not
in conflict with the higher law." (In re Guaria [1913],
24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is
the true construction which will best carry legislative
intention into effect.
With full consciousness of the importance of the
question, we nevertheless are clearly of the opinion
that the limitation of domestic ownership for purposes
of obtaining a certificate of Philippine registry in the
coastwise trade to citizens of the Philippine Islands,
and to citizens of the United States, does not violate
the provisions of paragraph 1 of section 3 of the Act of
Congress of August 29, 1916 No treaty right relied
upon Act No. 2761 of the Philippine Legislature is held
valid and constitutional .
The petition for a writ of mandamus is denied, with
costs against the petitioner. So ordered.

G.R. No. L-19550

June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J.

BROOKS and KARL BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY
OF JUSTICE; JOSE LUKBAN, in his capacity as Acting
Director, National Bureau of Investigation; SPECIAL
PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and
MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G.
REYES; JUDGE AMADO ROAN, Municipal Court of
Manila; JUDGE ROMAN CANSINO, Municipal Court of
Manila; JUDGE HERMOGENES CALUAG, Court of First
Instance of Rizal-Quezon City Branch, and JUDGE
DAMIAN JIMENEZ, Municipal Court of Quezon
City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer
and Meer and Juan T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Pacifico P. de Castro,
Assistant Solicitor General Frine C. Zaballero, Solicitor
Camilo D. Quiason and Solicitor C. Padua for
respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government
named on the margin1 hereinafter referred to as
Respondents-Prosecutors several judges2
hereinafter referred to as Respondents-Judges
issued, on different dates,3 a total of 42 search
warrants against petitioners herein4 and/or the
corporations of which they were officers,5 directed to
the any peace officer, to search the persons abovenamed and/or the premises of their offices, warehouses
and/or residences, and to seize and take possession of
the following personal property to wit:
Books of accounts, financial records, vouchers,
correspondence, receipts, ledgers, journals,
portfolios, credit journals, typewriters, and
other documents and/or papers showing all

business transactions including disbursements

receipts, balance sheets and profit and loss
statements and Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and
proceeds or fruits of the offense," or "used or intended
to be used as the means of committing the offense,"
which is described in the applications adverted to
above as "violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue (Code) and the
Revised Penal Code."
Alleging that the aforementioned search warrants are
null and void, as contravening the Constitution and the
Rules of Court because, inter alia: (1) they do not
describe with particularity the documents, books and
things to be seized; (2) cash money, not mentioned in
the warrants, were actually seized; (3) the warrants
were issued to fish evidence against the
aforementioned petitioners in deportation cases filed
against them; (4) the searches and seizures were made
in an illegal manner; and (5) the documents, papers
and cash money seized were not delivered to the
courts that issued the warrants, to be disposed of in
accordance with law on March 20, 1962, said
petitioners filed with the Supreme Court this original
action for certiorari, prohibition, mandamus and
injunction, and prayed that, pending final disposition of
the present case, a writ of preliminary injunction be
issued restraining Respondents-Prosecutors, their
agents and /or representatives from using the effects
seized as aforementioned or any copies thereof, in the
deportation cases already adverted to, and that, in due
course, thereafter, decision be rendered quashing the
contested search warrants and declaring the same null
and void, and commanding the respondents, their
agents or representatives to return to petitioners
herein, in accordance with Section 3, Rule 67, of the
Rules of Court, the documents, papers, things and cash
moneys seized or confiscated under the search
warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1)
that the contested search warrants are valid and have
been issued in accordance with law; (2) that the
defects of said warrants, if any, were cured by
petitioners' consent; and (3) that, in any event, the
effects seized are admissible in evidence against
herein petitioners, regardless of the alleged illegality of
the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of
preliminary injunction prayed for in the petition.
However, by resolution dated June 29, 1962, the writ
was partially lifted or dissolved, insofar as the papers,
documents and things seized from the offices of the
corporations above mentioned are concerned; but, the
injunction was maintained as regards the papers,
documents and things found and seized in the
residences of petitioners herein.7
Thus, the documents, papers, and things seized under
the alleged authority of the warrants in question may
be split into two (2) major groups, namely: (a) those
found and seized in the offices of the aforementioned
corporations, and (b) those found and seized in the
residences of petitioners herein.
As regards the first group, we hold that petitioners
herein have no cause of action to assail the legality of

the contested warrants and of the seizures made in

pursuance thereof, for the simple reason that said
corporations have their respective personalities,
separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock
or of the interest of each of them in said corporations,
and whatever the offices they hold therein may
be.8 Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose
rights have been impaired thereby,9 and that the
objection to an unlawful search and seizure is purely
personal and cannot be availed of by third
parties. 10 Consequently, petitioners herein may not
validly object to the use in evidence against them of
the documents, papers and things seized from the
offices and premises of the corporations adverted to
above, since the right to object to the admission of said
papers in evidence belongsexclusively to the
corporations, to whom the seized effects belong, and
may not be invoked by the corporate officers in
proceedings against them in their individual
capacity. 11 Indeed, it has been held:
. . . that the Government's action in gaining
possession of papers belonging to
the corporation did not relate to nor did it
affect the personal defendants. If these papers
were unlawfully seized and thereby the
constitutional rights of or any one were
invaded, they were the rights of
the corporation and not the rights of the other
defendants. Next, it is clear that a question of
the lawfulness of a seizure can be
raised only by one whose rights have been
invaded. Certainly, such a seizure, if unlawful,
could not affect the constitutional rights of
defendants whose property had not been
seized or the privacy of whose homes had not
been disturbed; nor could they claim for
themselves the benefits of the Fourth
Amendment, when its violation, if any, was
with reference to the rights of another. Remus
vs. United States (C.C.A.)291 F. 501, 511. It
follows, therefore, that the question of the
admissibility of the evidence based on an
alleged unlawful search and seizure
does not extend to the personal defendants but
embraces only the corporation whose property
was taken. . . . (A Guckenheimer & Bros. Co. vs.
United States, [1925] 3 F. 2d. 786, 789,
Emphasis supplied.)
With respect to the documents, papers and things
seized in the residences of petitioners herein, the
aforementioned resolution of June 29, 1962, lifted the
writ of preliminary injunction previously issued by this
Court,12 thereby, in effect, restraining herein
Respondents-Prosecutors from using them in evidence
against petitioners herein.
In connection with said documents, papers and things,
two (2) important questions need be settled, namely:
(1) whether the search warrants in question, and the
searches and seizures made under the authority
thereof, are valid or not, and (2) if the answer to the
preceding question is in the negative, whether said
documents, papers and things may be used in
evidence against petitioners herein.1wph1.t
Petitioners maintain that the aforementioned search
warrants are in the nature of general warrants and that

accordingly, the seizures effected upon the authority

there of are null and void. In this connection, the
Constitution13 provides:
The right of the people to be secure in their
persons, houses, papers, and effects against
unreasonable searches and seizures shall not
be violated, and no warrants shall issue but
upon probable cause, to be determined by the
judge after examination under oath or
affirmation of the complainant and the
witnesses he may produce, and particularly
describing the place to be searched, and the
persons or things to be seized.
Two points must be stressed in connection with this
constitutional mandate, namely: (1) that no warrant
shall issue but upon probable cause, to be determined
by the judge in the manner set forth in said provision;
and (2) that the warrant shall particularly describe the
things to be seized.
None of these requirements has been complied with in
the contested warrants. Indeed, the same were issued
upon applications stating that the natural and juridical
person therein named had committed a "violation of
Central Ban Laws, Tariff and Customs Laws, Internal
Revenue (Code) and Revised Penal Code." In other
words, nospecific offense had been alleged in said
applications. The averments thereof with respect to the
offense committed were abstract. As a consequence, it
was impossible for the judges who issued the warrants
to have found the existence of probable cause, for the
same presupposes the introduction of competent proof
that the party against whom it is sought has
performed particular acts, or
committed specific omissions, violating a given
provision of our criminal laws. As a matter of fact, the
applications involved in this case do not allege any
specific acts performed by herein petitioners. It would
be the legal heresy, of the highest order, to convict
anybody of a "violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue (Code) and Revised
Penal Code," as alleged in the aforementioned
applications without reference to any determinate
provision of said laws or
To uphold the validity of the warrants in question would
be to wipe out completely one of the most fundamental
rights guaranteed in our Constitution, for it would place
the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of
the whims caprice or passion of peace officers. This is
precisely the evil sought to be remedied by the
constitutional provision above quoted to outlaw the
so-called general warrants. It is not difficult to imagine
what would happen, in times of keen political strife,
when the party in power feels that the minority is likely
to wrest it, even though by legal means.
Such is the seriousness of the irregularities committed
in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122
of the former Rules of Court 14 by providing in its
counterpart, under the Revised Rules of Court 15 that "a
search warrant shall not issue but upon probable
cause in connection with one specific offense." Not
satisfied with this qualification, the Court added
thereto a paragraph, directing that "no search warrant
shall issue for more than one specific offense."

The grave violation of the Constitution made in the

application for the contested search warrants was
compounded by the description therein made of the
effects to be searched for and seized, to wit:
Books of accounts, financial records, vouchers,
journals, correspondence, receipts, ledgers,
portfolios, credit journals, typewriters, and
other documents and/or papers showing all
business transactions including disbursement
receipts, balance sheets and related profit and
loss statements.
Thus, the warrants authorized the search for and
seizure of records pertaining to all business
transactions of petitioners herein, regardless of
whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the
petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the
explicit command of our Bill of Rights that the things
to be seized be particularly described as well as
tending to defeat its major objective: the elimination
of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1),
Respondents-Prosecutors maintain that, even if the
searches and seizures under consideration were
unconstitutional, the documents, papers and things
thus seized are admissible in evidence against
petitioners herein. Upon mature deliberation, however,
we are unanimously of the opinion that the position
taken in the Moncado case must be abandoned. Said
position was in line with the American common law
rule, that the criminal should not be allowed to go free
merely "because the constable has blundered," 16 upon
the theory that the constitutional prohibition against
unreasonable searches and seizures is protected by
means other than the exclusion of evidence unlawfully
obtained, 17 such as the common-law action for
damages against the searching officer, against the
party who procured the issuance of the search warrant
and against those assisting in the execution of an
illegal search, their criminal punishment, resistance,
without liability to an unlawful seizure, and such other
legal remedies as may be provided by other laws.
However, most common law jurisdictions have already
given up this approach and eventually adopted the
exclusionary rule, realizing that this is the only
practical means of enforcing the constitutional
injunction against unreasonable searches and seizures.
In the language of Judge Learned Hand:
As we understand it, the reason for the
exclusion of evidence competent as such,
which has been unlawfully acquired, is that
exclusion is the only practical way of enforcing
the constitutional privilege. In earlier times the
action of trespass against the offending official
may have been protection enough; but that is
true no longer. Only in case the prosecution
which itself controls the seizing officials, knows
that it cannot profit by their wrong will that
wrong be repressed.18
In fact, over thirty (30) years before, the Federal
Supreme Court had already declared:

If letters and private documents can thus be

seized and held and used in evidence against a
citizen accused of an offense, the protection of
the 4th Amendment, declaring his rights to be
secure against such searches and seizures, is
of no value, and, so far as those thus placed
are concerned, might as well be stricken from
the Constitution. The efforts of the courts and
their officials to bring the guilty to punishment,
praiseworthy as they are, are not to be aided
by the sacrifice of those great principles
established by years of endeavor and suffering
which have resulted in their embodiment in the
fundamental law of the land.19
This view was, not only reiterated, but, also, broadened
in subsequent decisions on the same Federal
Court. 20After reviewing previous decisions thereon,
said Court held, in Mapp vs. Ohio (supra.):
. . . Today we once again examine the Wolf's
constitutional documentation of the right of
privacy free from unreasonable state intrusion,
and after its dozen years on our books, are led
by it to close the only courtroom door
remaining open to evidence secured by official
lawlessness in flagrant abuse of that basic
right, reserved to all persons as a specific
guarantee against that very same unlawful
conduct. We hold that all evidence obtained by
searches and seizures in violation of the
Constitution is, by that same authority,
inadmissible in a State.
Since the Fourth Amendment's right of privacy
has been declared enforceable against the
States through the Due Process Clause of the
Fourteenth, it is enforceable against them by
the same sanction of exclusion as it used
against the Federal Government. Were it
otherwise, then just as without the Weeks rule
the assurance against unreasonable federal
searches and seizures would be "a form of
words," valueless and underserving of mention
in a perpetual charter of inestimable human
liberties, so too, without that rule the freedom
from state invasions of privacy would be so
ephemeral and so neatly severed from its
conceptual nexus with the freedom from all
brutish means of coercing evidence as not to
permit this Court's high regard as a
freedom "implicit in the concept of ordered
liberty." At the time that the Court held in Wolf
that the amendment was applicable to the
States through the Due Process Clause, the
cases of this Court as we have seen, had
steadfastly held that as to federal officers the
Fourth Amendment included the exclusion of
the evidence seized in violation of its
provisions. Even Wolf "stoutly adhered" to that
proposition. The right to when conceded
operatively enforceable against the States, was
not susceptible of destruction by avulsion of
the sanction upon which its protection and
enjoyment had always been deemed
dependent under the Boyd, Weeks and
Silverthorne Cases. Therefore, in extending the
substantive protections of due process to all
constitutionally unreasonable searches state
or federal it was logically and
constitutionally necessarily that the exclusion

doctrine an essential part of the right to

privacy be also insisted upon as an essential
ingredient of the right newly recognized by the
Wolf Case. In short, the admission of the new
constitutional Right by Wolf could not tolerate
denial of its most important constitutional
privilege, namely, the exclusion of the
evidence which an accused had been forced to
give by reason of the unlawful seizure. To hold
otherwise is to grant the right but in reality to
withhold its privilege and enjoyment. Only last
year the Court itself recognized that the
purpose of the exclusionary rule to "is to deter
to compel respect for the constitutional
guaranty in the only effectively available way
by removing the incentive to disregard
it" . . . .
The ignoble shortcut to conviction left open to
the State tends to destroy the entire system of
constitutional restraints on which the liberties
of the people rest. Having once recognized that
the right to privacy embodied in the Fourth
Amendment is enforceable against the States,
and that the right to be secure against rude
invasions of privacy by state officers is,
therefore constitutional in origin, we can no
longer permit that right to remain an empty
promise. Because it is enforceable in the same
manner and to like effect as other basic rights
secured by its Due Process Clause, we can no
longer permit it to be revocable at the whim of
any police officer who, in the name of law
enforcement itself, chooses to suspend its
enjoyment. Our decision, founded on reason
and truth, gives to the individual no more than
that which the Constitution guarantees him to
the police officer no less than that to which
honest law enforcement is entitled, and, to the
courts, that judicial integrity so necessary in
the true administration of justice. (emphasis
ours.)
Indeed, the non-exclusionary rule is contrary, not only
to the letter, but also, to the spirit of the constitutional
injunction against unreasonable searches and seizures.
To be sure, if the applicant for a search warrant has
competent evidence to establish probable cause of the
commission of a given crime by the party against
whom the warrant is intended, then there is no reason
why the applicant should not comply with the
requirements of the fundamental law. Upon the other
hand, if he has no such competent evidence, then it
is not possible for the Judge to find that there is
probable cause, and, hence, no justification for the
issuance of the warrant. The only possible explanation
(not justification) for its issuance is the necessity
of fishing evidence of the commission of a crime. But,
then, this fishing expedition is indicative of the
absence of evidence to establish a probable cause.
Moreover, the theory that the criminal prosecution of
those who secure an illegal search warrant and/or
make unreasonable searches or seizures would suffice
to protect the constitutional guarantee under
consideration, overlooks the fact that violations thereof
are, in general, committed By agents of the party in
power, for, certainly, those belonging to the minority
could not possibly abuse a power they do not have.
Regardless of the handicap under which the minority
usually but, understandably finds itself in

prosecuting agents of the majority, one must not lose

sight of the fact that the psychological and moral effect
of the possibility 21 of securing their conviction, is
watered down by the pardoning power of the party for
whose benefit the illegality had been committed.
In their Motion for Reconsideration and Amendment of
the Resolution of this Court dated June 29, 1962,
petitioners allege that Rooms Nos. 81 and 91 of
Carmen Apartments, House No. 2008, Dewey
Boulevard, House No. 1436, Colorado Street, and Room
No. 304 of the Army-Navy Club, should be included
among the premises considered in said Resolution as
residences of herein petitioners, Harry S. Stonehill,
Robert P. Brook, John J. Brooks and Karl Beck,
respectively, and that, furthermore, the records, papers
and other effects seized in the offices of the
corporations above referred to include personal
belongings of said petitioners and other effects under
their exclusive possession and control, for the
exclusion of which they have a standing under the
latest rulings of the federal courts of federal courts of
the United States. 22
We note, however, that petitioners' theory, regarding
their alleged possession of and control over the
aforementioned records, papers and effects, and the
alleged "personal" nature thereof, has Been
Advanced, notin their petition or amended petition
herein, but in the Motion for Reconsideration and
Amendment of the Resolution of June 29, 1962. In
other words, said theory would appear to be
readjustment of that followed in said petitions, to suit
the approach intimated in the Resolution sought to be
reconsidered and amended. Then, too, some of the
affidavits or copies of alleged affidavits attached to
said motion for reconsideration, or submitted in
support thereof, contain either inconsistent allegations,
or allegations inconsistent with the theory now
advanced by petitioners herein.
Upon the other hand, we are not satisfied that the
allegations of said petitions said motion for
reconsideration, and the contents of the
aforementioned affidavits and other papers submitted
in support of said motion, have sufficiently established
the facts or conditions contemplated in the cases relied
upon by the petitioners; to warrant application of the
views therein expressed, should we agree thereto. At
any rate, we do not deem it necessary to express our
opinion thereon, it being best to leave the matter open
for determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the
Moncado case must be, as it is hereby, abandoned;
that the warrants for the search of three (3) residences
of herein petitioners, as specified in the Resolution of
June 29, 1962, are null and void; that the searches and
seizures therein made are illegal; that the writ of
preliminary injunction heretofore issued, in connection
with the documents, papers and other effects thus
seized in said residences of herein petitioners is hereby
made permanent; that the writs prayed for are
granted, insofar as the documents, papers and other
effects so seized in the aforementioned residences are
concerned; that the aforementioned motion for
Reconsideration and Amendment should be, as it is
hereby, denied; and that the petition herein is
dismissed and the writs prayed for denied, as regards
the documents, papers and other effects seized in the
twenty-nine (29) places, offices and other premises

enumerated in the same Resolution, without special

pronouncement as to costs.
It is so ordered.

EN BANC
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E.
SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M.
RUIZ, MISAEL P. VERA, in his capacity as Commissioner
of Internal Revenue, ARTURO LOGRONIO, RODOLFO DE
LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR
ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN
DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin,
for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor
General Crispin V . Bautista, Solicitor Pedro A. Ramirez
and Special Attorney Jaime M. Maza for Respondents.

DECISION

VILLAMOR, J.:

This is an original action of certiorari, prohibition and

mandamus, with prayer for a writ of preliminary
mandatory and prohibitory injunction. In their petition
Bache & Co. (Phil.), Inc., a corporation duly organized
and existing under the laws of the Philippines, and its
President, Frederick E. Seggerman, pray this Court to
declare null and void Search Warrant No. 2-M-70 issued
by respondent Judge on February 25, 1970; to order
respondents to desist from enforcing the same and/or
keeping the documents, papers and effects seized by
virtue thereof, as well as from enforcing the tax
assessments on petitioner corporation alleged by
petitioners to have been made on the basis of the said
documents, papers and effects, and to order the return
of the latter to petitioners. We gave due course to the
petition but did not issue the writ of preliminary
injunction prayed for therein.
The pertinent facts of this case, as gathered from
record, are as follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera,
Commissioner of Internal Revenue, wrote a letter
addressed to respondent Judge Vivencio M. Ruiz
requesting the issuance of a search warrant against
petitioners for violation of Section 46(a) of the National
Internal Revenue Code, in relation to all other pertinent
provisions thereof, particularly Sections 53, 72, 73, 208
and 209, and authorizing Revenue Examiner Rodolfo de
Leon, one of herein respondents, to make and file the
application for search warrant which was attached to
the letter.
In the afternoon of the following day, February 25,
1970, respondent De Leon and his witness, respondent
Arturo Logronio, went to the Court of First Instance of
Rizal. They brought with them the following papers:
respondent Veras aforesaid letter-request; an
application for search warrant already filled up but still
unsigned by respondent De Leon; an affidavit of
respondent Logronio subscribed before respondent De
Leon; a deposition in printed form of respondent
Logronio already accomplished and signed by him but
not yet subscribed; and a search warrant already
accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain

case; so, by means of a note, he instructed his Deputy

Clerk of Court to take the depositions of respondents
De Leon and Logronio. After the session had adjourned,
respondent Judge was informed that the depositions
had already been taken. The stenographer, upon
request of respondent Judge, read to him her
stenographic notes; and thereafter, respondent Judge
asked respondent Logronio to take the oath and
warned him that if his deposition was found to be false
and without legal basis, he could be charged for
perjury. Respondent Judge signed respondent de Leons
application for search warrant and respondent
Logronios deposition, Search Warrant No. 2-M-70 was
then sign by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a
Saturday, the BIR agents served the search warrant
petitioners at the offices of petitioner corporation on
Ayala Avenue, Makati, Rizal. Petitioners lawyers
protested the search on the ground that no formal
complaint or transcript of testimony was attached to
the warrant. The agents nevertheless proceeded with
their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the
Court of First Instance of Rizal praying that the search
warrant be quashed, dissolved or recalled, that
preliminary prohibitory and mandatory writs of
injunction be issued, that the search warrant be
declared null and void, and that the respondents be
ordered to pay petitioners, jointly and severally,
damages and attorneys fees. On March 18, 1970, the
respondents, thru the Solicitor General, filed an answer
to the petition. After hearing, the court, presided over
by respondent Judge, issued on July 29, 1970, an order
dismissing the petition for dissolution of the search
warrant. In the meantime, or on April 16, 1970, the
Bureau of Internal Revenue made tax assessments on
petitioner corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the
documents thus seized. Petitioners came to this Court.
The petition should be granted for the following
reasons:chanrob1es virtual 1aw library
1. Respondent Judge failed to personally examine the
complainant and his witness.
The pertinent provisions of the Constitution of the
Philippines and of the Revised Rules of Court
are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their
persons, houses, papers and effects against
unreasonable searches and seizures shall not be
violated, and no warrants shall issue but upon probable
cause, to be determined by the judge after
examination under oath or affirmation of the
complainant and the witnesses he may produce, and
particularly describing the place to be searched, and
the persons or things to be seized." (Art. III, Sec. 1,
Constitution.)
"SEC. 3. Requisites for issuing search warrant. A
search warrant shall not issue but upon probable cause
in connection with one specific offense to be
determined by the judge or justice of the peace after
examination under oath or affirmation of the
complainant and the witnesses he may produce, and
particularly describing the place to be searched and
the persons or things to be seized.
"No search warrant shall issue for more than one
specific offense.
"SEC. 4. Examination of the applicant. The judge or
justice of the peace must, before issuing the warrant,
personally examine on oath or affirmation the
complainant and any witnesses he may produce and
take their depositions in writing, and attach them to
the record, in addition to any affidavits presented to
him." (Rule 126, Revised Rules of Court.)

The examination of the complainant and the witnesses

he may produce, required by Art. III, Sec. 1, par. 3, of
the Constitution, and by Secs. 3 and 4, Rule 126 of the
Revised Rules of Court, should be conducted by the
judge himself and not by others. The phrase "which
shall be determined by the judge after examination
under oath or affirmation of the complainant and the
witnesses he may produce," appearing in the said
constitutional provision, was introduced by Delegate
Francisco as an amendment to the draft submitted by
the Sub-Committee of Seven. The following discussion
in the Constitutional Convention (Laurel, Proceedings of
the Philippine Constitutional Convention, Vol. III, pp.
755-757) is enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compaero los piropos y
vamos al grano.
En los casos de una necesidad de actuar
inmediatamente para que no se frusten los fines de la
justicia mediante el registro inmediato y la incautacion
del cuerpo del delito, no cree Su Seoria que causaria
cierta demora el procedimiento apuntado en su
enmienda en tal forma que podria frustrar los fines de
la justicia o si Su Seoria encuentra un remedio para
esto casos con el fin de compaginar los fines de la
justicia con los derechos del individuo en su persona,
bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso
hipottico que Su Seoria pregunta por la siguiente
razon: el que solicita un mandamiento de registro tiene
que hacerlo por escrito y ese escrito no aparecer en la
Mesa del Juez sin que alguien vaya el juez a presentar
ese escrito o peticion de sucuestro. Esa persona que
presenta el registro puede ser el mismo denunciante o
alguna persona que solicita dicho mandamiento de
registro. Ahora toda la enmienda en esos casos
consiste en que haya peticion de registro y el juez no
se atendra solamente a sea peticion sino que el juez
examiner a ese denunciante y si tiene testigos tambin
examiner a los testigos.
"SR. ORENSE. No cree Su Seoria que el tomar le
declaracion de ese denunciante por escrito siempre
requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero
por otro lado minimizamos en todo lo posible las
vejaciones injustas con la expedicion arbitraria de los
mandamientos de registro. Creo que entre dos males
debemos escoger. el menor.
x

"MR. LAUREL. . . . The reason why we are in favor of

this amendment is because we are incorporating in our
constitution something of a fundamental character.
Now, before a judge could issue a search warrant, he
must be under the obligation to examine personally
under oath the complainant and if he has any witness,
the witnesses that he may produce . . ."cralaw
virtua1aw library
The implementing rule in the Revised Rules of Court,
Sec. 4, Rule 126, is more emphatic and candid, for it
requires the judge, before issuing a search warrant, to
"personally examine on oath or affirmation the
complainant and any witnesses he may
produce . . ."cralaw virtua1aw library
Personal examination by the judge of the complainant
and his witnesses is necessary to enable him to
determine the existence or non-existence of a probable
cause, pursuant to Art. III, Sec. 1, par. 3, of the
Constitution, and Sec. 3, Rule 126 of the Revised Rules
of Court, both of which prohibit the issuance of
warrants except "upon probable cause." The
determination of whether or not a probable cause
exists calls for the exercise of judgment after a judicial

appraisal of facts and should not be allowed to be

delegated in the absence of any rule to the contrary.
In the case at bar, no personal examination at all was
conducted by respondent Judge of the complainant
(respondent De Leon) and his witness (respondent
Logronio). While it is true that the complainants
application for search warrant and the witness printedform deposition were subscribed and sworn to before
respondent Judge, the latter did not ask either of the
two any question the answer to which could possibly
be the basis for determining whether or not there was
probable cause against herein petitioners. Indeed, the
participants seem to have attached so little
significance to the matter that notes of the
proceedings before respondent Judge were not even
taken. At this juncture it may be well to recall the
salient facts. The transcript of stenographic notes (pp.
61-76, April 1, 1970, Annex J-2 of the Petition) taken at
the hearing of this case in the court below shows that
per instruction of respondent Judge, Mr. Eleodoro V.
Gonzales, Special Deputy Clerk of Court, took the
depositions of the complainant and his witness, and
that stenographic notes thereof were taken by Mrs.
Gaspar. At that time respondent Judge was at the sala
hearing a case. After respondent Judge was through
with the hearing, Deputy Clerk Gonzales, stenographer
Gaspar, complainant De Leon and witness Logronio
went to respondent Judges chamber and informed the
Judge that they had finished the depositions.
Respondent Judge then requested the stenographer to
read to him her stenographic notes. Special Deputy
Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes,
the Honorable Judge requested or instructed them,
requested Mr. Logronio to raise his hand and warned
him if his deposition will be found to be false and
without legal basis, he can be charged criminally for
perjury. The Honorable Court told Mr. Logronio whether
he affirms the facts contained in his deposition and the
affidavit executed before Mr. Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr.
Logronio.
"Q Who is this he?
"A The Honorable Judge.
"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search
warrant.
The participation of respondent Judge in the
proceedings which led to the issuance of Search
Warrant No. 2-M-70 was thus limited to listening to the
stenographers readings of her notes, to a few words of
warning against the commission of perjury, and to
administering the oath to the complainant and his
witness. This cannot be consider a personal
examination. If there was an examination at all of the
complainant and his witness, it was the one conducted
by the Deputy Clerk of Court. But, as stated, the
Constitution and the rules require a personal
examination by the judge. It was precisely on account
of the intention of the delegates to the Constitutional
Convention to make it a duty of the issuing judge to
personally examine the complainant and his witnesses
that the question of how much time would be
consumed by the judge in examining them came up
before the Convention, as can be seen from the record
of the proceedings quoted above. The reading of the
stenographic notes to respondent Judge did not
constitute sufficient compliance with the constitutional
mandate and the rule; for by that manner respondent

Judge did not have the opportunity to observe the

demeanor of the complainant and his witness, and to
propound initial and follow-up questions which the
judicial mind, on account of its training, was in the best
position to conceive. These were important in arriving
at a sound inference on the all-important question of
whether or not there was probable cause.
2. The search warrant was issued for more than one
specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation
of Sec. 46(a) of the National Internal Revenue Code in
relation to all other pertinent provisions thereof
particularly Secs. 53, 72, 73, 208 and 209." The
question is: Was the said search warrant issued "in
connection with one specific offense," as required by
Sec. 3, Rule 126?
To arrive at the correct answer it is essential to
examine closely the provisions of the Tax Code referred
to above. Thus we find the following:chanrob1es virtual
1aw library
Sec. 46(a) requires the filing of income tax returns by
corporations.
Sec. 53 requires the withholding of income taxes at
source.
Sec. 72 imposes surcharges for failure to render
income tax returns and for rendering false and
fraudulent returns.
Sec. 73 provides the penalty for failure to pay the
income tax, to make a return or to supply the
information required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies,
repacks, compounds, or manufactures any article
subject to a specific tax, without having paid the
privilege tax therefore, or who aids or abets in the
conduct of illicit distilling, rectifying, compounding, or
illicit manufacture of any article subject to specific tax .
. .," and provides that in the case of a corporation,
partnership, or association, the official and/or
employee who caused the violation shall be
responsible.
Sec. 209 penalizes the failure to make a return of
receipts, sales, business, or gross value of output
removed, or to pay the tax due thereon.
The search warrant in question was issued for at least
four distinct offenses under the Tax Code. The first is
the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the
filing of income tax returns), which are interrelated.
The second is the violation of Sec. 53 (withholding of
income taxes at source). The third is the violation of
Sec. 208 (unlawful pursuit of business or occupation);
and the fourth is the violation of Sec. 209 (failure to
make a return of receipts, sales, business or gross
value of output actually removed or to pay the tax due
thereon). Even in their classification the six abovementioned provisions are embraced in two different
titles: Secs. 46(a), 53, 72 and 73 are under Title II
(Income Tax); while Secs. 208 and 209 are under Title V
(Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et
Al., L-19550, June 19, 1967 (20 SCRA 383), is not
applicable, because there the search warrants were
issued for "violation of Central Bank Laws, Internal
Revenue (Code) and Revised Penal Code;" whereas,
here Search Warrant No 2-M-70 was issued for violation
of only one code, i.e., the National Internal Revenue
Code. The distinction more apparent than real, because
it was precisely on account of the Stonehill incident,
which occurred sometime before the present Rules of
Court took effect on January 1, 1964, that this Court
amended the former rule by inserting therein the
phrase "in connection with one specific offense," and

adding the sentence "No search warrant shall issue for

more than one specific offense," in what is now Sec. 3,
Rule 126. Thus we said in
Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed
in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122
of the former Rules of Court that a search warrant
shall not issue but upon probable cause in connection
with one specific offense. Not satisfied with this
qualification, the Court added thereto a paragraph,
directing that no search warrant shall issue for more
than one specific offense."
3. The search warrant does not particularly describe
the things to be seized.
The documents, papers and effects sought to be seized
are described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers,
journals, columnars, receipts and disbursements books,
customers ledgers); receipts for payments received;
certificates of stocks and securities; contracts,
promissory notes and deeds of sale; telex and coded
messages; business communications, accounting and
business records; checks and check stubs; records of
bank deposits and withdrawals; and records of foreign
remittances, covering the years 1966 to 1970."cralaw
virtua1aw library
The description does not meet the requirement in Art
III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126
of the Revised Rules of Court, that the warrant should
particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice
Roberto Concepcion, said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the
application for the contested search warrants was
compounded by the description therein made of the
effects to be searched for and seized, to
wit:chanrob1es virtual 1aw library
Books of accounts, financial records, vouchers,
journals, correspondence, receipts, ledgers, portfolios,
credit journals, typewriters, and other documents
and/or paper showing all business transactions
including disbursement receipts, balance sheets and
related profit and loss statements.
"Thus, the warrants authorized the search for and
seizure of records pertaining to all business
transactions of petitioners herein, regardless of
whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the
petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the
explicit command of our Bill of Rights that the things
to be seized be particularly described as well as
tending to defeat its major objective: the elimination of
general warrants."cralaw virtua1aw library
While the term "all business transactions" does not
appear in Search Warrant No. 2-M-70, the said warrant
nevertheless tends to defeat the major objective of the
Bill of Rights, i.e., the elimination of general warrants,
for the language used therein is so all-embracing as to
include all conceivable records of petitioner
corporation, which, if seized, could possibly render its
business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil.
886, 896, this Court had occasion to explain the
purpose of the requirement that the warrant should
particularly describe the place to be searched and the
things to be seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders

No. 58 (sec. 97) specifically require that a search

warrant should particularly describe the place to be
searched and the things to be seized. The evident
purpose and intent of this requirement is to limit the
things to be seized to those, and only those,
particularly described in the search warrant to leave
the officers of the law with no discretion regarding
what articles they shall seize, to the end that
unreasonable searches and seizures may not be
made, that abuses may not be committed. That this
is the correct interpretation of this constitutional
provision is borne out by American authorities."cralaw
virtua1aw library
The purpose as thus explained could, surely and
effectively, be defeated under the search warrant
issued in this case.
A search warrant may be said to particularly describe
the things to be seized when the description therein is
as specific as the circumstances will ordinarily allow
(People v. Rubio; 57 Phil. 384); or when the description
expresses a conclusion of fact not of law by which
the warrant officer may be guided in making the search
and seizure (idem., dissent of Abad Santos, J.,); or
when the things described are limited to those which
bear direct relation to the offense for which the warrant
is being issued (Sec. 2, Rule 126, Revised Rules of
Court). The herein search warrant does not conform to
any of the foregoing tests. If the articles desired to be
seized have any direct relation to an offense
committed, the applicant must necessarily have some
evidence, other than those articles, to prove the said
offense; and the articles subject of search and seizure
should come in handy merely to strengthen such
evidence. In this event, the description contained in
the herein disputed warrant should have mentioned, at
least, the dates, amounts, persons, and other pertinent
data regarding the receipts of payments, certificates of
stocks and securities, contracts, promissory notes,
deeds of sale, messages and communications, checks,
bank deposits and withdrawals, records of foreign
remittances, among others, enumerated in the
warrant.
Respondents contend that certiorari does not lie
because petitioners failed to file a motion for
reconsideration of respondent Judges order of July 29,
1970. The contention is without merit. In the first
place, when the questions raised before this Court are
the same as those which were squarely raised in and
passed upon by the court below, the filing of a motion
for reconsideration in said court before certiorari can
be instituted in this Court is no longer a prerequisite.
(Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the
second place, the rule requiring the filing of a motion
for reconsideration before an application for a writ
of certiorari can be entertained was never intended to
be applied without considering the circumstances.
(Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case
at bar time is of the essence in view of the tax
assessments sought to be enforced by respondent
officers of the Bureau of Internal Revenue against
petitioner corporation, On account of which immediate
and more direct action becomes necessary. (Matute v.
Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule
does not apply where, as in this case, the deprivation
of petitioners fundamental right to due process taints
the proceeding against them in the court below not
only with irregularity but also with nullity. (Matute v.
Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation
is not entitled to protection against unreasonable
search and seizures. Again, we find no merit in the
contention.
"Although, for the reasons above stated, we are of the
opinion that an officer of a corporation which is
charged with a violation of a statute of the state of its
creation, or of an act of Congress passed in the
exercise of its constitutional powers, cannot refuse to

produce the books and papers of such corporation, we

do not wish to be understood as holding that a
corporation is not entitled to immunity, under the 4th
Amendment, against unreasonable searches and
seizures. A corporation is, after all, but an association
of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective
body it waives no constitutional immunities appropriate
to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due
process of law, and is protected, under the 14th
Amendment, against unlawful discrimination . . ." (Hale
v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476,
480, it was thought that a different rule applied to a
corporation, the ground that it was not privileged from
producing its books and papers. But the rights of a
corporation against unlawful search and seizure are to
be protected even if the same result might have been
achieved in a lawful way." (Silverthorne Lumber
Company, Et. Al. v. United States of America, 251 U.S.
385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court
impliedly recognized the right of a corporation to
object against unreasonable searches and seizures,
thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners
herein have no cause of action to assail the legality of
the contested warrants and of the seizures made in
pursuance thereof, for the simple reason that said
corporations have their respective personalities,
separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock
or the interest of each of them in said corporations,
whatever, the offices they hold therein may be. Indeed,
it is well settled that the legality of a seizure can be
contested only by the party whose rights have been
impaired thereby, and that the objection to an unlawful
search and seizure is purely personal and cannot be
availed of by third parties. Consequently, petitioners
herein may not validly object to the use in evidence
against them of the documents, papers and things
seized from the offices and premises of the
corporations adverted to above, since the right to
object to the admission of said papers in evidence
belongs exclusively to the corporations, to whom the
seized effects belong, and may not be invoked by the
corporate officers in proceedings against them in their
individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various
corporations in whose offices documents, papers and
effects were searched and seized were the petitioners.
In the case at bar, the corporation to whom the seized
documents belong, and whose rights have thereby
been impaired, is itself a petitioner. On that score,
petitioner corporation here stands on a different
footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion
were, if not entirely as claimed by petitioners at
least partly as in effect admitted by respondents
based on the documents seized by virtue of Search
Warrant No. 2-M-70. Furthermore, the fact that the
assessments were made some one and one-half
months after the search and seizure on February 25,
1970, is a strong indication that the documents thus
seized served as basis for the assessments. Those
assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted.
Accordingly, Search Warrant No. 2-M-70 issued by
respondent Judge is declared null and void;
respondents are permanently enjoined from enforcing
the said search warrant; the documents, papers and
effects seized thereunder are ordered to be returned to
petitioners; and respondent officials the Bureau of
Internal Revenue and their representatives are
permanently enjoined from enforcing the assessments

mentioned in Annex "G" of the present petition, as well

as other assessments based on the documents, papers
and effects seized under the search warrant herein
nullified, and from using the same against petitioners
in any criminal or other proceeding. No pronouncement
as to costs.

Bataan Shipyard vs PCGG

Facts:
Challenged in this special civil action of certiorari and
prohibition by a private corporation known as the
Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by
President Corazon C. Aquino on February 28, 1986 and
March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and
acts done, in accordance with said executive orders by
the Presidential Commission on Good Government
and/or its Commissioners and agents, affecting said
corporation.
The PCGG was tasked to sequester the BASECO thru
Executive Orders 1 and 2 of President Cory Aquino.
The PCGG was able to take over the BASECO and
terminate its executive employees and requested to
have the following documents of the said company.
Such as (Stock transfer book, Legal documents,
Minutes of the meetings, Financial statements, and the
likes)
Petitioner contends that he cannot produce the said
documents due to it is an infringement of its right
against self incrimination.
ISSUE:
WON documents ask in by PCGG would vitiate their
right against self incrimination.
RULING:
BASECO also contends that its right against self
incrimination and unreasonable searches and seizures
had been transgressed by the Order of April 18, 1986
which required it "to produce corporate records from
1973 to 1986 under pain of contempt of the
Commission if it fails to do so." The order was issued
upon the authority of Section 3 (e) of Executive Order
No. 1, treating of the PCGG's power to "issue
subpoenas requiring * * the production of such books,
papers, contracts, records, statements of accounts and
other documents as may be material to the
investigation conducted by the Commission, " and
paragraph (3), Executive Order No. 2 dealing with its
power to "require all persons in the Philippines holding
* * (alleged "ill-gotten") assets or properties, whether
located in the Philippines or abroad, in their names as
nominees, agents or trustees, to make full disclosure of
the same * *." The contention lacks merit.
it is elementary that the right against self-incrimination
has no application to juridical persons.
While an individual may lawfully refuse to answer
incriminating questions unless protected by an
immunity statute, it does not follow that a corporation,
vested with special privileges and franchises, may
refuse to show its hand when charged with an abuse
ofsuchprivileges
At any rate, Executive Order No. 14-A, amending
Section 4 of Executive Order No. 14 assures protection
to individuals required to produce evidence before the
PCGG against any possible violation of his right against
self-incrimination. It gives them immunity from
prosecution on the basis of testimony or information he
is compelled to present. As amended, said Section 4
now provides that
xxx xxx xxx
The witness may not refuse to comply with the order
on the basis of his privilege against self-incrimination;
but no testimony or other information compelled under
the order (or any information directly or indirectly
derived from such testimony, or other information)
may be used against the witness in any criminal case,

except a prosecution for perjury, giving a false

statement, or otherwise failing to comply with the
order.
Relevant jurisprudence is also cited by the Solicitor
General. 114
* * corporations are not entitled to all of the
constitutional protections which private individuals
have. * * They are not at all within the privilege against
self-incrimination, although this court more than once
has said that the privilege runs very closely with the
4th Amendment's Search and Seizure provisions.It is
also settled that an officer of the company cannot
refuse to produce its records in its possession upon the
plea that they will either incriminate him or may
incriminate it." (Oklahoma Press Publishing Co. v.
Walling, 327 U.S. 186; emphasis, the Solicitor
General's).
* * The corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the
public. It received certain special privileges and
franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized
by its charter. Its rights to act as a corporation are only
preserved to it so long as it obeys the laws of its
creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has
exceeded its powers. It would be a strange anomaly to
hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the
exercise of sovereignty, inquire how these franchises
had been employed, and whether they had been
abused, and demand the production of the corporate
books and papers for that purpose. The defense
amounts to this, that an officer of the corporation
which is charged with a criminal violation of the statute
may plead the criminality of such corporation as a
refusal to produce its books. To state this proposition is
to answer it. While an individual may lawfully refuse to
answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation,
vested with special privileges and franchises may
refuse to show its hand when charged with an abuse of
such privileges.

about January 15, 1962, one Augusto Lim deposited in

his current account with the PCIB branch at Padre
Faura, Manila, GSIS Check No. 645915- B, in the sum of
P57,415.00, drawn against the PNB; that, following an
established banking practice in the Philippines, the
check was, on the same date, forwarded, for clearing,
through the Central Bank, to the PNB, which did not
return said check the next day, or at any other time,
but retained it and paid its amount to the PCIB, as well
as debited it against the account of the GSIS in the
PNB; that, subsequently, or on January 31, 1962, upon
demand from the GSIS, said sum of P57,415.00 was recredited to the latter's account, for the reason that the
signatures of its officers on the check were forged; and
that, thereupon, or on February 2, 1962, the PNB
demanded from the PCIB the refund of said sum, which
the PCIB refused to do. Hence, the present action
against the PCIB, which was dismissed by the Court of
First Instance of Manila, whose decision was, in turn,
affirmed by the Court of Appeals.

The constitutional safeguard against unreasonable

searches and seizures finds no application to the case
at bar either. There has been no search undertaken by
any agent or representative of the PCGG, and of course
no seizure on the occasion thereof.

In its brief, the PNB maintains that the lower court

erred: (1) in not finding the PCIB guilty of negligence;
(2) in not finding that the indorsements at the back of
the check are forged; (3) in not finding the PCIB liable
to the PNB by virtue of the former's warranty on the
back of the check; (4) in not holding that "clearing" is
not "acceptance", in contemplation of the Negotiable
Instruments law; (5) in not finding that, since the check
had not been accepted by the PNB, the latter is entitled
to reimbursement therefor; and (6) in denying the
PNB's right to recover from the PCIB.

G.R. No. L-26001

October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL
AND INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for
petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank hereinafter referred to
as the PNB seeks the review by certiorari of a
decision of the Court of Appeals, which affirmed that of
the Court of First Instance of Manila, dismissing
plaintiff's complaint against the Philippine Commercial
and Industrial Bank hereinafter referred to as the
PCIB for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties
and the decision of the Court of Appeals show that, on

It is not disputed that the signatures of the General

Manager and the Auditor of the GSIS on the check, as
drawer thereof, are forged; that the person named in
the check as its payee was one Mariano D. Pulido, who
purportedly indorsed it to one Manuel Go; that the
check purports to have been indorsed by Manuel Go to
Augusto Lim, who, in turn, deposited it with the PCIB,
on January 15, 1962; that, thereupon, the PCIB
stamped the following on the back of the check: "All
prior indorsements and/or Lack of Endorsement
Guaranteed, Philippine Commercial and Industrial
Bank," Padre Faura Branch, Manila; that, on the same
date, the PCIB sent the check to the PNB, for clearance,
through the Central Bank; and that, over two (2)
months before, or on November 13, 1961, the GSIS had
notified the PNB, which acknowledged receipt of the
notice, that said check had been lost, and, accordingly,
requested that its payment be stopped.

The first assignment of error will be discussed later,

together with the last,with which it is interrelated.
As regards the second assignment of error, the PNB
argues that, since the signatures of the drawer are
forged, so must the signatures of the supposed
indorsers be; but this conclusion does not necessarily
follow from said premise. Besides, there is absolutely
no evidence, and the PNB has not even tried to prove
that the aforementioned indorsements are spurious.
Again, the PNB refunded the amount of the check to
the GSIS, on account of the forgery in the
signatures, not of the indorsers or supposed indorsers,
but of the officers of the GSISas drawer of the
instrument. In other words, the question whether or not
the indorsements have been falsified is immaterial to
the PNB's liability as a drawee, or to its right to recover
from the PCIB,1 for, as against the drawee, the
indorsement of an intermediate bank does not

guarantee the signature of the drawer,2 since the

forgery of the indorsement is not the cause of the loss.3
With respect to the warranty on the back of the check,
to which the third assignment of error refers, it should
be noted that the PCIB thereby guaranteed "all
prior indorsements," not the authenticity of the
signatures of the officers of the GSIS who signed on its
behalf, because the GSIS is not an indorser of the
check, but its drawer.4Said warranty is irrelevant,
therefore, to the PNB's alleged right to recover from
the PCIB. It could have been availed of by a
subsequent indorsee5 or a holder in due
course6 subsequent to the PCIB, but, the PNB is
neither.7 Indeed, upon payment by the PNB, as drawee,
the check ceased to be a negotiable instrument, and
became a mere voucher or proof of payment.8
Referring to the fourth and fifth assignments of error,
we must bear in mind that, in general, "acceptance", in
the sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the
same are payable on demand.10 Indeed, "acceptance"
and "payment" are, within the purview of said Law,
essentially different things, for the former is
"a promise to perform an act," whereas the latter is the
"actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by
the drawee of his assent to the order of the drawer,"
which, in the case of checks, is the payment, on
demand, of a given sum of money. Upon the other
hand, actual payment of the amount of a check
implies not only an assent to said order of the drawer
and a recognition of the drawer's obligation to pay the
aforementioned sum, but, also, a compliance with such
obligation.
Let us now consider the first and the last assignments
of error. The PNB maintains that the lower court erred
in not finding that the PCIB had been guilty of
negligence in not discovering that the check was
forged. Assuming that there had been such negligence
on the part of the PCIB, it is undeniable, however, that
the PNB has, also, been negligent, with the
particularity that the PNB had been guilty of a greater
degree of negligence, because it had a previous and
formal notice from the GSIS that the check had been
lost, with the request that payment thereof be stopped.
Just as important, if not more important and decisive, is
the fact that the PNB's negligence was the main or
proximate cause for the corresponding loss.

induced the latter, not only to believe that the check

was genuine and good in every respect, but, also, to
pay its amount to Augusto Lim. In other words, the PNB
was the primary or proximate cause of the loss, and,
hence, may not recover from the PCIB.13
It is a well-settled maxim of law and equity that when
one of two (2) innocent persons must suffer by the
wrongful act of a third person, the loss must be borne
by the one whose negligence was the proximate cause
of the loss or who put it into the power of the third
person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the
collecting (PCIB) and the drawee (PNB) banks are
equally at fault, the court will leave the parties where it
finds them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument
engages that he will pay it according to the
tenor of his acceptance; and admits:
(a) The existence of the drawer, the
genuineness of his signature, and his capacity
and authority to draw the instrument; and
(b) The existence of the payee and his then
capacity to indorse.
The prevailing view is that the same rule applies in the
case of a drawee who pays a bill without having
previously accepted it.16
WHEREFORE, the decision appealed from is hereby
affirmed, with costs against the Philippine National
Bank. It is so ordered.

G.R. No. L-40324 October 5, 1988

JOSE O. SIA, petitioner,
vs.
COURT OF APPEALS and THE PEOPLE OF THE
PHILIPPINES, respondents.
Faustino B. Tobia and Robert H. Tobia for petitioner.
The Solicitor General for respondents.

In this connection, it will be recalled that the PCIB

did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in
his current account with the PCIB; that, on the same
day, the PCIB sent it, through the Central Bank, to the
PNB, for clearing; that the PNB did not return the check
to the PCIB the next day or at any other time; that said
failure to return the check to the PCIB implied, under
the current banking practice, that the PNB considered
the check good and would honor it; that, in fact, the
PNB honored the check and paid its amount to the
PCIB; and that only then did the PCIB allow Augusto
Lim to draw said amount from his aforementioned
current account.
Thus, by not returning the check to the PCIB, by
thereby indicating that the PNB had found nothing
wrong with the check and would honor the same, and
by actually paying its amount to the PCIB, the PNB

PADILLA, J.:
The facts in this ease are not disputed. As stated by
the Court of Appeals in its assailed decision, * dated 29
November 1974, rendered in CA-G.R. No. 12602-CR,
they are as follows:
... on October 31, 1963 Jose O. Sia
(appellant herein), President and
General Manager of the Metal
Manufacturing of the Philippines, Inc.
for and in its behalf, applied for and
was granted a Letter of Credit (Exhibit
"A") with the Continental Bank, Manila
to cover the importation of One

Hundred (100) pieces of Safe-Deposit

Locks No. 4440, complete with keys,
amounting Pl,979.06. A marginal
deposit was made with the Bank and
the Letter of Credit was confirmed with
its foreign correspondent. Thereafter,
appellant, for and in behalf of the Metal
Manufacturing of the Philippines, Inc.,
executed a trust receipt (Exhibit "C") in
favor of the Continental Bank, the
terms and conditions of which read, in
part, as follows:
... and in consideration
thereof, I/We HEREBY
AGREE TO HOLD SAID
GOODS IN TRUST FOR
THE SAID BANK as its
property with liberty to
sell the same for its
account but without
any authority to make
any other disposition
whatsoever of the said
goods or any part
thereof (or the
proceeds thereof)
either by way of
conditional sale, pledge
or otherwise.
In case of sale I/We
further agree to hand
the proceeds as soon
as received to the Bank
to apply against the
relative accept instance
(as described above)
and for the payment of
any other indebtedness
of mine/ours to
Continental Bank.
I/We agree to keep said
goods insured to their
full value against fire
and other casualties as
directed by the Bank,
the sum insured to be
payable in case of loss
to the Bank, with the
understanding that the
Bank is not to be
charged with the
storage, premium of
insurance or any other
expenses incurred on
said goods.
I/We also agree to keep
the said goods,
manufactured
products, or proceeds
thereof, whether in the
form of money or bills,
receivables or
accounts, separate and
capable of
Identification as
property of the Bank.

xxx xxx xxx

The Bank may at any
time cancel this trust
and take possession of
said goods or the
proceeds of the same
as may then have been
sold wherever the said
goods or proceeds may
then be found, and in
the event of any
suspensions, or failure,
or assignment for the
benefit of creditor on
my/our part or nonfulfillment of any
obligation, or of the
non-payment at
maturity of any
acceptance specified
hereon or under any
credit issued by the
Bank on my/our
account, or of any
indebtedness on
my/our part, all of
my/our obligations,
acceptances,
indebtedness, and
liabilities whatsoever
shall thereupon (with or
without notice) mature
and become due and
payable. ...
When the said trust receipt became
due and demandable, the Metal
Manufacturing of the Philippines, Inc.
failed to pay or deliver the
merchandise to the Bank despite the
latter's demands (Exh. "D"). ... 1
Consequently, before the Court of First Instance of
Manila, Branch XI, an information for estafa was filed
against petitioner for violation of the trust receipt
agreement executed by him in his capacity as
President and General Manager of Metal Manufacturing
of the Philippines, Inc. in favor of Continental Bank
(docketed as Criminal Case No. 77092).
Upon petitioner's plea of not guilty, trial proceeded.
The trial court entered a verdict of guilty beyond
reasonable doubt for the offense of estafa defined and
penalized in paragraph 1(b), Article 315 of the Revised
Penal Code, and sentenced the accused (petitioner) to
an indeterminate penalty of from One (1) Month and
One (1) Day of arresto mayor, as minimum, to One (1)
Year of prison correccional, as maximum, to indemnify
the offended party in the sum of P1,979.06 and to pay
the costs.
Elevating the trial court's decision to the Court of
Appeals (docketed therein as CA G.R. No. 16026-CR),
the conviction of the accused, as aforestated, was
affirmed with the modification to the effect that the
accused is to indemnify the offended party in the sum
of P1,278.65 only (after deducting the marginal
deposit). A motion for reconsideration followed, but
was denied for lack of merit. Hence, this petition for
review on certiorari.

From the assignment of errors submitted by the

petitioner, the following issues are raised:
1) whether petitioner Sia, as President and General
Manager of Metal Manufacturing of the Phil., Inc.
having acted for and on its behalf in executing the
Trust Receipt Agreement in favor of the Continental
Bank may be held liable for the crime charged; and
2) the real nature of a trust receipt agreement or
transaction.
This case presents issues similar to those resolved by
the Court en banc in Sia vs. People. 2 The decision in
the cited case calls for a reversal of the respondent
appellate court's herein appealed judgment thereby
resulting in the acquittal of the petitioner.
There is no further point is discussing the issues raised
by petitioner, as met by the respondents, because the
Court's decision in the earlier Sia case has preempted
the subject (although there are pronouncements in said
decision which may be open to question so much so
that the decision was not reached by a unanimous
court).
It should be pointed out, however, that if the acts
herein involved occurred after 29 January 1975,
petitioner would be criminally liable for estafa under
paragraph l(b), Article 315 of the Revised Penal Code,
pursuant to the following provisions of PD 115
Sec. 13. Penalty clause.The failure of
an entrustee to turn over the proceeds
of the sale of the goods, documents or,
instruments covered by a trust receipt
to the extent of the amount owing to
the entruster or as appears in the trust
receipt or to return said goods,
documents or instruments if they were
not sold or disposed of in accordance
with the terms of the trust receipt shall
constitute the crime of estafa,
punishable under the provisions of
Article Three hundred and fifteen,
paragraph one of Act Numbered Three
thousand eight hundred and fifteen, as
amended, otherwise known as the
Revised Penal Code. If the violation or
offense is committed by a corporation,
partnership, association or other
juridical entities, the penalty provided
for in this Decree shall be imposed
upon the directors, officers, employees
or other officials or persons therein
responsible for the offense, without
prejudice to the civil liabilities arising
from the criminal offense. 3
WHEREFORE, IN VIEW OF THE FOREGOING, the petition
is hereby GRANTED. The decision of the Court of
Appeals is SET ASIDE. Defendant is ACQUITTED without
prejudice to the institution of a civil action against the
Metal Manufacturing of the Phil., Inc. for collection of
the sum due plus damages if any. No costs.
SO ORDERED.
G.R. No. L-19190

November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiffappellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.
Attorney-General Villa-Real for appellee.

MALCOLM, J.:
By telegrams and a letter of confirmation to the
manager of the Aparri branch of the Philippine National
Bank, Venancio Concepcion, President of the Philippine
National Bank, between April 10, 1919, and May 7,
1919, authorized an extension of credit in favor of
"Puno y Concepcion, S. en C." in the amount of
P300,000. This special authorization was essential in
view of the memorandum order of President
Concepcion dated May 17, 1918, limiting the
discretional power of the local manager at Aparri,
Cagayan, to grant loans and discount negotiable
documents to P5,000, which, in certain cases, could be
increased to P10,000. Pursuant to this authorization,
credit aggregating P300,000, was granted the firm of
"Puno y Concepcion, S. en C.," the only security
required consisting of six demand notes. The notes,
together with the interest, were taken up and paid by
July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership
capitalized at P100,000. Anacleto Concepcion
contributed P5,000; Clara Vda. de Concepcion, P5,000;
Miguel S. Concepcion, P20,000; Clemente Puno,
P20,000; and Rosario San Agustin, "casada con Gral.
Venancio Concepcion," P50,000. Member Miguel S.
Concepcion was the administrator of the company.
On the facts recounted, Venancio Concepcion, as
President of the Philippine National Bank and as
member of the board of directors of this bank, was
charged in the Court of First Instance of Cagayan with a
violation of section 35 of Act No. 2747. He was found
guilty by the Honorable Enrique V. Filamor, Judge of
First Instance, and was sentenced to imprisonment for
one year and six months, to pay a fine of P3,000, with
subsidiary imprisonment in case of insolvency, and the
costs.
Section 35 of Act No. 2747, effective on February 20,
1918, just mentioned, to which reference must
hereafter repeatedly be made, reads as follows: "The
National Bank shall not, directly or indirectly, grant
loans to any of the members of the board of directors
of the bank nor to agents of the branch banks." Section
49 of the same Act provides: "Any person who shall
violate any of the provisions of this Act shall be
punished by a fine not to exceed ten thousand pesos,
or by imprisonment not to exceed five years, or by
both such fine and imprisonment." These two sections
were in effect in 1919 when the alleged unlawful acts
took place, but were repealed by Act No. 2938,
approved on January 30, 1921.
Counsel for the defense assign ten errors as having
been committed by the trial court. These errors they
have argued adroitly and exhaustively in their printed
brief, and again in oral argument. Attorney-General
Villa-Real, in an exceptionally accurate and

comprehensive brief, answers the proposition of

appellant one by one.

notes fell due; and (2) they were single-name and not
double-name paper.

The question presented are reduced to their simplest

elements in the opinion which follows:

The facts of the instant case having relation to this

phase of the argument are not essentially different
from the facts in the Binalbagan Estate case. Just as
there it was declared that the operations constituted a
loan and not a discount, so should we here lay down
the same ruling.

I. Was the granting of a credit of P300,000 to the

copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine
National Bank, a "loan" within the meaning of section
35 of Act No. 2747?
Counsel argue that the documents of record do not
prove that authority to make a loan was given, but only
show the concession of a credit. In this statement of
fact, counsel is correct, for the exhibits in question
speak of a "credito" (credit) and not of a " prestamo"
(loan).
The "credit" of an individual means his ability to borrow
money by virtue of the confidence or trust reposed by
a lender that he will pay what he may promise.
(Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law
Dictionary.) A "loan" means the delivery by one party
and the receipt by the other party of a given sum of
money, upon an agreement, express or implied, to
repay the sum loaned, with or without interest.
(Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The
concession of a "credit" necessarily involves the
granting of "loans" up to the limit of the amount fixed
in the "credit,"
II. Was the granting of a credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C.," by
Venancio Concepcion, President of the Philippine
National Bank, a "loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747
prohibits the granting of a "loan," it does not prohibit
what is commonly known as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then
President of the National Bank, inquired of the Insular
Auditor whether section 37 of Act No. 2612 was
intended to apply to discounts as well as to loans. The
ruling of the Acting Insular Auditor, dated August 11,
1916, was to the effect that said section referred to
loans alone, and placed no restriction upon discount
transactions. It becomes material, therefore, to
discover the distinction between a "loan" and a
"discount," and to ascertain if the instant transaction
comes under the first or the latter denomination.
Discounts are favored by bankers because of their
liquid nature, growing, as they do, out of an actual,
live, transaction. But in its last analysis, to discount a
paper is only a mode of loaning money, with, however,
these distinctions: (1) In a discount, interest is
deducted in advance, while in a loan, interest is taken
at the expiration of a credit; (2) a discount is always on
double-name paper; a loan is generally on single-name
paper.
Conceding, without deciding, that, as ruled by the
Insular Auditor, the law covers loans and not discounts,
yet the conclusion is inevitable that the demand notes
signed by the firm "Puno y Concepcion, S. en C." were
not discount paper but were mere evidences of
indebtedness, because (1) interest was not deducted
from the face of the notes, but was paid when the

III. Was the granting of a credit of P300,000 to the

copartnership, "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine
National Bank, an "indirect loan" within the meaning of
section 35 of Act No. 2747?
Counsel argue that a loan to the partnership "Puno y
Concepcion, S. en C." was not an "indirect loan." In this
connection, it should be recalled that the wife of the
defendant held one-half of the capital of this
partnership.
In the interpretation and construction of statutes, the
primary rule is to ascertain and give effect to the
intention of the Legislature. In this instance, the
purpose of the Legislature is plainly to erect a wall of
safety against temptation for a director of the bank.
The prohibition against indirect loans is a recognition of
the familiar maxim that no man may serve two
masters that where personal interest clashes with
fidelity to duty the latter almost always suffers. If,
therefore, it is shown that the husband is financially
interested in the success or failure of his wife's
business venture, a loan to partnership of which the
wife of a director is a member, falls within the
prohibition.
Various provisions of the Civil serve to establish the
familiar relationship called a conjugal partnership.
(Articles 1315, 1393, 1401, 1407, 1408, and 1412 can
be specially noted.) A loan, therefore, to a partnership
of which the wife of a director of a bank is a member, is
an indirect loan to such director.
That it was the intention of the Legislature to prohibit
exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant
was tempted to mingle his personal and family affairs
with his official duties, and to permit the loan P300,000
to a partnership of no established reputation and
without asking for collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870],
33 Md., 558; 3 Am. Rep., 211), the Supreme Court of
Maryland said:
What then was the purpose of the law when it
declared that no director or officer should
borrow of the bank, and "if any director," etc.,
"shall be convicted," etc., "of directly or
indirectly violating this section he shall be
punished by fine and imprisonment?" We say
to protect the stockholders, depositors and
creditors of the bank, against the temptation to
which the directors and officers might be
exposed, and the power which as such they
must necessarily possess in the control and
management of the bank, and the legislature
unwilling to rely upon the implied
understanding that in assuming this relation

they would not acquire any interest hostile or

adverse to the most exact and faithful
discharge of duty, declared in express terms
that they should not borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373),
relied upon in the Binalbagan Estate decision, it was
said:
We are of opinion the statute forbade the loan
to his copartnership firm as well as to himself
directly. The loan was made indirectly to him
through his firm.
IV. Could Venancio Concepcion, President of the
Philippine National Bank, be convicted of a violation of
section 35 of Act No. 2747 in relation with section 49 of
the same Act, when these portions of Act No. 2747
were repealed by Act No. 2938, prior to the finding of
the information and the rendition of the judgment?
As noted along toward the beginning of this opinion,
section 49 of Act No. 2747, in relation to section 35 of
the same Act, provides a punishment for any person
who shall violate any of the provisions of the Act. It is
contended, however, by the appellant, that the repeal
of these sections of Act No. 2747 by Act No. 2938 has
served to take away the basis for criminal prosecution.

Counsel argue that if defendant committed the acts of

which he was convicted, it was because he was misled
by rulings coming from the Insular Auditor. It is
furthermore stated that since the loans made to the
copartnership "Puno y Concepcion, S. en C." have been
paid, no loss has been suffered by the Philippine
National Bank.
Neither argument, even if conceded to be true, is
conclusive. Under the statute which the defendant has
violated, criminal intent is not necessarily material. The
doing of the inhibited act, inhibited on account of
public policy and public interest, constitutes the crime.
And, in this instance, as previously demonstrated, the
acts of the President of the Philippine National Bank do
not fall within the purview of the rulings of the Insular
Auditor, even conceding that such rulings have
controlling effect.
Morse, in his work, Banks and Banking, section 125,
says:
It is fraud for directors to secure by means of
their trust, and advantage not common to the
other stockholders. The law will not allow
private profit from a trust, and will not listen to
any proof of honest intent.
JUDGMENT

This same question has been previously submitted and

has received an answer adverse to such contention in
the cases of United Stated vs. Cuna ([1908], 12 Phil.,
241); People vs. Concepcion ([1922], 43 Phil., 653);
and Ong Chang Wing and Kwong Fok vs. United States
([1910], 218 U. S., 272; 40 Phil., 1046). In other words,
it has been the holding, and it must again be the
holding, that where an Act of the Legislature which
penalizes an offense, such repeals a former Act which
penalized the same offense, such repeal does not have
the effect of thereafter depriving the courts of
jurisdiction to try, convict, and sentenced offenders
charged with violations of the old law.
V. Was the granting of a credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine
National Bank, in violation of section 35 of Act No.
2747, penalized by this law?
Counsel argue that since the prohibition contained in
section 35 of Act No. 2747 is on the bank, and since
section 49 of said Act provides a punishment not on
the bank when it violates any provisions of the law, but
on a personviolating any provisions of the same, and
imposing imprisonment as a part of the penalty, the
prohibition contained in said section 35 is without
penal sanction.lawph!l.net
The answer is that when the corporation itself is
forbidden to do an act, the prohibition extends to the
board of directors, and to each director separately and
individually. (People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio
Concepcion, President of the Philippine National Bank,
in extending the credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C." constitute
a legal defense?

On a review of the evidence of record, with reference

to the decision of the trial court, and the errors
assigned by the appellant, and with reference to
previous decisions of this court on the same subject,
we are irresistibly led to the conclusion that no
reversible error was committed in the trial of this case,
and that the defendant has been proved guilty beyond
a reasonable doubt of the crime charged in the
information. The penalty imposed by the trial judge
falls within the limits of the punitive provisions of the
law.
Judgment is affirmed, with the costs of this instance
against the appellant. So ordered.

ASSET PRIVATIZATION VS CA (300 SCRA 579)

Asset Privatization Trust vs Court of Appeals
300 SCRA 579 [GR No. 121171 December 29, 1998]
Facts: The development, exploration and utilization of
the mineral deposits in the Surigao Mineral Reservation
have been authorized by the Republic Act No. 1528, as
amended by Republic Act No. 2077 and Republic Act
No. 4167, by virtue of which laws, a memorandum of
agreement was drawn on July 3, 1968, whereby the
Republic of the Philippines thru the Surigao Mineral
Reservation Board, granted MMIC the exclusive right to
explore, develop and exploit nickel, cobalt, and other
minerals in the Surigao Mineral Reservation. MMIC is a
domestic corporation engaged in mining with
respondent Jesus S. Cabarrus Sr. as president and
among its original stockholders. The Philippine
government undertook to support the financing of
MMIC by purchase of MMIC debenture bonds and
extension of guarantees. Further, from the DBP and/or
the government financing institutions to subscribe in
MMIC and issue guarantee/s of foreign loans or
deferred payment arrangements secured from the US
Eximbank, Asian Development Bank (ADB), Kobe steel
of amount not exceeding US$100 million. On July 13,
1981, MMIC, PNB, and DBP executed a mortgage trust
agreement whereby MMIC as mortgagor, agreed to

constitute a mortgage in favor of PNB and DBP as

mortgages, over all MMIC assets; subject of real estate
and chattel mortgage executed by the mortgagor, and
additional assets described and identified, including
assets of whatever kind, nature or description, which
the mortgagor may acquire whether in substitution of,
in replenishment or in addition thereto. Due to the
unsettled obligations, a financial restructuring plan
(FRP) was suggested, however not finalized. The
obligations matured and the mortgage was foreclosed.
The foreclosed assets were sold to PNB as the lone
bidder and were assigned to the newly formed
corporations namely Nonoc Mining Corporation,
Maricalum Mining and Industrial Corporation and Island
Cement Corporation. In 1986, these assets were
transferred to the asset privatization trust. On
February 28, 1985, Jesus S. Cabarrus Sr. together with
the other stockholders of MMIC, filed a derivative suit
against DBP and PNB before the RTC of Makati branch
62, for annulment of foreclosures, specific performance
and damages. The suit docketed as civil case no. 9900,
prayed that the court: 1.) Annul the foreclosures,
restore the foreclosed assets to MMIC, and require the
banks to account for their use and operation in the
interim; 2.) Direct the banks to honor and perform their
commitments under the alleged FRP; 3.) Pay moral and
exemplary damages, attorneys fees, litigation
expenses and costs. A compromise and arbitration
agreement was entered by the parties to which
committee awarded damages in favor of Cabarrus.
Issue: Whether or not the award granted to Cabarrus
was proper.
Held: No. Civil case no. 9900 filed before the RTC being
a derivative suit, MMIC should have been impleaded as
a party. It was not joined as a part plaintiff or party
defendant at any stage before of the proceedings as it
is, the award for damages to MMIC, which was not
party before the arbitration committee is a complete
nullity.
Settled is the doctrine that in a derivative suit, the
corporation is the real party in interest while the
stockholder filing suit for the corporations behalf is
only a nominal party. The corporation should be
included s a party in the suit.
An individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he
holds stock 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 the control of
the corporation. In such actions, the suing stockholder
is regarded as a nominal party, with the corporation as
the real part in interest.
It is a condition sine qua non that the corporation be
impleaded as a party because not only is the
corporation an indispensable party, but it is also the
present rule that it must be served with process. The
reason given is that the judgement must be made
binding upon the corporation in order that the
corporation may get the benefit of the suit and may
not bring a subsequent suit against the same
defendants for the same cause of action. In other
words the corporation must be joined as a party
because it is its cause of action that is being litigated
and because judgement must be a res judicata against
it.
The reasons given for not allowing direct individual suit
are:
1. That the prior rights of the creditors may be
prejudiced. Thus, our Supreme Court held in
the case of Evangelista vs Santos that the
Stockholders may not directly claim those
damages for themselves for that would
result in the appropriation by, and the
distribution among them of part of the
corporate assets before the
2. The universally recognized doctrine that a
stockholder in a corporation has no title
legal or equitable to the corporate property;
that both of these are in the corporation
itself for the benefit of the stockholders. In

3.

4.
5.
6.

other words, to allow shareholders to sue

separately would conflict with the separate
corporate entity principle.
dissolution of the corporation and the
liquidation of its debts and liabilities,
something which cannot be legally done in
view of section 16 of the corporation law.
The filing of such suits would conflict with
the duty of the management to sue for the
protection of all concerned;
It would produce wasteful multiplicity of
suits; and
It would involve confusion in ascertaining
the effect of partial recovery by an
individual on the damages recoverable by
the corporation for the same act.

G.R. Nos. 86883-85 January 29, 1993

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
NORBERTO MANERO, JR., EDILBERTO MANERO, ELPIDIO
MANERO, SEVERINO LINES, RUDY LINES, EFREN
PLEAGO, ROGER BEDAO, RODRIGO ESPIA, ARSENIO
VILLAMOR, JR., JOHN DOE and PETER DOE, accused.
SEVERINO LINES, RUDY LINES, EFREN PLEAGO and
ROGER BENDAO, accused-appellants.
The Solicitor General for plaintiff-appellee.
Romeo P. Jorge for accused-appellants.

BELLOSILLO, J.:
This was gruesome murder in a main thoroughfare an
hour before sundown. A hapless foreign religious
minister was riddled with bullets, his head shattered
into bits and pieces amidst the revelling of his
executioners as they danced and laughed around their
quarry, chanting the tune "Mutya Ka Baleleng", a
popular regional folk song, kicking and scoffing at his
prostrate, miserable, spiritless figure that was gasping
its last. Seemingly unsatiated with the ignominy of
their manslaughter, their leader picked up pieces of the
splattered brain and mockingly displayed them before
horrified spectators. Some accounts swear that acts of
cannibalism ensued, although they were not
sufficiently demonstrated. However, for their
outrageous feat, the gangleader already earned the
monicker "cannibal priest-killer" But, what is
indubitable is that Fr. Tulio Favali 1 was senselessly
killed for no apparent reason than that he was one of
the Italian Catholic missionaries laboring in heir
vineyard in the hinterlands of Mindanao. 2
In the aftermath of the murder, police authorities
launched a massive manhunt which resulted in the
capture of the perpetrators except Arsenio Villamor, Jr.,
and two unidentified persons who eluded arrest and
still remain at large.
Informations for Murder, 3 Attempted Murder 4 and
Arson 5 were accordingly filed against those responsible
for the frenzied orgy of violence that fateful day of 11
April 1985. As these cases arose from the same
occasion, they were all consolidated in Branch 17 of
the Regional Trial Court of Kidapawan, Cotabato. 6

After trial, the court a quo held

WHEREFORE . . . the Court finds the
accused Norberto Manero, Jr. alias
Commander Bucay, Edilberto Manero
alias Edil, Elpidio Manero, Severino
Lines, Rudy Lines, Rodrigo Espia alias
Rudy, Efren Pleago and Roger Bedao
GUILTY beyond reasonable doubt of the
offense of Murder, and with the
aggravating circumstances of superior
strength and treachery, hereby
sentences each of them to a penalty of
imprisonment of reclusion perpetua; to
pay the Pontifical Institute of Foreign
Mission (PIME) Brothers, the
congregation to which Father Tulio
Favali belonged, a civil indemnity of
P12,000.00; attorney's fees in the sum
of P50,000.00 for each of the eight (8)
accused or a total sum of P400,000.00;
court appearance fee of P10,000.00 for
every day the case was set for trial;
moral damages in the sum of
P100,000.00; and to pay
proportionately the costs.
Further, the Court finds the accused
Norberto Manero, Jr. alias Commander
Bucay GUILTY beyond reasonable doubt
of the offense of Arson and with the
application of the Indeterminate
Sentence Law, hereby sentences him
to an indeterminate penalty of
imprisonment of not less than four (4)
years, nine (9) months, one (1) day
of prision correccional, as minimum, to
six (6) years of prision correccional, as
maximum, and to indemnify the
Pontifical Institute of Foreign Mission
(PIME) Brothers, the congregation to
which Father Tulio Favali belonged, the
sum of P19,000.00 representing the
value of the motorcycle and to pay the
costs.
Finally, the Court finds the accused
Norberto Manero, Jr., alias Commander
Bucay, Edilberto Manero alias Edil,
Elpidio Manero, Severino Lines, Rudy
Lines, Rodrigo Espia alias Rudy, Efren
Pleago and Roger Bedao GUILTY
beyond reasonable doubt of the
offense of Attempted Murder and with
the application of the Indeterminate
Sentence Law, hereby sentences each
of them to an indeterminate penalty of
imprisonment of not less than two (2)
years, four (4) months and one (1) day
of prision correccional, and minimum,
to eight (8) years and twenty (20) days
of prision mayor, as maximum, and to
pay the complainant Rufino Robles the
sum of P20,000.00 as attorney's fees
and P2,000.00 as court appearance fee
for every day of trial and to pay
proportionately the costs.
The foregoing penalties shall be served
by the said accused successively in the
order of their respective severity in

accordance with the provisions of

Article 70 of the Revised Penal Code, as
amended. 7
From this judgment of conviction only accused
Severino Lines, Rudy Lines, Efren Pleago and Roger
Bedao appealed with respect to the cases for Murder
and Attempted Murder. The Manero brothers as well as
Rodrigo Espia did not appeal; neither did Norberto
Manero, Jr., in the Arson case. Consequently, the
decision as against them already became final.
Culled from the records, the facts are: On 11 April
1985, around 10:00 o'clock in the morning, the Manero
brothers Norberto Jr., Edilberto and Elpidio, along with
Rodrigo Espia, Severino Lines, Rudy Lines, Efren
Pleago and Roger Bedao, were inside the eatery of
one Reynaldo Diocades at Km. 125, La Esperanza,
Tulunan, Cotabato. They were conferring with Arsenio
Villamor, Jr., private secretary to the Municipal Mayor of
Tulunan, Cotabato, and his two (2) unidentified
bodyguards. Plans to liquidate a number of suspected
communist sympathizers were discussed. Arsenio
Villamor, Jr. scribbled on a cigarette wrapper the
following "NPA v. NPA, starring Fr. Peter, Domingo
Gomez, Bantil, Fred Gapate, Rene alias Tabagac and
Villaning." "Fr. Peter" is Fr. Peter Geremias, an Italian
priest suspected of having links with the communist
movement; "Bantil" is Rufino Robles, a Catholic lay
leader who is the complaining witness in the Attempted
Murder; Domingo Gomez is another lay leader, while
the others are simply "messengers". On the same
occasion, the conspirators agreed to Edilberto Manero's
proposal that should they fail to kill Fr. Peter Geremias,
another Italian priest would be killed in his stead. 8
At about 1:00 o'clock that afternoon, Elpidio Manero
with two (2) unidentified companions nailed a placard
on a street-post beside the eatery of Deocades. The
placard bore the same inscriptions as those found on
the cigarette wrapper except for the additional phrase
"versus Bucay, Edil and Palo." Some two (2) hours
later, Elpidio also posted a wooden placard bearing the
same message on a street cross-sign close to the
eatery. 9
Later, at 4:00 o'clock, the Manero brothers, together
with Espia and the four (4) appellants, all with assorted
firearms, proceeded to the house of "Bantil", their first
intended victim, which was also in the vicinity of
Deocades'carinderia. They were met by "Bantil" who
confronted them why his name was included in the
placards. Edilberto brushed aside the query; instead,
he asked "Bantil" if he had any qualms about it, and
without any provocation, Edilberto drew his revolver
and fired at the forehead of "Bantil". "Bantil" was able
to parry the gun, albeit his right finger and the lower
portion of his right ear were hit. Then they grappled for
its possession until "Bantil" was extricated by his wife
from the fray. But, as he was running away, he was
again fired upon by Edilberto. Only his trousers were
hit. "Bantil" however managed to seek refuge in the
house of a certain Domingo Gomez. 10Norberto, Jr.,
ordered his men to surround the house and not to allow
any one to get out so that "Bantil" would die of
hemorrhage. Then Edilberto went back to the
restaurant of Deocades and pistol-whipped him on the
face and accused him of being a communist coddler,
while appellants and their cohorts relished the
unfolding drama. 11

Moments later, while Deocades was feeding his swine,

Edilberto strewed him with a burst of gunfire from his
M-14 Armalite. Deocades cowered in fear as he knelt
with both hands clenched at the back of his head. This
again drew boisterous laughter and ridicule from the
dreaded desperados.
At 5:00 o'clock, Fr. Tulio Favali arrived at Km. 125 on
board his motorcycle. He entered the house of Gomez.
While inside, Norberto, Jr., and his co-accused Pleago
towed the motorcycle outside to the center of the
highway. Norberto, Jr., opened the gasoline tank, spilled
some fuel, lit a fire and burned the motorcycle. As the
vehicle was ablaze, the felons raved and rejoiced. 12
Upon seeing his motorcycle on fire, Fr. Favali accosted
Norberto, Jr. But the latter simply stepped backwards
and executed a thumbs-down signal. At this point,
Edilberto asked the priest: "Ano ang gusto mo, padre
(What is it you want, Father)? Gusto mo, Father, bukon
ko ang ulo mo (Do you want me, Father, to break your
head)?" Thereafter, in a flash, Edilberto fired at the
head of the priest. As Fr. Favali dropped to the ground,
his hands clasped against his chest, Norberto, Jr.,
taunted Edilberto if that was the only way he knew to
kill a priest. Slighted over the remark, Edilberto jumped
over the prostrate body three (3) times, kicked it twice,
and fired anew. The burst of gunfire virtually shattered
the head of Fr. Favali, causing his brain to scatter on
the road. As Norberto, Jr., flaunted the brain to the
terrified onlookers, his brothers danced and sang
"Mutya Ka Baleleng" to the delight of their comradesin-arms who now took guarded positions to isolate the
victim from possible assistance. 13
In seeking exculpation from criminal liability,
appellants Severino Lines, Rudy Lines, Efren Pleago
and Roger Bedao contend that the trial court erred in
disregarding their respective defenses of alibi which, if
properly appreciated, would tend to establish that
there was no prior agreement to kill; that the intended
victim was Fr. Peter Geremias, not Fr. Tulio Favali; that
there was only one (1) gunman, Edilberto; and, that
there was absolutely no showing that appellants
cooperated in the shooting of the victim despite their
proximity at the time to Edilberto.
But the evidence on record does not agree with the
arguments of accused-appellants.
On their defense of alibi, accused brothers Severino
and Rudy Lines claim that they were harvesting palay
the whole day of 11 April 1985 some one kilometer
away from the crime scene. Accused Roger Bedao
alleges that he was on an errand for the church to buy
lumber and nipa in M'lang, Cotabato, that morning of
11 April 1985, taking along his wife and sick child for
medical treatment and arrived in La Esperanza,
Tulunan, past noontime.
Interestingly, all appellants similarly contend that it
was only after they heard gunshots that they rushed to
the house of Norberto Manero, Sr., Barangay Captain of
La Esperanza, where they were joined by their fellow
CHDF members and co-accused, and that it was only
then that they proceeded together to where the crime
took place at Km. 125.
It is axiomatic that the accused interposing the defense
of alibi must not only be at some other place but that it

must also be physically impossible for him to be at the

scene of the crime at the time of its commission. 14
Considering the failure of appellants to prove the
required physical impossibility of being present at the
crime scene, as can be readily deduced from the
proximity between the places where accusedappellants were allegedly situated at the time of the
commission of the offenses and the locus
criminis, 15 the defense of alibi is definitely
feeble. 16 After all, it has been the consistent ruling of
this Court that no physical impossibility exists in
instances where it would take the accused only fifteen
to twenty minutes by jeep or tricycle, or some one-anda-half hours by foot, to traverse the distance between
the place where he allegedly was at the time of
commission of the offense and the scene of the
crime. 17 Recently, we ruled that there can be no
physical impossibility even if the distance between two
places is merely two (2) hours by bus. 18 More
important, it is well-settled that the defense of alibi
cannot prevail over
the positive identification of the authors of the crime
by the prosecution witnesses. 19
In the case before Us, two (2) eyewitnesses, Reynaldo
Deocades and Manuel Bantolo, testified that they were
both inside the eatery at about 10:00 o'clock in the
morning of 11 April 1985 when the Manero brothers,
together with appellants, first discussed their plan to
kill some communist sympathizers. The witnesses also
testified that they still saw the appellants in the
company of the Manero brothers at 4:00 o'clock in the
afternoon when Rufino Robles was shot. Further, at
5:00 o'clock that same afternoon, appellants were very
much at the scene of the crime, along with the Manero
brothers, when Fr. Favali was brutally
murdered. 20 Indeed, in the face of such positive
declarations that appellants were at the locus
criminis from 10:00 o'clock in the morning up to about
5:00 o'clock in the afternoon, the alibi of appellants
that they were somewhere else, which is negative in
nature, cannot prevail. 21 The presence of appellants in
the eatery at Km. 125 having been positively
established, all doubts that they were not privy to the
plot to liquidate alleged communist sympathizers are
therefore removed. There was direct proof to link them
to the conspiracy.
There is conspiracy when two or more persons come to
an agreement to commit a crime and decide to commit
it.22 It is not essential that all the accused commit
together each and every act constitutive of the
offense. 23 It is enough that an accused participates in
an act or deed where there is singularity of purpose,
and unity in its execution is present. 24
The findings of the court a quo unmistakably show that
there was indeed a community of design as evidenced
by the concerted acts of all the accused. Thus
The other six accused, 25 all armed with
high powered firearms, were positively
identified with Norberto Manero, Jr. and
Edilberto Manero in the carinderia of
Reynaldo Deocades in La Esperanza,
Tulunan, Cotabato at 10:00 o'clock in
the morning of 11 April 1985
morning . . . they were outside of the
carinderia by the window near the
table where Edilberto Manero, Norberto

Manero, Jr., Jun Villamor, Elpidio Manero

and unidentified members of the
airborne from Cotabato were grouped
together. Later that morning, they all
went to the cockhouse nearby to finish
their plan and drink tuba. They were
seen again with Edilberto Manero and
Norberto Manero, Jr., at 4:00 o'clock in
the afternoon of that day near the
house of Rufino Robles (Bantil) when
Edilberto Manero shot Robles. They
surrounded the house of Domingo
Gomez where Robles fled and hid, but
later left when Edilberto Manero told
them to leave as Robles would die of
hemorrhage. They followed Fr. Favali to
Domingo Gomez' house, witnessed and
enjoyed the burning of the motorcycle
of Fr. Favali and later stood guard with
their firearms ready on the road when
Edilberto Manero shot to death Fr.
Favali. Finally, they joined Norberto
Manero, Jr. and Edilberto Manero in
their enjoyment and merriment on the
death of the priest.26
From the foregoing narration of the trial court, it is
clear that appellants were not merely innocent
bystanders but were in fact vital cogs in perpetrating
the savage murder of Fr. Favali and the attempted
murder of Rufino Robles by the Manero brothers and
their militiamen. For sure, appellants all assumed a
fighting stance to discourage if not prevent any
attempt to provide assistance to the fallen priest. They
surrounded the house of Domingo Gomez to stop
Robles and the other occupants from leaving so that
the wounded Robles may die of
hemorrhage. 27Undoubtedly, these were overt acts to
ensure success of the commission of the crimes and in
furtherance of the aims of the conspiracy. The
appellants acted in concert in the murder of Fr. Favali
and in the attempted murder of Rufino Robles. While
accused-appellants may not have delivered the fatal
shots themselves, their collective action showed a
common intent to commit the criminal acts.
While it may be true that Fr. Favali was not originally
the intended victim, as it was Fr. Peter Geremias whom
the group targetted for the kill, nevertheless, Fr. Favali
was deemed a good substitute in the murder as he was
an Italian priest. On this, the conspirators expressly
agreed. As witness Manuel Bantolo explained 28
Q Aside from those
persons listed in that
paper to be killed, were
there other persons
who were to be
liquidated?
A There were some
others.
Q Who were they?
A They said that if they
could not kill those
persons listed in that
paper then they will
(sic) kill anyone so long

as he is (sic) an Italian
and if they could not
kill the persons they
like to kill they will (sic)
make Reynaldo
Deocades as their
sample.
That appellants and their co-accused reached a
common understanding to kill another Italian priest in
the event that Fr. Peter Geremias could not be spotted
was elucidated by Bantolo thus 29
Q Who suggested that
Fr. Peter be the first to
be killed?
A All of them in the
group.
Q What was the
reaction of Norberto
Manero with respect to
the plan to kill Fr.
Peter?
A He laughed and even
said, "amo ina"
meaning "yes, we will
kill him ahead."
xxx xxx xxx
Q What about Severino
Lines? What was his
reaction?
A He also laughed and
so conformed and
agreed to it.
Q Rudy Lines.
A He also said "yes".
Q What do you mean
"yes"?
A He also agreed and
he was happy and said
"yes" we will kill him.
xxx xxx xxx
Q What about Efren
Pleago?
A He also agreed and
even commented
laughing "go ahead".
Q Roger Bedao, what
was his reaction to that
suggestion that should
they fail to kill Fr. Peter,
they will (sic) kill
anybody provided he is
an Italian and if not,
they will (sic) make

Reynaldo Deocades an
example?
A He also agreed
laughing.
Conspiracy or action in concert to achieve a criminal
design being sufficiently shown, the act of one is the
act of all the other conspirators, and
the precise extent or modality of participation of each
of them becomes secondary. 30
The award of moral damages in the amount of
P100,000.00 to the congregation, the Pontifical
Institute of Foreign Mission (PIME) Brothers, is not
proper. There is nothing on record which indicates that
the deceased effectively severed his civil relations with
his family, or that he disinherited any member thereof,
when he joined his religious congregation. As a matter
of fact, Fr. Peter Geremias of the same congregation,
who was then a parish priest of Kidapawan, testified
that "the religious family belongs to the natural family
of origin." 31 Besides, as We already held, 32 a juridical
person is not entitled to moral damages because, not
being a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. It is
only when a juridical person has a good reputation that
is debased, resulting in social humiliation, that moral
damages may be awarded.
Neither can We award moral damages to the heirs of
the deceased who may otherwise be lawfully entitled
thereto pursuant to par. (3), Art. 2206, of the Civil
Code, 33 for the reason that the heirs never presented
any evidence showing that they suffered mental
anguish; much less did they take the witness stand. It
has been held 34 that moral damages and their causal
relation to the defendant's acts should be satisfactorily
proved by the claimant. It is elementary that in order
that moral damages may be awarded there must be
proof of moral suffering. 35 However, considering that
the brutal slaying of Fr. Tulio Favali was attended with
abuse of superior strength, cruelty and ignominy by
deliberately and inhumanly augmenting the pain and
anguish of the victim, outraging or scoffing at his
person or corpse, exemplary damages may be awarded
to the lawful heirs, 36 even though not proved nor
expressly pleaded in the complaint, 37 and the amount
of P100,000.00 is considered reasonable.
With respect to the civil indemnity of P12,000.00 for
the death of Fr. Tulio Favali, the amount is increased to
P50,000.00 in accordance with existing jurisprudence,
which should be paid to the lawful heirs, not the PIME
as the trial court ruled.
WHEREFORE, the judgment appealed from being in
accord with law and the evidence is AFFIRMED with the
modification that the civil indemnity which is increased
from P12,000.00 to P50,000.00 is awarded to the lawful
heirs of the deceased plus exemplary damages of
P100,000.00; however, the award of moral damages is
deleted.

G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC
BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABSCBN Broadcasting Corp. (hereafter ABS-CBN) seeks to
reverse and set aside the decision 1 of 31 October 1996
and the resolution 2 of 10 March 1997 of the Court of
Appeals in CA-G.R. CV No. 44125. The former affirmed
with modification the decision 3 of 28 April 1993 of the
Regional Trial Court (RTC) of Quezon City, Branch 80, in
Civil Case No. Q-92-12309. The latter denied the
motion to reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by
the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a
Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an
exclusive right to exhibit some Viva
films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of
said agreement stating that .
1.4 ABS-CBN shall have the right of first
refusal to the next twenty-four (24)
Viva films for TV telecast under such
terms as may be agreed upon by the
parties hereto, provided, however, that
such right shall be exercised by ABSCBN from the actual offer in writing.
Viva, through defendant Del Rosario,
offered ABS-CBN, through its vicepresident Charo Santos-Concio, a list of
three(3) film packages (36 title) from
which ABS-CBN may exercise its right
of first refusal under the afore-said
agreement (Exhs. "1" par, 2, "2," "2-A''
and "2-B"-Viva). ABS-CBN, however
through Mrs. Concio, "can tick off only
ten (10) titles" (from the list) "we can
purchase" (Exh. "3" - Viva) and
therefore did not accept said list (TSN,
June 8, 1992, pp. 9-10). The titles
ticked off by Mrs. Concio are not the
subject of the case at bar except the
film ''Maging Sino Ka Man."
For further enlightenment, this
rejection letter dated January 06, 1992
(Exh "3" - Viva) is hereby quoted:
6 January 1992

Costs against accused-appellants.

Dear Vic,

SO ORDERED.

This is not a very formal business letter

I am writing to you as I would like to
express my difficulty in recommending

the purchase of the three film

packages you are offering ABS-CBN.
From among the three packages I can
only tick off 10 titles we can purchase.
Please see attached. I hope you will
understand my position. Most of the
action pictures in the list do not have
big action stars in the cast. They are
not for primetime. In line with this I
wish to mention that I have not
scheduled for telecast several action
pictures in out very first contract
because of the cheap production value
of these movies as well as the lack of
big action stars. As a film producer, I
am sure you understand what I am
trying to say as Viva produces only big
action pictures.
In fact, I would like to request two (2)
additional runs for these movies as I
can only schedule them in our nonprimetime slots. We have to cover the
amount that was paid for these movies
because as you very well know that
non-primetime advertising rates are
very low. These are the unaired titles in
the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of
mine.
The other dramatic films have been
offered to us before and have been
rejected because of the ruling of
MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic]
from the 3 packages please consider
including all the other Viva movies
produced last year. I have quite an
attractive offer to make.
Thanking you and with my warmest
regards.

On February 27, 1992, defendant Del

Rosario approached ABS-CBN's Ms.
Concio, with a list consisting of 52
original movie titles (i.e. not yet aired
on television) including the 14 titles
subject of the present case, as well as
104 re-runs (previously aired on
television) from which ABS-CBN may
choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN
airing rights over this package of 52
originals and 52 re-runs for
P60,000,000.00 of which
P30,000,000.00 will be in cash and
P30,000,000.00 worth of television
spots (Exh. "4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario
and ABS-CBN general manager,
Eugenio Lopez III, met at the Tamarind
Grill Restaurant in Quezon City to
discuss the package proposal of Viva.
What transpired in that lunch meeting
is the subject of conflicting versions.
Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CRN
was granted exclusive film rights to
fourteen (14) films for a total
consideration of P36 million; that he
allegedly put this agreement as to the
price and number of films in a "napkin''
and signed it and gave it to Mr. Del
Rosario (Exh. D; TSN, pp. 24-26, 77-78,
June 8, 1992). On the other hand, Del
Rosario denied having made any
agreement with Lopez regarding the 14
Viva films; denied the existence of a
napkin in which Lopez wrote
something; and insisted that what he
and Lopez discussed at the lunch
meeting was Viva's film package offer
of 104 films (52 originals and 52 reruns) for a total price of P60 million. Mr.
Lopez promising [sic]to make a counter
proposal which came in the form of a
proposal contract Annex "C" of the
complaint (Exh. "1"- Viva; Exh. "C" ABS-CBN).
On April 06, 1992, Del Rosario and Mr.
Graciano Gozon of RBS Senior vicepresident for Finance discussed the
terms and conditions of Viva's offer to
sell the 104 films, after the rejection of
the same package by ABS-CBN.
On April 07, 1992, defendant Del
Rosario received through his secretary,
a handwritten note from Ms. Concio,
(Exh. "5" - Viva), which reads: "Here's
the draft of the contract. I hope you
find everything in order," to which was
attached a draft exhibition agreement
(Exh. "C''- ABS-CBN; Exh. "9" - Viva, p.
3) a counter-proposal covering 53 films,
52 of which came from the list sent by
defendant Del Rosario and one film was
added by Ms. Concio, for a
consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films
right to 53 films and contains a right of

first refusal to "1992 Viva Films." The

said counter proposal was however
rejected by Viva's Board of Directors [in
the] evening of the same day, April 7,
1992, as Viva would not sell anything
less than the package of 104 films for
P60 million pesos (Exh. "9" - Viva), and
such rejection was relayed to Ms.
Concio.
On April 29, 1992, after the rejection of
ABS-CBN and following several
negotiations and meetings defendant
Del Rosario and Viva's President
Teresita Cruz, in consideration of P60
million, signed a letter of agreement
dated April 24, 1992. granting RBS the
exclusive right to air 104 Vivaproduced and/or acquired films (Exh.
"7-A" - RBS; Exh. "4" - RBS) including
the fourteen (14) films subject of the
present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a
complaint for specific performance with a prayer for a
writ of preliminary injunction and/or temporary
restraining order against private respondents Republic
Broadcasting Corporation 5 (hereafter RBS ), Viva
Production (hereafter VIVA), and Vicente Del Rosario.
The complaint was docketed as Civil Case No. Q-9212309.
On 27 May 1992, RTC issued a temporary restraining
order 6 enjoining private respondents from proceeding
with the airing, broadcasting, and televising of the
fourteen VIVA films subject of the controversy, starting
with the film Maging Sino Ka Man, which was scheduled
to be shown on private respondents RBS' channel 7 at
seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the
RTC issued an
order 7 directing the issuance of a writ of preliminary
injunction upon ABS-CBN's posting of P35 million bond.
ABS-CBN moved for the reduction of the bond, 8 while
private respondents moved for reconsideration of the
order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate
answers with counterclaim. 10 RBS also set up a crossclaim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving
the writ of preliminary injunction upon the posting by
RBS of a P30 million counterbond to answer for
whatever damages ABS-CBN might suffer by virtue of
such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent
for the reinstatement of the writ of preliminary
injunction should private respondents be unable to
post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon
suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime,
RBS prayed for and was granted reasonable time
within which to put up a P30 million counterbond in the
event that no settlement would be reached.

As the parties failed to enter into an amicable

settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15
October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for
reconsideration 14 of the 3 August and 15 October 1992
Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial.

16

Pending resolution of its motion for reconsideration,

ABS-CBN filed with the Court of Appeals a
petition 17challenging the RTC's Orders of 3 August and
15 October 1992 and praying for the issuance of a writ
of preliminary injunction to enjoin the RTC from
enforcing said orders. The case was docketed as CAG.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a
temporary restraining order 18 to enjoin the airing,
broadcasting, and televising of any or all of the films
involved in the controversy.
On 18 December 1992, the Court of Appeals
promulgated a decision 19 dismissing the petition in CA
-G.R. No. 29300 for being premature. ABS-CBN
challenged the dismissal in a petition for review filed
with this Court on 19 January 1993, which was
docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the
parties in Civil Case No. Q-192-1209. Thereafter, on 28
April 1993, it rendered a decision 20 in favor of RBS and
VIVA and against ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing,
judgments is rendered in favor of
defendants and against the plaintiff.
(1) The complaint is
hereby dismissed;
(2) Plaintiff ABS-CBN is
ordered to pay
defendant RBS the
following:
a) P107,727.00, the amount of premium paid by RBS to
the surety which issued defendant RBS's bond to lift
the injunction;
b) P191,843.00 for the amount of print advertisement
for "Maging Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA,
plaintiff ABS-CBN is
ordered to pay
P212,000.00 by way of
reasonable attorney's
fees.

(4) The cross-claim of

defendant RBS against
defendant VIVA is
dismissed.
(5) Plaintiff to pay the
costs.
According to the RTC, there was no meeting of minds
on the price and terms of the offer. The alleged
agreement between Lopez III and Del Rosario was
subject to the approval of the VIVA Board of Directors,
and said agreement was disapproved during the
meeting of the Board on 7 April 1992. Hence, there was
no basis for ABS-CBN's demand that VIVA signed the
1992 Film Exhibition Agreement. Furthermore, the right
of first refusal under the 1990 Film Exhibition
Agreement had previously been exercised per Ms.
Concio's letter to Del Rosario ticking off ten titles
acceptable to them, which would have made the 1992
agreement an entirely new contract.

fifteen (15) days from

the actual offer in
writing (Records, p.
14).
[H]owever, it is very clear that said
right of first refusal in favor of ABS-CBN
shall still be subject to such terms as
may be agreed upon by the parties
thereto, and that the said right shall be
exercised by ABS-CBN within fifteen
(15) days from the actual offer in
writing.
Said parag. 1.4 of the agreement
Exhibit "A" on the right of first refusal
did not fix the price of the film right to
the twenty-four (24) films, nor did it
specify the terms thereof. The same
are still left to be agreed upon by the
parties.

On 21 June 1993, this Court denied 21 ABS-CBN's

petition for review in G.R. No. 108363, as no reversible
error was committed by the Court of Appeals in its
challenged decision and the case had "become moot
and academic in view of the dismissal of the main
action by the court a quo in its decision" of 28 April
1993.

In the instant case, ABS-CBN's letter of

rejection Exhibit 3 (Records, p. 89)
stated that it can only tick off ten (10)
films, and the draft contract Exhibit "C"
accepted only fourteen (14) films, while
parag. 1.4 of Exhibit "A'' speaks of the
next twenty-four (24) films.

Aggrieved by the RTC's decision, ABS-CBN appealed to

the Court of Appeals claiming that there was a
perfected contract between ABS-CBN and VIVA
granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario
also appealed seeking moral and exemplary damages
and additional attorney's fees.

The offer of V1VA was sometime in

December 1991 (Exhibits 2, 2-A. 2-B;
Records, pp. 86-88; Decision, p. 11,
Records, p. 1150), when the first list of
VIVA films was sent by Mr. Del Rosario
to ABS-CBN. The Vice President of ABSCBN, Ms. Charo Santos-Concio, sent a
letter dated January 6, 1992 (Exhibit 3,
Records, p. 89) where ABS-CBN
exercised its right of refusal by
rejecting the offer of VIVA.. As aptly
observed by the trial court, with the
said letter of Mrs. Concio of January 6,
1992, ABS-CBN had lost its right of first
refusal. And even if We reckon the
fifteen (15) day period from February
27, 1992 (Exhibit 4 to 4-C) when
another list was sent to ABS-CBN after
the letter of Mrs. Concio, still the fifteen
(15) day period within which ABS-CBN
shall exercise its right of first refusal
has already expired. 22

In its decision of 31 October 1996, the Court of Appeals

agreed with the RTC that the contract between ABSCBN and VIVA had not been perfected, absent the
approval by the VIVA Board of Directors of whatever
Del Rosario, it's agent, might have agreed with Lopez
III. The appellate court did not even believe ABS-CBN's
evidence that Lopez III actually wrote down such an
agreement on a "napkin," as the same was never
produced in court. It likewise rejected ABS-CBN's
insistence on its right of first refusal and ratiocinated
as follows:
As regards the matter of right of first
refusal, it may be true that a Film
Exhibition Agreement was entered into
between Appellant ABS-CBN and
appellant VIVA under Exhibit "A" in
1990, and that parag. 1.4 thereof
provides:
1.4 ABS-CBN shall have
the right of first refusal
to the next twenty-four
(24) VIVA films for TV
telecast under such
terms as may be
agreed upon by the
parties hereto,
provided, however, that
such right shall be
exercised by ABS-CBN
within a period of

Accordingly, respondent court sustained the award of

actual damages consisting in the cost of print
advertisements and the premium payments for the
counterbond, there being adequate proof of the
pecuniary loss which RBS had suffered as a result of
the filing of the complaint by ABS-CBN. As to the award
of moral damages, the Court of Appeals found
reasonable basis therefor, holding that RBS's
reputation was debased by the filing of the complaint
in Civil Case No. Q-92-12309 and by the non-showing
of the film "Maging Sino Ka Man." Respondent court
also held that exemplary damages were correctly
imposed by way of example or correction for the public
good in view of the filing of the complaint despite
petitioner's knowledge that the contract with VIVA had
not been perfected, It also upheld the award of
attorney's fees, reasoning that with ABS-CBN's act of
instituting Civil Case No, Q-92-1209, RBS was

"unnecessarily forced to litigate." The appellate court,

however, reduced the awards of moral damages to P2
million, exemplary damages to P2 million, and
attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied
VIVA and Del Rosario's appeal because it was "RBS and
not VIVA which was actually prejudiced when the
complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied,
ABS-CBN filed the petition in this case, contending that
the Court of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO
PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT
VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE
CONTRARY.
II
. . . IN AWARDING ACTUAL AND
COMPENSATORY DAMAGES IN FAVOR
OF PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND
EXEMPLARY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN
FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right
of first refusal over twenty-four titles under the 1990
Film Exhibition Agreement, as it had chosen only ten
titles from the first list. It insists that we give credence
to Lopez's testimony that he and Del Rosario met at
the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the
same on a paper napkin. It also asserts that the
contract has already been effective, as the elements
thereof, namely, consent, object, and consideration
were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law
and jurisprudence, as per our decision of 1 December
1995 in Limketkai Sons Milling, Inc. v. Court of
Appeals, 23 which cited Toyota Shaw, Inc. v. Court of
Appeals, 24 Ang Yu Asuncion v. Court of
Appeals, 25 andVillonco Realty Company v. Bormaheco.
Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN
disavows liability therefor. RBS spent for the premium
on the counterbond of its own volition in order to
negate the injunction issued by the trial court after the
parties had ventilated their respective positions during
the hearings for the purpose. The filing of the
counterbond was an option available to RBS, but it can
hardly be argued that ABS-CBN compelled RBS to incur

such expense. Besides, RBS had another available

option, i.e., move for the dissolution or the injunction;
or if it was determined to put up a counterbond, it
could have presented a cash bond. Furthermore under
Article 2203 of the Civil Code, the party suffering loss
or injury is also required to exercise the diligence of a
good father of a family to minimize the damages
resulting from the act or omission. As regards the cost
of print advertisements, RBS had not convincingly
established that this was a loss attributable to the non
showing "Maging Sino Ka Man"; on the contrary, it was
brought out during trial that with or without the case or
the injunction, RBS would have spent such an amount
to generate interest in the film.
ABS-CBN further contends that there was no clear basis
for the awards of moral and exemplary damages. The
controversy involving ABS-CBN and RBS did not in any
way originate from business transaction between them.
The claims for such damages did not arise from any
contractual dealings or from specific acts committed by
ABS-CBN against RBS that may be characterized as
wanton, fraudulent, or reckless; they arose by virtue
only of the filing of the complaint, An award of moral
and exemplary damages is not warranted where the
record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any
case, free resort to courts for redress of wrongs is a
matter of public policy. The law recognizes the right of
every one to sue for that which he honestly believes to
be his right without fear of standing trial for damages
where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws
on the matter, the case would lose ground. 28 One who
makes use of his own legal right does no injury. 29 If
damage results front the filing of the complaint, it
is damnum absque injuria. 30 Besides, moral damages
are generally not awarded in favor of a juridical person,
unless it enjoys a good reputation that was debased by
the offending party resulting in social humiliation. 31
As regards the award of attorney's fees, ABS-CBN
maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial court's
award, the Court of Appeals acted in clear disregard of
the doctrines laid down in Buan v. Camaganacan 32 that
the text of the decision should state the reason why
attorney's fees are being awarded; otherwise, the
award should be disallowed. Besides, no bad faith has
been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that "where
no sufficient showing of bad faith would be reflected in
a party' s persistence in a case other than an
erroneous conviction of the righteousness of his cause,
attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no
perfected contract between ABS-CBN and VIVA absent
any meeting of minds between them regarding the
object and consideration of the alleged contract. It
affirms that the ABS-CBN's claim of a right of first
refusal was correctly rejected by the trial court. RBS
insist the premium it had paid for the counterbond
constituted a pecuniary loss upon which it may recover.
It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court
found that ABS-CBN had no cause of action or valid
claim against RBS and, therefore not entitled to the
writ of injunction, RBS could recover from ABS-CBN the
premium paid on the counterbond. Contrary to the
claim of ABS-CBN, the cash bond would prove to be

more expensive, as the loss would be equivalent to the

cost of money RBS would forego in case the P30 million
came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of
advertisements for the cancelled showing of the film
"Maging Sino Ka Man" because the print
advertisements were put out to announce the showing
on a particular day and hour on Channel 7, i.e., in its
entirety at one time, not a series to be shown on a
periodic basis. Hence, the print advertisement were
good and relevant for the particular date showing, and
since the film could not be shown on that particular
date and hour because of the injunction, the expenses
for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts
that ABS-CBN filed the case and secured injunctions
purely for the purpose of harassing and prejudicing
RBS. Pursuant then to Article 19 and 21 of the Civil
Code, ABS-CBN must be held liable for such
damages. Citing Tolentino, 34 damages may be awarded
in cases of abuse of rights even if the act done is not
illicit and there is abuse of rights were plaintiff
institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover
moral and exemplary damages, private respondents
RBScited People v. Manero, 35 where it was stated that
such entity may recover moral and exemplary
damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS'
reputation has been debased by ABSCBN's acts in this case. When RBS was
not able to fulfill its commitment to the
viewing public to show the film "Maging
Sino Ka Man" on the scheduled dates
and times (and on two occasions that
RBS advertised), it suffered serious
embarrassment and social humiliation.
When the showing was canceled, late
viewers called up RBS' offices and
subjected RBS to verbal abuse
("Announce kayo nang announce, hindi
ninyo naman ilalabas," "nanloloko yata
kayo") (Exh. 3-RBS, par. 3). This alone
was not something RBS brought upon
itself. it was exactly what ABS-CBN had
planned to happen.
The amount of moral and exemplary
damages cannot be said to be
excessive. Two reasons justify the
amount of the award.
The first is that the humiliation suffered
by RBS is national extent. RBS
operations as a broadcasting company
is [sic] nationwide. Its clientele, like
that of ABS-CBN, consists of those who
own and watch television. It is not an
exaggeration to state, and it is a
matter of judicial notice that almost
every other person in the country
watches television. The humiliation
suffered by RBS is multiplied by the
number of televiewers who had

anticipated the showing of the film

"Maging Sino Ka Man" on May 28 and
November 3, 1992 but did not see it
owing to the cancellation. Added to this
are the advertisers who had placed
commercial spots for the telecast and
to whom RBS had a commitment in
consideration of the placement to show
the film in the dates and times
specified.
The second is that it is a competitor
that caused RBS to suffer the
humiliation. The humiliation and injury
are far greater in degree when caused
by an entity whose ultimate business
objective is to lure customers (viewers
in this case) away from the
competition. 36
For their part, VIVA and Vicente del Rosario contend
that the findings of fact of the trial court and the Court
of Appeals do not support ABS-CBN's claim that there
was a perfected contract. Such factual findings can no
longer be disturbed in this petition for review under
Rule 45, as only questions of law can be raised, not
questions of fact. On the issue of damages and
attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether
there was a perfected contract between VIVA and ABSCBN, and (2) whether RBS is entitled to damages and
attorney's fees. It may be noted that the award of
attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A
contract is a meeting of minds between two persons
whereby one binds himself to give something or to
render some service to another 37 for a consideration.
there is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2)
object certain which is the subject of the contract; and
(3) cause of the obligation, which is established. 38 A
contract undergoes three stages:
(a) preparation, conception, or
generation, which is the period of
negotiation and bargaining, ending at
the moment of agreement of the
parties;
(b) perfection or birth of the contract,
which is the moment when the parties
come to agree on the terms of the
contract; and
(c) consummation or death, which is
the fulfillment or performance of the
terms agreed upon in the contract. 39
Contracts that are consensual in nature are perfected
upon mere meeting of the minds, Once there is
concurrence between the offer and the acceptance
upon the subject matter, consideration, and terms of
payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the

terms of the offer; it must be plain, unequivocal,

unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that
involves a new proposal, constitutes a counter-offer
and is a rejection of the original offer. Consequently,
when something is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient
to generate consent because any modification or
variation from the terms of the offer annuls the offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of
ABS-CBN at the Tamarind Grill on 2 April 1992 to
discuss the package of films, said package of 104 VIVA
films was VIVA's offer to ABS-CBN to enter into a new
Film Exhibition Agreement. But ABS-CBN, sent, through
Ms. Concio, a counter-proposal in the form of a draft
contract proposing exhibition of 53 films for a
consideration of P35 million. This counter-proposal
could be nothing less than the counter-offer of Mr.
Lopez during his conference with Del Rosario at
Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVA's offer, for it was met by a counteroffer which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc.
v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco,
Inc., 42 is misplaced. In these cases, it was held that an
acceptance may contain a request for certain changes
in the terms of the offer and yet be a binding
acceptance as long as "it is clear that the meaning of
the acceptance is positively and unequivocally to
accept the offer, whether such request is granted or
not." This ruling was, however, reversed in the
resolution of 29 March 1996, 43 which ruled that the
acceptance of all offer must be unqualified and
absolute, i.e., it "must be identical in all respects with
that of the offer so as to produce consent or meeting of
the minds."
On the other hand, in Villonco, cited in Limketkai, the
alleged changes in the revised counter-offer were not
material but merely clarificatory of what had previously
been agreed upon. It cited the statement in Stuart
v.Franklin Life Insurance Co. 44 that "a vendor's change
in a phrase of the offer to purchase, which change does
not essentially change the terms of the offer, does not
amount to a rejection of the offer and the tender of a
counter-offer." 45However, when any of the elements of
the contract is modified upon acceptance, such
alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified
acceptance of VIVA's offer. Hence, they underwent a
period of bargaining. ABS-CBN then formalized its
counter-proposals or counter-offer in a draft contract,
VIVA through its Board of Directors, rejected such
counter-offer, Even if it be conceded arguendo that Del
Rosario had accepted the counter-offer, the acceptance
did not bind VIVA, as there was no proof whatsoever
that Del Rosario had the specific authority to do so.
Under Corporation Code, 46 unless otherwise provided
by said Code, corporate powers, such as the power; to
enter into contracts; are exercised by the Board of
Directors. However, the Board may delegate such
powers to either an executive committee or officials or
contracted managers. The delegation, except for the
executive committee, must be for specific
purposes, 47 Delegation to officers makes the latter
agents of the corporation; accordingly, the general

rules of agency as to the bindings effects of their acts

would
apply. 48 For such officers to be deemed fully clothed by
the corporation to exercise a power of the Board, the
latter must specially authorize them to do so. That Del
Rosario did not have the authority to accept ABS-CBN's
counter-offer was best evidenced by his submission of
the draft contract to VIVA's Board of Directors for the
latter's approval. In any event, there was between Del
Rosario and Lopez III no meeting of minds. The
following findings of the trial court are instructive:
A number of considerations militate
against ABS-CBN's claim that a
contract was perfected at that lunch
meeting on April 02, 1992 at the
Tamarind Grill.
FIRST, Mr. Lopez claimed that what was
agreed upon at the Tamarind Grill
referred to the price and the number of
films, which he wrote on a napkin.
However, Exhibit "C"
contains numerous provisions which,
were not discussed at the Tamarind
Grill, if Lopez testimony was to be
believed nor could they have been
physically written on a napkin. There
was even doubt as to whether it was a
paper napkin or a cloth napkin. In short
what were written in Exhibit "C'' were
not discussed, and therefore could not
have been agreed upon, by the parties.
How then could this court compel the
parties to sign Exhibit "C" when the
provisions thereof were not previously
agreed upon?
SECOND, Mr. Lopez claimed that what
was agreed upon as the subject matter
of the contract was 14 films. The
complaint in fact prays for delivery of
14 films. But Exhibit "C" mentions 53
films as its subject matter. Which is
which If Exhibits "C" reflected the true
intent of the parties, then ABS-CBN's
claim for 14 films in its complaint is
false or if what it alleged in the
complaint is true, then Exhibit "C" did
not reflect what was agreed upon by
the parties. This underscores the fact
that there was no meeting of the minds
as to the subject matter of the
contracts, so as to preclude perfection
thereof. For settled is the rule that
there can be no contract where there is
no object which is its subject matter
(Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to
question 29 of his affidavit testimony
(Exh. "D") states:
We were able to reach
an agreement. VIVA
gave us the exclusive
license to show these
fourteen (14) films, and
we agreed to pay Viva
the amount of
P16,050,000.00 as well

as grant Viva
commercial slots worth
P19,950,000.00. We
had already earmarked
this P16, 050,000.00.
which gives a total consideration of P36
million (P19,950,000.00 plus
P16,050,000.00. equals
P36,000,000.00).
On cross-examination Mr. Lopez
testified:
Q. What was written in
this napkin?
A. The total price, the
breakdown the known
Viva movies, the 7
blockbuster movies and
the other 7 Viva movies
because the price was
broken down
accordingly. The none
[sic] Viva and the
seven other Viva
movies and the sharing
between the cash
portion and the
concerned spot portion
in the total amount of
P35 million pesos.

authority to compel Viva to agree

thereto.
FIFTH. Mr. Lopez understand [sic] that
what he and Mr. Del Rosario agreed
upon at the Tamarind Grill was only
provisional, in the sense that it was
subject to approval by the Board of
Directors of Viva. He testified:
Q. Now, Mr. Witness,
and after that Tamarind
meeting ... the second
meeting wherein you
claimed that you have
the meeting of the
minds between you
and Mr. Vic del Rosario,
what happened?
A. Vic Del Rosario was
supposed to call us up
and tell us specifically
the result of the
discussion with the
Board of Directors.
Q. And you are
referring to the socalled agreement which
you wrote in [sic] a
piece of paper?
A. Yes, sir.

Now, which is which? P36 million or P35

million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for
ABS-CBN stated that she transmitted
Exhibit "C" to Mr. Del Rosario with a
handwritten note, describing said
Exhibit "C" as a "draft." (Exh. "5" - Viva;
tsn pp. 23-24 June 08, 1992). The said
draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a
tentative, provisional or preparatory
writing prepared for discussion, the
terms and conditions thereof could not
have been previously agreed upon by
ABS-CBN and Viva Exhibit "C'' could not
therefore legally bind Viva, not having
agreed thereto. In fact, Ms. Concio
admitted that the terms and conditions
embodied in Exhibit "C" were prepared
by ABS-CBN's lawyers and there was no
discussion on said terms and
conditions. . . .
As the parties had not yet discussed
the proposed terms and conditions in
Exhibit "C," and there was no evidence
whatsoever that Viva agreed to the
terms and conditions thereof, said
document cannot be a binding
contract. The fact that Viva refused to
sign Exhibit "C" reveals only two [sic]
well that it did not agree on its terms
and conditions, and this court has no

Q. So, he was going to

forward that to the
board of Directors for
approval?
A. Yes, sir. (Tsn, pp. 4243, June 8, 1992)
Q. Did Mr. Del Rosario
tell you that he will
submit it to his Board
for approval?
A. Yes, sir. (Tsn, p. 69,
June 8, 1992).
The above testimony of Mr. Lopez
shows beyond doubt that he knew Mr.
Del Rosario had no authority to bind
Viva to a contract with ABS-CBN until
and unless its Board of Directors
approved it. The complaint, in fact,
alleges that Mr. Del Rosario "is the
Executive Producer of defendant Viva"
which "is a corporation." (par. 2,
complaint). As a mere agent of Viva,
Del Rosario could not bind Viva unless
what he did is ratified by its Board of
Directors. (Vicente vs. Geraldez, 52
SCRA 210; Arnold vs. Willets and
Paterson, 44 Phil. 634). As a mere
agent, recognized as such by plaintiff,
Del Rosario could not be held liable
jointly and severally with Viva and his
inclusion as party defendant has no

legal basis. (Salonga vs. Warner

Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the
allegations in the complaint are clear
admissions that what was supposed to
have been agreed upon at the
Tamarind Grill between Mr. Lopez and
Del Rosario was not a binding
agreement. It is as it should be
because corporate power to enter into
a contract is lodged in the Board of
Directors. (Sec. 23, Corporation Code).
Without such board approval by the
Viva board, whatever agreement Lopez
and Del Rosario arrived at could not
ripen into a valid contract binding upon
Viva (Yao Ka Sin Trading vs. Court of
Appeals, 209 SCRA 763). The evidence
adduced shows that the Board of
Directors of Viva rejected Exhibit "C"
and insisted that the film package for
140 films be maintained (Exh. "7-1" Viva ). 49
The contention that ABS-CBN had yet to fully exercise
its right of first refusal over twenty-four films under the
1990 Film Exhibition Agreement and that the meeting
between Lopez and Del Rosario was a continuation of
said previous contract is untenable. As observed by the
trial court, ABS-CBN right of first refusal had already
been exercised when Ms. Concio wrote to VIVA ticking
off ten films, Thus:
[T]he subsequent negotiation with ABSCBN two (2) months after this letter
was sent, was for an entirely different
package. Ms. Concio herself admitted
on cross-examination to having used or
exercised the right of first refusal. She
stated that the list was not acceptable
and was indeed not accepted by ABSCBN, (TSN, June 8, 1992, pp. 8-10).
Even Mr. Lopez himself admitted that
the right of the first refusal may have
been already exercised by Ms. Concio
(as she had). (TSN, June 8, 1992, pp.
71-75). Del Rosario himself knew and
understand [sic] that ABS-CBN has lost
its rights of the first refusal when his
list of 36 titles were rejected (Tsn, June
9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of
damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is the
specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is
entitled to compensation for actual damages only for
such pecuniary loss suffered by him as he has duly
proved. 51 The indemnification shall comprehend not
only the value of the loss suffered, but also that of the
profits that the obligee failed to obtain. 52 In contracts
and quasi-contracts the damages which may be
awarded are dependent on whether the obligor acted
with good faith or otherwise, It case of good faith, the
damages recoverable are those which are the natural
and probable consequences of the breach of the

obligation and which the parties have foreseen or could

have reasonably foreseen at the time of the
constitution of the obligation. If the obligor acted with
fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably
attributed to the non-performance of the
obligation. 53 In crimes and quasi-delicts, the defendant
shall be liable for all damages which are the natural
and probable consequences of the act or omission
complained of, whether or not such damages has been
foreseen or could have reasonably been foreseen by
the defendant. 54
Actual damages may likewise be recovered for loss or
impairment of earning capacity in cases of temporary
or permanent personal injury, or for injury to the
plaintiff's business standing or commercial credit. 55
The claim of RBS for actual damages did not arise from
contract, quasi-contract, delict, or quasi-delict. It arose
from the fact of filing of the complaint despite ABSCBN's alleged knowledge of lack of cause of action.
Thus paragraph 12 of RBS's Answer with Counterclaim
and Cross-claim under the heading COUNTERCLAIM
specifically alleges:
12. ABS-CBN filed the complaint
knowing fully well that it has no cause
of action RBS. As a result thereof, RBS
suffered actual damages in the amount
of P6,621,195.32. 56
Needless to state the award of actual damages cannot
be comprehended under the above law on actual
damages. RBS could only probably take refuge under
Articles 19, 20, and 21 of the Civil Code, which read as
follows:
Art. 19. Every person must, in the
exercise of his rights and in the
performance of his duties, act with
justice, give everyone his due, and
observe honesty and good faith.
Art. 20. Every person who, contrary to
law, wilfully or negligently causes
damage to another, shall indemnify the
latter for tile same.
Art. 21. Any person who wilfully causes
loss or injury to another in a manner
that is contrary to morals, good
customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ
of preliminary injunction is issued, the damages which
the defendant may suffer by reason of the writ are
recoverable from the injunctive bond. 57 In this case,
ABS-CBN had not yet filed the required bond; as a
matter of fact, it asked for reduction of the bond and
even went to the Court of Appeals to challenge the
order on the matter, Clearly then, it was not necessary
for RBS to file a counterbond. Hence, ABS-CBN cannot
be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print
advertisements for "Maging Sino Ka Man" for lack of
sufficient legal basis. The RTC issued a temporary

restraining order and later, a writ of preliminary

injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof.
Notably, the RTC did not dissolve the injunction on the
ground of lack of legal and factual basis, but because
of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the
absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under
any of the circumstances provided for in Article 2208 of
the Civil Code. 58
The general rule is that attorney's fees cannot be
recovered as part of damages because of the policy
that no premium should be placed on the right to
litigate. 59 They are not to be awarded every time a
party wins a suit. The power of the court to award
attorney's fees under Article 2208 demands factual,
legal, and equitable justification. 60 Even when claimant
is compelled to litigate with third persons or to incur
expenses to protect his rights, still attorney's fees may
not be awarded where no sufficient showing of bad
faith could be reflected in a party's persistence in a
case other than erroneous conviction of the
righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3,
Title XVIII, Book IV of the Civil Code. Article 2217
thereof defines what are included in moral damages,
while Article 2219 enumerates the cases where they
may be recovered, Article 2220 provides that moral
damages may be recovered in breaches of contract
where the defendant acted fraudulently or in bad faith.
RBS's claim for moral damages could possibly fall only
under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in
Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
Moral damages are in the category of an award
designed to compensate the claimant for actual injury
suffered. and not to impose a penalty on the
wrongdoer. 62 The award is not meant to enrich the
complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or
amusements that will serve to obviate then moral
suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate
to the suffering inflicted. 63 Trial courts must then guard
against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity
to avoid suspicion that it was due to passion, prejudice,
or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in
favor of a corporation because, being an artificial
person and having existence only in legal
contemplation, it has no feelings, no emotions, no
senses, It cannot, therefore, experience physical
suffering and mental anguish, which call be
experienced only by one having a nervous
system. 65 The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a
corporation may recover moral damages if it "has a
good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone

the award for damages must be set aside, since RBS is

a corporation.
The basic law on exemplary damages is Section 5,
Chapter 3, Title XVIII, Book IV of the Civil Code. These
are imposed by way of example or correction for the
public good, in addition to moral, temperate, liquidated
or compensatory damages. 68 They are recoverable in
criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant
acted with gross negligence;70 and in contracts and
quasi-contracts, if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent
manner. 71
It may be reiterated that the claim of RBS against ABSCBN is not based on contract, quasi-contract, delict, or
quasi-delict, Hence, the claims for moral and
exemplary damages can only be based on Articles 19,
20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the
following: (1) the existence of a legal right or duty, (2)
which is exercised in bad faith, and (3) for the sole
intent of prejudicing or injuring another. Article 20
speaks of the general sanction for all other provisions
of law which do not especially provide for their own
sanction; while Article 21 deals with acts contra bonus
mores, and has the following elements; (1) there is an
act which is legal, (2) but which is contrary to morals,
good custom, public order, or public policy, and (3) and
it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles
19, 20, and 21. Malice or bad faith implies a conscious
and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity. 73 Such must be
substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired
by malice or bad faith. It was honestly convinced of the
merits of its cause after it had undergone serious
negotiations culminating in its formal submission of a
draft contract. Settled is the rule that the adverse
result of an action does not per se make the action
wrongful and subject the actor to damages, for the law
could not have meant to impose a penalty on the right
to litigate. If damages result from a person's exercise of
a right, it is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The
challenged decision of the Court of Appeals in CA-G.R.
CV No, 44125 is hereby REVERSED except as to
unappealed award of attorney's fees in favor of VIVA
Productions, Inc.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-6776

May 21, 1955

THE REGISTER OF DEEDS OF RIZAL, petitionerappellee,

vs.
UNG SIU SI TEMPLE, respondent-appellant.

Alejo F. Candido for appellant.

Office of the Solicitor General Querube C. Makalintal
and Solicitor Felix V. Makasiar for appellee.

and (2) that the refusal of the Register of Deeds

violates the freedom of religion clause of our
Constitution [Art. III, Sec. 1(7)].

REYES, J.B.L., J.:

We are of the opinion that the Court below has

correctly held that in view of the absolute terms of
section 5, Title XIII, of the Constitution, the provisions
of Act No. 271 of the old Philippine Commission must
be deemed repealed since the Constitution was
enacted, in so far as incompatible therewith. In
providing that,

The Register of Deeds for the province of Rizal refused

to accept for record a deed of donation executed in due
form on January 22, 1953, by Jesus Dy, a Filipino
citizen, conveying a parcel of residential land, in
Caloocan, Rizal, known as lot No. 2, block 48-D, PSD4212, G.L.R.O. Record No. 11267, in favor of the
unregistered religious organization "Ung Siu Si Temple",
operating through three trustees all of Chinese
nationality. The donation was duly accepted by Yu Juan,
of Chinese nationality, founder and deaconess of the
Temple, acting in representation and in behalf of the
latter and its trustees.
The refusal of the Registrar was elevated en
Consultato the IVth Branch of the Court of First
Instance of Manila. On March 14, 1953, the Court
upheld the action of the Rizal Register of Deeds,
saying:
The question raised by the Register of Deeds in
the above transcribed consulta is whether a
deed of donation of a parcel of land executed
in favor of a religious organization whose
founder, trustees and administrator are
Chinese citizens should be registered or not.
It appearing from the record of the Consulta
that UNG SIU SI TEMPLE is a religious
organization whose deaconess, founder,
trustees and administrator are all Chinese
citizens, this Court is of the opinion and so hold
that in view of the provisions of the sections 1
and 5 of Article XIII of the Constitution of the
Philippines limiting the acquisition of land in
the Philippines to its citizens, or to corporations
or associations at least sixty per centum of the
capital stock of which is owned by such citizens
adopted after the enactment of said Act No.
271, and the decision of the Supreme Court in
the case of Krivenko vs. the Register of Deeds
of Manila, the deed of donation in question
should not be admitted for admitted for
registration. (Printed Rec. App. pp 17-18).
Not satisfied with the ruling of the Court of First
Instance, counsel for the donee Uy Siu Si Temple has
appealed to this Court, claiming: (1) that the
acquisition of the land in question, for religious
purposes, is authorized and permitted by Act No. 271
of the old Philippine Commission, providing as follows:
SECTION 1. It shall be lawful for all religious
associations, of whatever sort or denomination,
whether incorporated in the Philippine Islands
or in the name of other country, or not
incorporated at all, to hold land in the
Philippine Islands upon which to build
churches, parsonages, or educational or
charitable institutions.
SEC. 2. Such religious institutions, if not
incorporated, shall hold the land in the name of
three Trustees for the use of such
associations; . . .. (Printed Rec. App. p. 5.)

Save in cases of hereditary succession, no

private agricultural land shall be transferred or
assigned except to individuals, corporations or
associations qualified to acquire or hold lands
of the public domain in the Philippines,
the Constitution makes no exception in favor of
religious associations. Neither is there any such saving
found in sections 1 and 2 of Article XIII, restricting the
acquisition of public agricultural lands and other
natural resources to "corporations or associations at
least sixty per centum of the capital of which is owned
by such citizens" (of the Philippines).
The fact that the appellant religious organization has
no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its
members are of foreign nationality. The purpose of the
sixty per centum requirement is obviously to ensure
that corporations or associations allowed to acquire
agricultural land or to exploit natural resources shall be
controlled by Filipinos; and the spirit of the Constitution
demands that in the absence of capital stock, the
controlling membership should be composed of Filipino
citizens.
To permit religious associations controlled by nonFilipinos to acquire agricultural lands would be to drive
the opening wedge to revive alien religious land
holdings in this country. We can not ignore the
historical fact that complaints against land holdings of
that kind were among the factors that sparked the
revolution of 1896.
As to the complaint that the disqualification under
article XIII is violative of the freedom of religion
guaranteed by Article III of the Constitution, we are by
no means convinced (nor has it been shown) that land
tenure is indispensable to the free exercise and
enjoyment of religious profession or worship; or that
one may not worship the Deity according to the
dictates of his own conscience unless upon land held in
fee simple.
The resolution appealed from is affirmed, with costs
against appellant.

G.R. No. L-6055

June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in
his own behalf.
Office of the Solicitor General Juan R. Liwag and

Assistant Solicitor General Francisco Carreon for

appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was
charged in the Court of First Instance of Manila with the
crime of falsification of a public and commercial
document in that, having been entrusted with the
preparation and registration of the article of
incorporation of the Pacific Airways Corporation, a
domestic corporation organized for the purpose of
engaging in business as a common carrier, he caused it
to appear in said article of incorporation that one
Arsenio Baylon, a Filipino citizen, had subscribed to and
was the owner of 60.005 per cent of the subscribed
capital stock of the corporation when in reality, as the
accused well knew, such was not the case, the truth
being that the owner of the portion of the capital stock
subscribed to by Baylon and the money paid thereon
were American citizen whose name did not appear in
the article of incorporation, and that the purpose for
making this false statement was to circumvent the
constitutional mandate that no corporation shall be
authorize to operate as a public utility in the
Philippines unless 60 per cent of its capital stock is
owned by Filipinos.
Found guilty after trial and sentenced to a term of
imprisonment and a fine, the accused has appealed to
this Court.
The essential facts are not in dispute. On November
4,1946, the Pacific Airways Corporation registered its
articles of incorporation with the Securities and
Exchanged Commission. The article were prepared and
the registration was effected by the accused, who was
in fact the organizer of the corporation. The article
stated that the primary purpose of the corporation was
to carry on the business of a common carrier by air,
land or water; that its capital stock was P1,000,000,
represented by 9,000 preferred and 100,000 common
shares, each preferred share being of the par value of
p100 and entitled to 1/3 vote and each common share,
of the par value of P1 and entitled to one vote; that the
amount capital stock actually subscribed was
P200,000, and the names of the subscribers were
Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott,
James O'Bannon, Denzel J. Cavin, and William H.
Quasha, the first being a Filipino and the other five all
Americans; that Baylon's subscription was for 1,145
preferred shares, of the total value of P114,500, and
for 6,500 common shares, of the total par value of
P6,500, while the aggregate subscriptions of the
American subscribers were for 200 preferred shares, of
the total par value of P20,000, and 59,000 common
shares, of the total par value of P59,000; and that
Baylon and the American subscribers had already paid
25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per
cent of the subscribed capital stock of the corporation,
Baylon nevertheless did not have the controlling vote
because of the difference in voting power between the
preferred shares and the common shares. Still, with the
capital structure as it was, the article of incorporation
were accepted for registration and a certificate of
incorporation was issued by the Securities and
Exchange Commission.
There is no question that Baylon actually subscribed to
60.005 per cent of the subscribed capital stock of the

corporation. But it is admitted that the money paid on

his subscription did not belong to him but to the
Americans subscribers to the corporate stock. In
explanation, the accused testified, without
contradiction, that in the process of organization
Baylon was made a trustee for the American
incorporators, and that the reason for making Baylon
such trustee was as follows:
Q. According to this article of incorporation
Arsenio Baylon subscribed to 1,135 preferred
shares with a total value of P1,135. Do you
know how that came to be?
A. Yes.
The people who were desirous of forming the
corporation, whose names are listed on page 7 of this
certified copy came to my house, Messrs. Shannahan,
Onstott, O'Bannon, Caven, Perry and Anastasakas one
evening. There was considerable difficulty to get them
all together at one time because they were pilots. They
had difficulty in deciding what their respective share
holdings would be. Onstott had invested a certain
amount of money in airplane surplus property and they
had obtained a considerable amount of money on
those planes and as I recall they were desirous of
getting a corporation formed right away. And they
wanted to have their respective shares holdings
resolved at a latter date. They stated that they could
get together that they feel that they had no time to
settle their respective share holdings. We discussed the
matter and finally it was decided that the best way to
handle the things was not to put the shares in the
name of anyone of the interested parties and to have
someone act as trustee for their respective shares
holdings. So we looked around for a trustee. And he
said "There are a lot of people whom I trust." He said,
"Is there someone around whom we could get right
away?" I said, "There is Arsenio. He was my boy during
the liberation and he cared for me when i was sick and
i said i consider him my friend." I said. They all knew
Arsenio. He is a very kind man and that was what was
done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in
connection with article 171, paragraph 4, of the
Revised Penal Code, which read:
ART. 171. Falsification by public officer,
employee, or notary or ecclesiastic minister.
The penalty ofprision mayor and a fine not to
exceed 5,000 pesos shall be imposed upon any
public officer, employee, or notary who, taking
advantage of his official position, shall falsify a
document by committing any of the following
acts:
xxx

xxx

xxx

4. Making untruthful statements in a narration

of facts.
ART. 172. Falsification by private individuals
and use of falsified documents. The penalty
of prision correccional in its medium and
maximum period and a fine of not more than
5,000 pesos shall be imposed upon:
xxx

xxx

xxx

1. Any private individual who shall commit any

of the falsifications enumerated in the next
preceding article in any public or official
document or letter of exchange or any other
kind of commercial document.
Commenting on the above provision, Justice Albert, in
his well-known work on the Revised Penal Code ( new
edition, pp. 407-408), observes, on the authority
of U.S. vs. Reyes, (1 Phil., 341), that the perversion of
truth in the narration of facts must be made with the
wrongful intent of injuring a third person; and on the
authority of U.S. vs. Lopez (15 Phil., 515), the same
author further maintains that even if such wrongful
intent is proven, still the untruthful statement will not
constitute the crime of falsification if there is no legal
obligation on the part of the narrator to disclose the
truth. Wrongful intent to injure a third person and
obligation on the part of the narrator to disclose the
truth are thus essential to a conviction for a crime of
falsification under the above article of the Revised
Penal Code.
Now, as we see it, the falsification imputed in the
accused in the present case consists in not disclosing
in the articles of incorporation that Baylon was a mere
trustee ( or dummy as the prosecution chooses to call
him) of his American co-incorporators, thus giving the
impression that Baylon was the owner of the shares
subscribed to by him which, as above stated, amount
to 60.005 per cent of the sub-scribed capital stock.
This, in the opinion of the trial court, is a malicious
perversion of the truth made with the wrongful intent
circumventing section 8, Article XIV of the Constitution,
which provides that " no franchise, certificate, or any
other form of authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporation or other entities organized
under the law of the Philippines, sixty per centum of
the capital of which is owned by citizens of the
Philippines . . . ." Plausible though it may appear at first
glance, this opinion loses validity once it is noted that it
is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to
prohibit the mere formation of a public utility
corporation without 60 per cent of its capital being
owned by the Filipinos, a mistaken belief which has
induced the lower court to that the accused was under
obligation to disclose the whole truth about the
nationality of the subscribed capital stock of the
corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators,
and that in not making such disclosure defendant's
intention was to circumvent the Constitution to the
detriment of the public interests. Contrary to the lower
court's assumption, the Constitution does not prohibit
the mere formation of a public utility corporation
without the required formation of Filipino capital. What
it does prohibit is the granting of a franchise or other
form of authorization for the operation of a public
utility to a corporation already in existence but without
the requisite proportion of Filipino capital. This is
obvious from the context, for the constitutional
provision in question qualifies the terms " franchise",
"certificate", or "any other form of authorization" with
the phrase "for the operation of a public utility,"
thereby making it clear that the franchise meant is not
the "primary franchise" that invest a body of men with
corporate existence but the "secondary franchise" or
the privilege to operate as a public utility after the
corporation has already come into being.

If the Constitution does not prohibit the mere formation

of a public utility corporation with the alien capital,
then how can the accused be charged with having
wrongfully intended to circumvent that fundamental
law by not revealing in the articles of incorporation that
Baylon was a mere trustee of his American coincorporation and that for that reason the subscribed
capital stock of the corporation was wholly American?
For the mere formation of the corporation such
revelation was not essential, and the Corporation Law
does not require it. Defendant was, therefore, under no
obligation to make it. In the absence of such obligation
and of the allege wrongful intent, defendant cannot be
legally convicted of the crime with which he is charged.
It is urged, however, that the formation of the
corporation with 60 per cent of its subscribed capital
stock appearing in the name of Baylon was an
indispensable preparatory step to the subversion of the
constitutional prohibition and the laws implementing
the policy expressed therein. This view is not correct.
For a corporation to be entitled to operate a public
utility it is not necessary that it be organized with 60
per cent of its capital owned by Filipinos from the start.
A corporation formed with capital that is entirely alien
may subsequently change the nationality of its capital
through transfer of shares to Filipino citizens.
conversely, a corporation originally formed with Filipino
capital may subsequently change the national status of
said capital through transfer of shares to foreigners.
What need is there then for a corporation that intends
to operate a public utility to have, at the time of its
formation, 60 per cent of its capital owned by Filipinos
alone? That condition may anytime be attained thru
the necessary transfer of stocks. The moment for
determining whether a corporation is entitled to
operate as a public utility is when it applies for a
franchise, certificate, or any other form of authorization
for that purpose. And that can be done after the
corporation has already come into being and not while
it is still being formed. And at that moment, the
corporation must show that it has complied not only
with the requirement of the Constitution as to the
nationality of its capital, but also with the requirements
of the Civil Aviation Law if it is a common carrier by air,
the Revised Administrative Code if it is a common
carrier by water, and the Public Service Law if it is a
common carrier by land or other kind of public service.
Equally untenable is the suggestion that defendant
should at least be held guilty of an "impossible crime"
under article 59 of the Revised Penal Code. It not being
possible to suppose that defendant had intended to
commit a crime for the simple reason that the alleged
constitutional prohibition which he is charged for
having tried to circumvent does not exist, conviction
under that article is out of the question.
The foregoing consideration can not but lead to the
conclusion that the defendant can not be held guilty of
the crime charged. The majority of the court, however,
are also of the opinion that, even supposing that the
act imputed to the defendant constituted falsification
at the time it was perpetrated, still with the approval of
the Party Amendment to the Constitution in March,
1947, which placed Americans on the same footing as
Filipino citizens with respect to the right to operate
public utilities in the Philippines, thus doing away with
the prohibition in section 8, Article XIV of the
Constitution in so far as American citizens are
concerned, the said act has ceased to be an offense

within the meaning of the law, so that defendant can

no longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is
reversed and the defendant William H. Quasha
acquitted, with costs de oficio.

G.R. No. L-19891

July 31, 1964

J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J.

BELTRAN, petitioners,
vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA,
Sheriff of Manila and
HON. AGUSTIN MONTESA, Judge of the Court of First
Instance of Manila, respondents.
Felipe N. Aurea for petitioners.
Taada, Teehankee and Carreon for respondent
Imperial Insurance, Inc.
PAREDES, J.:
Petitioner J. R. Da Silva, is the President of the J.R.S.
Business Corporation, an establishment duly franchised
by the Congress of the Philippines, to conduct a
messenger and delivery express service. On July 12,
1961, the respondent Imperial Insurance, Inc.,
presented with the CFI of Manila a complaint (Civ. Case
No. 47520), for sum of money against the petitioner
corporation. After the defendants therein have
submitted their Answer, the parties entered into a
Compromise Agreement, assisted by their respective
counsels, the pertinent portions of which recite:
1) WHEREAS, the DEFENDANTS admit and
confess their joint and solidary indebtedness to
the PLAINTIFF in the full sum of PESOS SIXTY
ONE THOUSAND ONE HUNDRED SEVENTY-TWO
& 32/100 (P61,172.32), Philippine Currency,
itemized as follows:
a) Principal
b) Interest at 12% per annum
c) Liquidated damages at 7% per
annum
d) Costs of suit
e) Attorney's fees
2) WHEREAS, the DEFENDANTS bind
themselves, jointly and severally, and hereby
promise to pay their aforementioned obligation
to the PLAINTIFF at its business address at 301305 Banquero St., (Ground Floor), Regina
Building, Escolta, Manila, within sixty (60) days
from March 16, 1962 or on or before May 14,
1962;
3) WHEREAS, in the event the DEFENDANTS
FAIL to pay in full the total amount of PESOS
SIXTY ONE THOUSAND ONE HUNDRED
SEVENTY TWO & 32/100 (P61,172.32),
Philippine Currency, for any reason
whatsoever, on May 14, 1962, the PLAINTIFF
shall be entitled, as a matter of right, to move
for the execution of the decision to be rendered
in the above-entitled case by this Honorable
Court based on this COMPROMISE AGREEMENT.

On March 17, 1962, the lower court rendered judgment

embodying the contents of the said compromise
agreement, the dispositive portion of which reads
WHEREFORE, the Court hereby approves the
above-quoted compromise agreement and
renders judgment in accordance therewith,
enjoining the parties to comply faithfully and
strictly with the terms and conditions thereof,
without special pronouncement as to costs.
Wherefore, the parties respectfully pray that
the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without
prejudice to the parties adducing other
evidence to prove their case not covered by
this stipulation of facts. 1wph1.t
On May 15, 1962, one day after the date fixed in the
compromise agreement, within which the judgment
debt would be paid, but was not, respondent Imperial
Insurance Inc., filed a "Motion for the Insurance of a
Writ of Execution". On May 23, 1962, a Writ of
Execution was issued by respondent Sheriff of Manila
and on May 26, 1962, Notices of Sale were sent out for
the auction of the personal properties of the petitioner
J.R.S. Business Corporation. On June 2, 1962, a Notice
of Sale of the "whole capital stocks of the defendants
JRS Business Corporation, the business name, right of
operation, the whole assets, furnitures and
equipments, the total liabilities, and Net Worth, books
of accounts, etc., etc." of the petitioner corporation
was, handed down. On June 9, the petitioner, thru
counsel, presented an "Urgent Petition for
Postponement of Auction Sale and for Release of Levy
on the Business Name and Right to Operate of
Defendant JRS Business Corporation", stating that
petitioners were busy negotiating for a loan with which
to pay the judgment debt; that the judgment was for
money only and, therefore, plaintiff (respondent
Insurance Company) was not authorized to take over
and appropriate for its own use, the business name of
the defendants; that the right to operate under the
franchise, was not transferable and could not be
considered a personal or immovable, property, subject
to levy and sale. On June 10, 1962, a Supplemental
Motion for Release of Execution, was filed by counsel of
petitioner JRS Business Corporation, claiming that the
P50,000.00
capital stocks thereof, could not be levied upon and
sold under execution. Under date of June 20, 1962,
petitioner's counsel presented a pleading captioned
"Very Urgent Motion for Postponement of Public Auction
Sale and for Ruling on Motion for Release of Levy on
the Business Name, Right to Operate and Capital
Stocks of JRS Business Corporation". The auction sale
was set for June 21, 1962. In said motion, petitioners
alleged that the loan they had applied for, was to be
secured within the next ten (10) days, and they would
be able to discharge the judgment debt. Respondents
opposed the said motion and on June 21, 1962, the
lower court denied the motion for postponement of the
auction sale.
In the sale which was conducted in the premises of the
JRS Business Corporation at 1341 Perez St., Paco,
Manila, all the properties of said corporation contained
in the Notices of Sale dated May 26, 1962, and June 2,
1962 (the latter notice being for the whole capital
stocks of the defendant, JRS Business Corporation, the
business name, right of operation, the whole assets,
furnitures and equipments, the total liabilities and Net
Worth, books of accounts, etc., etc.), were bought by
respondent Imperial Insurance, Inc., for P10,000.00,
which was the highest bid offered. Immediately after
the sale, respondent Insurance Company took
possession of the proper ties and started running the
affairs and operating the business of the JRS Business
Corporation. Hence, the present appeal.

It would seem that the matters which need

determination are (1) whether the respondent Judge
acted without or in excess of his jurisdiction or with
grave abuse of discretion in promulgating the Order of
June 21, 1962, denying the motion for postponement of
the scheduled sale at public auction, of the properties
of petitioner; and (2) whether the business name or
trade name, franchise (right to operate) and capital
stocks of the petitioner are properties or property
rights which could be the subject of levy, execution and
sale.
The respondent Court's act of postponing the
scheduled sale was within the discretion of respondent
Judge, the exercise of which, one way or the other, did
not constitute grave abuse of discretion and/or excess
of jurisdiction. There was a decision rendered and the
corresponding writ of execution was issued.
Respondent Judge had jurisdiction over the matter and
erroneous conclusions of law or fact, if any, committed
in the exercise of such jurisdiction are merely errors of
judgment, not correctible by certiorari (Villa Rey Transit
v. Bello, et al., L-18957, April 23, 1963, and cases cited
therein.)
The corporation law, on forced sale of franchises,
provides
Any franchise granted to a corporation to
collect tolls or to occupy, enjoy, or use public
property or any portion of the public domain or
any right of way over public property or the
public domain, and any rights and privileges
acquired under such franchise may be levied
upon and sold under execution, together with
the property necessary for the enjoyment, the
exercise of the powers, and the receipt of the
proceeds of such franchise or right of way, in
the same manner and with like effect as any
other property to satisfy any judgment against
the corporation: Provided, That the sale of the
franchise or right of way and the property
necessary for the enjoyment, the exercise of
the powers, and the receipt of the proceeds of
said franchise or right of way is especially
decreed and ordered in the judgment: And
provided, further, That the sale shall not
become effective until confirmed by the court
after due notice. (Sec. 56, Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co.,
108 So., 158, it was held
The first question then for decision is the
meaning of the word "franchise" in the statute.
"A franchise is a special privilege
conferred by governmental authority,
and which does not belong to citizens
of the country generally as a matter of
common right. ... Its meaning depends
more or less upon the connection in
which the word is employed and the
property and corporation to which it is
applied. It may have different
significations.
"For practical purposes, franchises, so
far as relating to corporations, are
divisible into (1) corporate or general
franchises; and (2) special or
secondary franchises. The former is the
franchise to exist as a corporation,
while the latter are certain rights and
privileges conferred upon existing
corporations, such as the right to use
the streets of a municipality to lay
pipes or tracks, erect poles or string
wires." 2 Fletcher's Cyclopedia Corp.

See. 1148; 14 C.J. p. 160; Adams v.

Yazon & M. V. R. Co., 24 So. 200, 317,
28 So. 956, 77 Miss. 253, 60 L.R.A. 33
et seq.
The primary franchise of a corporation that is,
the right to exist as such, is vested "in the
individuals who compose the corporation and
not in the corporation itself" (14 C.J. pp. 160,
161; Adams v. Railroad, supra; 2 Fletcher's
Cyclopedia Corp. Secs. 1153, 1158; 3
Thompson on Corporations 2d Ed.] Secs. 2863,
2864),and cannot be conveyed in the absence
of a legislative authority so to do (14A CJ. 543,
577; 1 Fletcher's Cyc. Corp. Sec. 1224;
Memphis & L.R.R. Co. v. Berry 5 S. Ct. 299, 112
U.S. 609, 28 L.E.d. 837; Vicksburg Waterworks
Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453,
50 L.E.d. 1102, 6 Ann. Cas. 253; Arthur v.
Commercial & Railroad Bank, 9 Smedes & M.
394, 48 Am. Dec. 719), but the specify or
secondary franchises of a corporation are
vested in the corporation and may ordinarily
be conveyed or mortgaged under a general
power granted to a corporation to dispose of
its property (Adams v. Railroad, supra; 14A C.J.
542, 557; 3 Thompson on Corp. [2nd Ed.] Sec.
2909), except such special or secondary
franchises as are charged with a public use (2
Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544; 3
Thompson on Corp. [2d Ed.] sec. 2908; Arthur
v. Commercial & R.R. Bank, supra; McAllister v.
Plant, 54 Miss. 106).
The right to operate a messenger and express delivery
service, by virtue of a legislative enactment, is
admittedly a secondary franchise (R.A. No. 3260,
entitled "An Act granting the JRS Business Corporation
a franchise to conduct a messenger and express
service)" and, as such, under our corporation law, is
subject to levy and sale on execution together and
including all the property necessary for the enjoyment
thereof. The law, however, indicates the procedure
under which the same (secondary franchise and the
properties necessary for its enjoyment) may be sold
under execution. Said franchise can be sold under
execution, when such sale is especially decreed and
ordered in the judgment and it becomes effective only
when the sale is confirmed by the Court after due
notice (Sec. 56, Corp. Law). The compromise
agreement and the judgment based thereon, do not
contain any special decree or order making the
franchise answerable for the judgment debt. The same
thing may be stated with respect to petitioner's trade
name or business name and its capital stock.
Incidentally, the trade name or business name
corresponds to the initials of the President of the
petitioner corporation and there can be no serious
dispute regarding the fact that a trade name or
business name and capital stock are necessarily
included in the enjoyment of the franchise. Like that of
a franchise, the law mandates, that property necessary
for the enjoyment of said franchise, can only be sold to
satisfy a judgment debt if the decision especially so
provides. As We have stated heretofore, no such
directive appears in the decision. Moreover, a trade
name or business name cannot be sold separately from
the franchise, and the capital stock of the petitioner
corporation or any other corporation, for the matter,
represents the interest and is the property of
stockholders in the corporation, who can only be
deprived thereof in the manner provided by law
(Therbee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re
Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6
Words and Phrases, 109).
It, therefore, results that the inclusion of the franchise,
the trade name and/or business name and the capital
stock of the petitioner corporation, in the sale of the
properties of the JRS Business Corporation, has no
justification. The sale of the properties of petitioner

corporation is set aside, in so far as it authorizes the

levy and sale of its franchise, trade name and capital
stocks. Without pronouncement as to costs.
G.R. No. 114222 April 6, 1995
FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO
G. BIAZON, petitioners,
vs.
HON. JESUS B. GARCIA, JR., in his capacity as the
Secretary of the Department of Transportation and
Communications, and EDSA LRT CORPORATION,
LTD., respondents.

QUIASON, J.:
This is a petition under Rule 65 of the Revised Rules of
Court to prohibit respondents from further
implementing and enforcing the "Revised and Restated
Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA" dated April 22, 1992, and the
"Supplemental Agreement to the 22 April 1992 Revised
and Restated Agreement To Build, Lease and Transfer a
Light Rail Transit System for EDSA" dated May 6, 1993.
Petitioners Francisco S. Tatad, John H. Osmena and
Rodolfo G. Biazon are members of the Philippine
Senate and are suing in their capacities as Senators
and as taxpayers. Respondent Jesus B. Garcia, Jr. is the
incumbent Secretary of the Department of
Transportation and Communications (DOTC), while
private respondent EDSA LRT Corporation, Ltd. is a
private corporation organized under the laws of
Hongkong.
I
In 1989, DOTC planned to construct a light railway
transit line along EDSA, a major thoroughfare in
Metropolitan Manila, which shall traverse the cities of
Pasay, Quezon, Mandaluyong and Makati. The plan,
referred to as EDSA Light Rail Transit III (EDSA LRT III),
was intended to provide a mass transit system along
EDSA and alleviate the congestion and growing
transportation problem in the metropolis.
On March 3, 1990, a letter of intent was sent by the Eli
Levin Enterprises, Inc., represented by Elijahu Levin to
DOTC Secretary Oscar Orbos, proposing to construct
the EDSA LRT III on a Build-Operate-Transfer (BOT)
basis.
On March 15, 1990, Secretary Orbos invited Levin to
send a technical team to discuss the project with
DOTC.
On July 9, 1990, Republic Act No. 6957 entitled "An Act
Authorizing the Financing, Construction, Operation and
Maintenance of Infrastructure Projects by the Private
Sector, and For Other Purposes," was signed by
President Corazon C. Aquino. Referred to as the BuildOperate-Transfer (BOT) Law, it took effect on October 9,
1990.
Republic Act No. 6957 provides for two schemes for the
financing, construction and operation of government
projects through private initiative and investment:
Build-Operate-Transfer (BOT) or Build-Transfer (BT).

In accordance with the provisions of R.A. No. 6957 and

to set the EDSA LRT III project underway, DOTC, on
January 22, 1991 and March 14, 1991, issued
Department Orders Nos. 91-494 and 91-496,
respectively creating the Prequalification Bids and
Awards Committee (PBAC) and the Technical
Committee.
After its constitution, the PBAC issued guidelines for
the prequalification of contractors for the financing and
implementation of the project The notice, advertising
the prequalification of bidders, was published in three
newspapers of general circulation once a week for
three consecutive weeks starting February 21, 1991.
The deadline set for submission of prequalification
documents was March 21, 1991, later extended to April
1, 1991. Five groups responded to the invitation
namely, ABB Trazione of Italy, Hopewell Holdings Ltd.
of Hongkong, Mansteel International of Mandaue, Cebu,
Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium,
composed of ten foreign and domestic corporations:
namely, Kaiser Engineers International, Inc., ACER
Consultants (Far East) Ltd. and Freeman Fox,
Tradeinvest/CKD Tatra of the Czech and Slovak Federal
Republics, TCGI Engineering All Asia Capital and
Leasing Corporation, The Salim Group of Jakarta, E. L.
Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial
Construction Group, Inc, and F. F. Cruz & co., Inc.
On the last day for submission of prequalification
documents, the prequalification criteria proposed by
the Technical Committee were adopted by the PBAC.
The criteria totalling 100 percent, are as follows: (a)
Legal aspects 10 percent; (b)
Management/Organizational capability 30 percent;
and (c) Financial capability 30 percent; and (d)
Technical capability 30 percent (Rollo, p. 122).
On April 3, 1991, the Committee, charged under the
BOT Law with the formulation of the Implementation
Rules and Regulations thereof, approved the same.
After evaluating the prequalification, bids, the PBAC
issued a Resolution on May 9, 1991 declaring that of
the five applicants, only the EDSA LRT Consortium "met
the requirements of garnering at least 21 points per
criteria [sic], except for Legal Aspects, and obtaining
an over-all passing mark of at least 82 points" (Rollo, p.
146). The Legal Aspects referred to provided that the
BOT/BT contractor-applicant meet the requirements
specified in the Constitution and other pertinent laws
(Rollo, p. 114).
Subsequently, Secretary Orbos was appointed
Executive Secretary to the President of the Philippines
and was replaced by Secretary Pete Nicomedes Prado.
The latter sent to President Aquino two letters dated
May 31, 1991 and June 14, 1991, respectively
recommending the award of the EDSA LRT III project to
the sole complying bidder, the EDSA LRT Consortium,
and requesting for authority to negotiate with the said
firm for the contract pursuant to paragraph 14(b) of the
Implementing Rules and Regulations of the BOT Law
(Rollo, pp. 298-302).

In July 1991, Executive Secretary Orbos, acting on

instructions of the President, issued a directive to the
DOTC to proceed with the negotiations. On July 16,
1991, the EDSA LRT Consortium submitted its bid
proposal to DOTC.
Finding this proposal to be in compliance with the bid
requirements, DOTC and respondent EDSA LRT
Corporation, Ltd., in substitution of the EDSA LRT
Consortium, entered into an "Agreement to Build,
Lease and Transfer a Light Rail Transit System for
EDSA" under the terms of the BOT Law (Rollo, pp. 147177).
Secretary Prado, thereafter, requested presidential
approval of the contract.
In a letter dated March 13, 1992, Executive Secretary
Franklin Drilon, who replaced Executive Secretary
Orbos, informed Secretary Prado that the President
could not grant the requested approval for the
following reasons: (1) that DOTC failed to conduct
actual public bidding in compliance with Section 5 of
the BOT Law; (2) that the law authorized public bidding
as the only mode to award BOT projects, and the
prequalification proceedings was not the public bidding
contemplated under the law; (3) that Item 14 of the
Implementing Rules and Regulations of the BOT Law
which authorized negotiated award of contract in
addition to public bidding was of doubtful legality; and
(4) that congressional approval of the list of priority
projects under the BOT or BT Scheme provided in the
law had not yet been granted at the time the contract
was awarded (Rollo, pp. 178-179).
In view of the comments of Executive Secretary Drilon,
the DOTC and private respondents re-negotiated the
agreement. On April 22, 1992, the parties entered into
a "Revised and Restated Agreement to Build, Lease
and Transfer a Light Rail Transit System for EDSA"
(Rollo, pp. 47-78) inasmuch as "the parties [are]
cognizant of the fact the DOTC has full authority to sign
the Agreement without need of approval by the
President pursuant to the provisions of Executive Order
No. 380 and that certain events [had] supervened
since November 7, 1991 which necessitate[d] the
revision of the Agreement" (Rollo, p. 51). On May 6,
1992, DOTC, represented by Secretary Jesus
Garcia vice Secretary Prado, and private respondent
entered into a "Supplemental Agreement to the 22
April 1992 Revised and Restated Agreement to Build,
Lease and Transfer a Light Rail Transit System for
EDSA" so as to "clarify their respective rights and
responsibilities" and to submit [the] Supplemental
Agreement to the President, of the Philippines for his
approval" (Rollo, pp. 79-80).
Secretary Garcia submitted the two Agreements to
President Fidel V. Ramos for his consideration and
approval. In a Memorandum to Secretary Garcia on
May 6, 1993, approved the said Agreements, (Rollo, p.
194).
According to the agreements, the EDSA LRT III will use
light rail vehicles from the Czech and Slovak Federal
Republics and will have a maximum carrying capacity
of 450,000 passengers a day, or 150 million a year to
be achieved-through 54 such vehicles operating
simultaneously. The EDSA LRT III will run at grade, or
street level, on the mid-section of EDSA for a distance

of 17.8 kilometers from F.B. Harrison, Pasay City to

North Avenue, Quezon City. The system will have its
own power facility (Revised and Restated Agreement,
Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen (13)
passenger stations and one depot in 16-hectare
government property at North Avenue (Supplemental
Agreement, Sec. 11; Rollo, pp. 91-92).
Private respondents shall undertake and finance the
entire project required for a complete operational light
rail transit system (Revised and Restated Agreement,
Sec. 4.1; Rollo, p. 58). Target completion date is 1,080
days or approximately three years from the
implementation date of the contract inclusive of
mobilization, site works, initial and final testing of the
system (Supplemental Agreement, Sec. 5; Rollo, p. 83).
Upon full or partial completion and viability thereof,
private respondent shall deliver the use and possession
of the completed portion to DOTC which shall operate
the same (Supplemental Agreement, Sec. 5; Revised
and Restated Agreement, Sec. 5.1; Rollo, pp. 61-62,
84). DOTC shall pay private respondent rentals on a
monthly basis through an Irrevocable Letter of Credit.
The rentals shall be determined by an independent and
internationally accredited inspection firm to be
appointed by the parties (Supplemental Agreement,
Sec. 6; Rollo, pp. 85-86) As agreed upon, private
respondent's capital shall be recovered from the
rentals to be paid by the DOTC which, in turn, shall
come from the earnings of the EDSA LRT III (Revised
and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54).
After 25 years and DOTC shall have completed
payment of the rentals, ownership of the project shall
be transferred to the latter for a consideration of only
U.S. $1.00 (Revised and Restated Agreement, Sec.
11.1; Rollo, p. 67).
On May 5, 1994, R.A. No. 7718, an "Act Amending
Certain Sections of Republic Act No. 6957, Entitled "An
Act Authorizing the Financing, Construction, Operation
and Maintenance of Infrastructure Projects by the
Private Sector, and for Other Purposes" was signed into
law by the President. The law was published in two
newspapers of general circulation on May 12, 1994,
and took effect 15 days thereafter or on May 28, 1994.
The law expressly recognizes BLT scheme and allows
direct negotiation of BLT contracts.
II
In their petition, petitioners argued that:
(1) THE AGREEMENT OF APRIL 22,
1992, AS AMENDED BY THE
SUPPLEMENTAL AGREEMENT OF MAY 6,
1993, INSOFAR AS IT GRANTS EDSA LRT
CORPORATION, LTD., A FOREIGN
CORPORATION, THE OWNERSHIP OF
EDSA LRT III, A PUBLIC UTILITY,
VIOLATES THE CONSTITUTION AND,
HENCE, IS UNCONSTITUTIONAL;
(2) THE BUILD-LEASE-TRANSFER
SCHEME PROVIDED IN THE
AGREEMENTS IS NOT DEFINED NOR
RECOGNIZED IN R.A. NO. 6957 OR ITS
IMPLEMENTING RULES AND
REGULATIONS AND, HENCE, IS ILLEGAL;

(3) THE AWARD OF THE CONTRACT ON

A NEGOTIATED BASIS VIOLATES R; A.
NO. 6957 AND, HENCE, IS UNLAWFUL;
(4) THE AWARD OF THE CONTRACT IN
FAVOR OF RESPONDENT EDSA LRT
CORPORATION, LTD. VIOLATES THE
REQUIREMENTS PROVIDED IN THE
IMPLEMENTING RULES AND
REGULATIONS OF THE BOT LAW AND,
HENCE, IS ILLEGAL;
(5) THE AGREEMENTS VIOLATE
EXECUTIVE ORDER NO 380 FOR THEIR
FAILURE TO BEAR PRESIDENTIAL
APPROVAL AND, HENCE, ARE ILLEGAL
AND INEFFECTIVE; AND
(6) THE AGREEMENTS ARE GROSSLY
DISADVANTAGEOUS TO THE
GOVERNMENT (Rollo, pp. 15-16).
Secretary Garcia and private respondent filed their
comments separately and claimed that:

For as long as the ruling in Kilosbayan on locus

standi is not reversed, we have no choice but to follow
it and uphold the legal standing of petitioners as
taxpayers to institute the present action.
IV
In the main, petitioners asserted that the Revised and
Restated Agreement of April 22, 1992 and the
Supplemental Agreement of May 6, 1993 are
unconstitutional and invalid for the following reasons:
(1) the EDSA LRT III is a public utility,
and the ownership and operation
thereof is limited by the Constitution to
Filipino citizens and domestic
corporations, not foreign corporations
like private respondent;
(2) the Build-Lease-Transfer (BLT)
scheme provided in the agreements is
not the BOT or BT Scheme under the
law;

(2) The writ of prohibition is not the proper remedy and

the petition requires ascertainment of facts;

(3) the contract to construct the EDSA

LRT III was awarded to private
respondent not through public bidding
which is the only mode of awarding
infrastructure projects under the BOT
law; and

(3) The scheme adopted in the Agreements is actually

a build-transfer scheme allowed by the BOT Law;

(4) the agreements are grossly

disadvantageous to the government.

(1) Petitioners are not the real parties-in-interest and

have no legal standing to institute the present petition;

(4) The nationality requirement for public utilities

mandated by the Constitution does not apply to private
respondent;
(5) The Agreements executed by and between
respondents have been approved by President Ramos
and are not disadvantageous to the government;
(6) The award of the contract to private respondent
through negotiation and not public bidding is allowed
by the BOT Law; and
(7) Granting that the BOT Law requires public bidding,
this has been amended by R.A No. 7718 passed by the
Legislature On May 12, 1994, which provides for direct
negotiation as a mode of award of infrastructure
projects.
III
Respondents claimed that petitioners had no legal
standing to initiate the instant action. Petitioners,
however, countered that the action was filed by them
in their capacity as Senators and as taxpayers.
The prevailing doctrines in taxpayer's suits are to allow
taxpayers to question contracts entered into by the
national government or government-owned or
controlled corporations allegedly in contravention of
the law (Kilosbayan, Inc. v. Guingona, 232 SCRA 110
[1994]) and to disallow the same when only municipal
contracts are involved (Bugnay Construction and
Development Corporation v. Laron, 176 SCRA. 240
[1989]).

1. Private respondent EDSA LRT Corporation, Ltd. to

whom the contract to construct the EDSA LRT III was
awarded by public respondent, is admittedly a foreign
corporation "duly incorporated and existing under the
laws of Hongkong" (Rollo, pp. 50, 79). There is also no
dispute that once the EDSA LRT III is constructed,
private respondent, as lessor, will turn it over to DOTC,
as lessee, for the latter to operate the system and pay
rentals for said use.
The question posed by petitioners is:
Can respondent EDSA LRT Corporation,
Ltd., a foreign corporation own EDSA
LRT III; a public utility? (Rollo, p. 17).
The phrasing of the question is erroneous; it is loaded.
What private respondent owns are the rail tracks,
rolling stocks like the coaches, rail stations, terminals
and the power plant, not a public utility. While a
franchise is needed to operate these facilities to serve
the public, they do not by themselves constitute a
public utility. What constitutes a public utility is not
their ownership but their use to serve the public (Iloilo
Ice & Cold Storage Co. v. Public Service Board, 44 Phil.
551, 557 558 [1923]).
The Constitution, in no uncertain terms, requires a
franchise for the operation of a public utility. However,
it does not require a franchise before one can own the
facilities needed to operate a public utility so long as it
does not operate them to serve the public.
Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other

form of authorization for the operation
of a public utility shall be granted
except to citizens of the Philippines or
to corporations or associations
organized under the laws of the
Philippines at least sixty per centum of
whose capital is owned by such
citizens, nor shall such franchise,
certificate or authorization be exclusive
character or for a longer period than
fifty years . . . (Emphasis supplied).
In law, there is a clear distinction between the
"operation" of a public utility and the ownership of the
facilities and equipment used to serve the public.
Ownership is defined as a relation in law by virtue of
which a thing pertaining to one person is completely
subjected to his will in everything not prohibited by law
or the concurrence with the rights of another
(Tolentino, II Commentaries and Jurisprudence on the
Civil Code of the Philippines 45 [1992]).
The exercise of the rights encompassed in ownership is
limited by law so that a property cannot be operated
and used to serve the public as a public utility unless
the operator has a franchise. The operation of a rail
system as a public utility includes the transportation of
passengers from one point to another point, their
loading and unloading at designated places and the
movement of the trains at pre-scheduled times
(cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz
282, 180 P.159, 7 A.L.R. 1149 [1919] ;United States Fire
Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d
868, 2 A.L.R. 2d 1065 [1948]).
The right to operate a public utility may exist
independently and separately from the ownership of
the facilities thereof. One can own said facilities
without operating them as a public utility, or
conversely, one may operate a public utility without
owning the facilities used to serve the public. The
devotion of property to serve the public may be done
by the owner or by the person in control thereof who
may not necessarily be the owner thereof.
This dichotomy between the operation of a public
utility and the ownership of the facilities used to serve
the public can be very well appreciated when we
consider the transportation industry. Enfranchised
airline and shipping companies may lease their aircraft
and vessels instead of owning them themselves.

While private respondent is the owner of the facilities

necessary to operate the EDSA. LRT III, it admits that it
is not enfranchised to operate a public utility (Revised
and Restated Agreement, Sec. 3.2; Rollo, p. 57). In
view of this incapacity, private respondent and DOTC
agreed that on completion date, private respondent
will immediately deliver possession of the LRT system
by way of lease for 25 years, during which period DOTC
shall operate the same as a common carrier and
private respondent shall provide technical maintenance
and repair services to DOTC (Revised and Restated
Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 6162). Technical maintenance consists of providing (1)
repair and maintenance facilities for the depot and rail
lines, services for routine clearing and security; and (2)
producing and distributing maintenance manuals and
drawings for the entire system (Revised and Restated
Agreement, Annex F).
Private respondent shall also train DOTC personnel for
familiarization with the operation, use, maintenance
and repair of the rolling stock, power plant,
substations, electrical, signaling, communications and
all other equipment as supplied in the agreement
(Revised and Restated Agreement, Sec. 10; Rollo, pp.
66-67). Training consists of theoretical and live training
of DOTC operational personnel which includes actual
driving of light rail vehicles under simulated operating
conditions, control of operations, dealing with
emergencies, collection, counting and securing cash
from the fare collection system (Revised and Restated
Agreement, Annex E, Secs. 2-3). Personnel of DOTC will
work under the direction and control of private
respondent only during training (Revised and Restated
Agreement, Annex E, Sec. 3.1). The training objectives,
however, shall be such that upon completion of the
EDSA LRT III and upon opening of normal revenue
operation, DOTC shall have in their employ personnel
capable of undertaking training of all new and
replacement personnel (Revised and Restated
Agreement, Annex E Sec. 5.1). In other words, by the
end of the three-year construction period and upon
commencement of normal revenue operation, DOTC
shall be able to operate the EDSA LRT III on its own and
train all new personnel by itself.
Fees for private respondent' s services shall be
included in the rent, which likewise includes the project
cost, cost of replacement of plant equipment and spare
parts, investment and financing cost, plus a reasonable
rate of return thereon (Revised and Restated
Agreement, Sec. 1; Rollo, p. 54).
Since DOTC shall operate the EDSA LRT III, it shall
assume all the obligations and liabilities of a common
carrier. For this purpose, DOTC shall indemnify and hold
harmless private respondent from any losses,
damages, injuries or death which may be claimed in
the operation or implementation of the system, except
losses, damages, injury or death due to defects in the
EDSA LRT III on account of the defective condition of
equipment or facilities or the defective maintenance of
such equipment facilities (Revised and Restated
Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).
In sum, private respondent will not run the light rail
vehicles and collect fees from the riding public. It will
have no dealings with the public and the public will
have no right to demand any services from it.

It is well to point out that the role of private respondent

as lessor during the lease period must be distinguished
from the role of the Philippine Gaming Management
Corporation (PGMC) in the case of Kilosbayan Inc. v.
Guingona, 232 SCRA 110 (1994). Therein, the Contract
of Lease between PGMC and the Philippine Charity
Sweepstakes Office (PCSO) was actually a collaboration
or joint venture agreement prescribed under the
charter of the PCSO. In the Contract of Lease; PGMC,
the lessor obligated itself to build, at its own expense,
all the facilities necessary to operate and maintain a
nationwide on-line lottery system from whom PCSO
was to lease the facilities and operate the same. Upon
due examination of the contract, the Court found that
PGMC's participation was not confined to the
construction and setting up of the on-line lottery
system. It spilled over to the actual operation thereof,
becoming indispensable to the pursuit, conduct,
administration and control of the highly technical and
sophisticated lottery system. In effect, the PCSO leased
out its franchise to PGMC which actually operated and
managed the same.
Indeed, a mere owner and lessor of the facilities used
by a public utility is not a public utility (Providence and
W.R. Co. v. United States, 46 F. 2d 149, 152 [1930];
Chippewa Power Co. v. Railroad Commission of
Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925];
Ellis v. Interstate Commerce Commission, Ill 35 S. Ct.
645, 646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither
are owners of tank, refrigerator, wine, poultry and beer
cars who supply cars under contract to railroad
companies considered as public utilities (Crystal Car
Line v. State Tax Commission, 174 p. 2d 984, 987
[1946]).
Even the mere formation of a public utility corporation
does not ipso facto characterize the corporation as one
operating a public utility. The moment for determining
the requisite Filipino nationality is when the entity
applies for a franchise, certificate or any other form of
authorization for that purpose (People v. Quasha, 93
Phil. 333 [1953]).
2. Petitioners further assert that the BLT scheme under
the Agreements in question is not recognized in the
BOT Law and its Implementing Rules and Regulations.
Section 2 of the BOT Law defines the BOT and BT
schemes as follows:
(a) Build-operate-and-transfer scheme
A contractual arrangement whereby
the contractor undertakes the
construction including financing, of a
given infrastructure facility, and the
operation and maintenance thereof.
The contractor operates the facility
over a fixed term during which it is
allowed to charge facility users
appropriate tolls, fees, rentals and
charges sufficient to enable the
contractor to recover its operating and
maintenance expenses and its
investment in the project plus a
reasonable rate of return thereon. The
contractor transfers the facility to the
government agency or local
government unit concerned at the end
of the fixed term which shall not
exceed fifty (50) years. For the

construction stage, the contractor may

obtain financing from foreign and/or
domestic sources and/or engage the
services of a foreign and/or Filipino
constructor [sic]: Provided, That the
ownership structure of the contractor
of an infrastructure facility whose
operation requires a public utility
franchise must be in accordance with
the Constitution: Provided, however,
That in the case of corporate investors
in the build-operate-and-transfer
corporation, the citizenship of each
stockholder in the corporate investors
shall be the basis for the computation
of Filipino equity in the said
corporation: Provided, further, That, in
the case of foreign constructors [sic],
Filipino labor shall be employed or
hired in the different phases of the
construction where Filipino skills are
available: Provided, furthermore, that
the financing of a foreign or foreigncontrolled contractor from Philippine
government financing institutions shall
not exceed twenty percent (20%) of
the total cost of the infrastructure
facility or project: Provided, finally,
That financing from foreign sources
shall not require a guarantee by the
Government or by government-owned
or controlled corporations. The buildoperate-and-transfer scheme shall
include a supply-and-operate situation
which is a contractual agreement
whereby the supplier of equipment and
machinery for a given infrastructure
facility, if the interest of the
Government so requires, operates the
facility providing in the process
technology transfer and training to
Filipino nationals.
(b) Build-and-transfer scheme "A
contractual arrangement whereby the
contractor undertakes the construction
including financing, of a given
infrastructure facility, and its turnover
after completion to the government
agency or local government unit
concerned which shall pay the
contractor its total investment
expended on the project, plus a
reasonable rate of return thereon. This
arrangement may be employed in the
construction of any infrastructure
project including critical facilities which
for security or strategic reasons, must
be operated directly by the
government (Emphasis supplied).
The BOT scheme is expressly defined as one where the
contractor undertakes the construction and financing in
infrastructure facility, and operates and maintains the
same. The contractor operates the facility for a fixed
period during which it may recover its expenses and
investment in the project plus a reasonable rate of
return thereon. After the expiration of the agreed term,
the contractor transfers the ownership and operation of
the project to the government.

In the BT scheme, the contractor undertakes the

construction and financing of the facility, but after
completion, the ownership and operation thereof are
turned over to the government. The government, in
turn, shall pay the contractor its total investment on
the project in addition to a reasonable rate of return. If
payment is to be effected through amortization
payments by the government infrastructure agency or
local government unit concerned, this shall be made in
accordance with a scheme proposed in the bid and
incorporated in the contract (R.A. No. 6957, Sec. 6).
Emphasis must be made that under the BOT scheme,
the owner of the infrastructure facility must comply
with the citizenship requirement of the Constitution on
the operation of a public utility. No such a requirement
is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and
BT schemes bar any other arrangement for the
payment by the government of the project cost. The
law must not be read in such a way as to rule out or
unduly restrict any variation within the context of the
two schemes. Indeed, no statute can be enacted to
anticipate and provide all the fine points and details for
the multifarious and complex situations that may be
encountered in enforcing the law (Director of Forestry
v. Munoz, 23 SCRA 1183 [1968]; People v. Exconde,
101 Phil. 1125 [1957]; United States v. Tupasi Molina,
29 Phil. 119 [1914]).
The BLT scheme in the challenged agreements is but a
variation of the BT scheme under the law.
As a matter of fact, the burden on the government in
raising funds to pay for the project is made lighter by
allowing it to amortize payments out of the income
from the operation of the LRT System.
In form and substance, the challenged agreements
provide that rentals are to be paid on a monthly basis
according to a schedule of rates through and under the
terms of a confirmed Irrevocable Revolving Letter of
Credit (Supplemental Agreement, Sec. 6; Rollo, p. 85).
At the end of 25 years and when full payment shall
have been made to and received by private
respondent, it shall transfer to DOTC, free from any lien
or encumbrances, all its title to, rights and interest in,
the project for only U.S. $1.00 (Revised and Restated
Agreement, Sec. 11.1; Supplemental Agreement, Sec;
7; Rollo, pp. 67, .87).
A lease is a contract where one of the parties binds
himself to give to another the enjoyment or use of a
thing for a certain price and for a period which may be
definite or indefinite but not longer than 99 years (Civil
Code of the Philippines, Art. 1643). There is no transfer
of ownership at the end of the lease period. But if the
parties stipulate that title to the leased premises shall
be transferred to the lessee at the end of the lease
period upon the payment of an agreed sum, the lease
becomes a lease-purchase agreement.

Furthermore, it is of no significance that the rents shall

be paid in United States currency, not Philippine pesos.
The EDSA LRT III Project is a high priority project
certified by Congress and the National Economic and
Development Authority as falling under the Investment
Priorities Plan of Government (Rollo, pp. 310-311). It is,
therefore, outside the application of the Uniform
Currency Act (R.A. No. 529), which reads as follows:
Sec. 1. Every provision contained in,
or made with respect to, any domestic
obligation to wit, any obligation
contracted in the Philippines which
provisions purports to give the obligee
the right to require payment in gold or
in a particular kind of coin or currency
other than Philippine currency or in an
amount of money of the Philippines
measured thereby, be as it is hereby
declared against public policy, and null,
void, and of no effect, and no such
provision shall be contained in, or
made with respect to, any obligation
hereafter incurred. The above
prohibition shall not apply to (a) . . .;
(b) transactions affecting high-priority
economic projects for agricultural,
industrial and power development as
may be determined by
the National Economic Council which
are financed by or through foreign
funds; . . . .
3. The fact that the contract for the construction of the
EDSA LRT III was awarded through negotiation and
before congressional approval on January 22 and 23,
1992 of the List of National Projects to be undertaken
by the private sector pursuant to the BOT Law (Rollo,
pp. 309-312) does not suffice to invalidate the award.
Subsequent congressional approval of the list including
"rail-based projects packaged with commercial
development opportunities" (Rollo, p. 310) under which
the EDSA LRT III projects falls, amounts to a ratification
of the prior award of the EDSA LRT III contract under
the BOT Law.
Petitioners insist that the prequalifications process
which led to the negotiated award of the contract
appears to have been rigged from the very beginning
to do away with the usual open international public
bidding where qualified internationally known
applicants could fairly participate.
The records show that only one applicant passed the
prequalification process. Since only one was left, to
conduct a public bidding in accordance with Section 5
of the BOT Law for that lone participant will be an
absurb and pointless exercise (cf. Deloso v.
Sandiganbayan, 217 SCRA 49, 61 [1993]).
Contrary to the comments of the Executive Secretary
Drilon, Section 5 of the BOT Law in relation to
Presidential Decree No. 1594 allows the negotiated
award of government infrastructure projects.
Presidential Decree No. 1594, "Prescribing Policies,
Guidelines, Rules and Regulations for Government
Infrastructure Contracts," allows the negotiated award

of government projects in exceptional cases. Sections 4

of the said law reads as follows:
Bidding. Construction projects shall
generally be undertaken by contract
after competitive public
bidding. Projects may be undertaken
by administration or force account or
by negotiated contract only in
exceptional cases where time is of the
essence, or where there is lack of
qualified bidders or contractors, or
where there is conclusive evidence
that greater economy and efficiency
would be achieved through this
arrangement, and in accordance with
provision of laws and acts on the
matter, subject to the approval of the
Minister of Public Works and
Transportation and Communications,
the Minister of Public Highways, or the
Minister of Energy, as the case may be,
if the project cost is less than P1
Million, and the President of the
Philippines, upon recommendation of
the Minister, if the project cost is P1
Million or more (Emphasis supplied).
xxx xxx xxx
Indeed, where there is a lack of qualified bidders or
contractors, the award of government infrastructure
contracts may he made by negotiation. Presidential
Decree No. 1594 is the general law on government
infrastructure contracts while the BOT Law governs
particular arrangements or schemes aimed at
encouraging private sector participation in government
infrastructure projects. The two laws are not
inconsistent with each other but are inpari materia and
should be read together accordingly.
In the instant case, if the prequalification process was
actually tainted by foul play, one wonders why none of
the competing firms ever brought the matter before
the PBAC, or intervened in this case before us
(cf. Malayan Integrated Industries Corp. v. Court of
Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office
of the President, 205 SCRA 705 [1992]).
The challenged agreements have been approved by
President Ramos himself. Although then Executive
Secretary Drilon may have disapproved the
"Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA," there is nothing in our laws
that prohibits parties to a contract from renegotiating
and modifying in good faith the terms and conditions
thereof so as to meet legal, statutory and
constitutional requirements. Under the circumstances,
to require the parties to go back to step one of the
prequalification process would just be an idle
ceremony. Useless bureaucratic "red tape" should be
eschewed because it discourages private sector
participation, the "main engine" for national growth
and development (R.A. No. 6957, Sec. 1), and renders
the BOT Law nugatory.
Republic Act No. 7718 recognizes and defines a BLT
scheme in Section 2 thereof as:

(e) Build-lease-and-transfer A
contractual arrangement whereby a
project proponent is authorized to
finance and construct an infrastructure
or development facility and upon its
completion turns it over to the
government agency or local
government unit concerned on a lease
arrangement for a fixed period after
which ownership of the facility is
automatically transferred to the
government unit concerned.
Section 5-A of the law, which expressly allows direct
negotiation of contracts, provides:
Direct Negotiation of Contracts.
Direct negotiation shall be resorted to
when there is only one complying
bidder left as defined hereunder.
(a) If, after advertisement, only one
contractor applies for prequalification
and it meets the prequalification
requirements, after which it is required
to submit a bid proposal which is
subsequently found by the
agency/local government unit (LGU) to
be complying.
(b) If, after advertisement, more than
one contractor applied for
prequalification but only one meets the
prequalification requirements, after
which it submits bid/proposal which is
found by the agency/local government
unit (LGU) to be complying.
(c) If, after prequalification of more
than one contractor only one submits a
bid which is found by the agency/LGU
to be complying.
(d) If, after prequalification, more than
one contractor submit bids but only
one is found by the agency/LGU to be
complying. Provided, That, any of the
disqualified prospective bidder [sic]
may appeal the decision of the
implementing agency, agency/LGUs
prequalification bids and awards
committee within fifteen (15) working
days to the head of the agency, in case
of national projects or to the
Department of the Interior and Local
Government, in case of local projects
from the date the disqualification was
made known to the disqualified bidder:
Provided, furthermore, That the
implementing agency/LGUs concerned
should act on the appeal within fortyfive (45) working days from receipt
thereof.
Petitioners' claim that the BLT scheme and direct
negotiation of contracts are not contemplated by the
BOT Law has now been rendered moot and academic
by R.A. No. 7718. Section 3 of this law authorizes all
government infrastructure agencies, governmentowned and controlled corporations and local

government units to enter into contract with any duly

prequalified proponent for the financing, construction,
operation and maintenance of any financially viable
infrastructure or development facility through a BOT,
BT, BLT, BOO (Build-own-and-operate), CAO (Contractadd-operate), DOT (Develop-operate-and-transfer),
ROT (Rehabilitate-operate-and-transfer), and ROO
(Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).
From the law itself, once and applicant has
prequalified, it can enter into any of the schemes
enumerated in Section 2 thereof, including a BLT
arrangement, enumerated and defined therein (Sec. 3).
Republic Act No. 7718 is a curative statute. It is
intended to provide financial incentives and "a climate
of minimum government regulations and procedures
and specific government undertakings in support of the
private sector" (Sec. 1). A curative statute makes valid
that which before enactment of the statute was invalid.
Thus, whatever doubts and alleged procedural lapses
private respondent and DOTC may have engendered
and committed in entering into the questioned
contracts, these have now been cured by R.A. No. 7718
(cf. Development Bank of the Philippines v. Court of
Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14
SCRA 1041 [1965]; Adong V. Cheong Seng Gee, 43 Phil.
43 [1922].
4. Lastly, petitioners claim that the agreements are
grossly disadvantageous to the government because
the rental rates are excessive and private respondent's
development rights over the 13 stations and the depot
will rob DOTC of the best terms during the most
productive years of the project.

not presented evidence on the reasonable rentals to be

paid by the parties to each other. The matter of
valuation is an esoteric field which is better left to the
experts and which this Court is not eager to undertake.
That the grantee of a government contract will profit
therefrom and to that extent the government is
deprived of the profits if it engages in the business
itself, is not worthy of being raised as an issue. In all
cases where a party enters into a contract with the
government, he does so, not out of charity and not to
lose money, but to gain pecuniarily.
5. Definitely, the agreements in question have been
entered into by DOTC in the exercise of its
governmental function. DOTC is the primary policy,
planning, programming, regulating and administrative
entity of the Executive branch of government in the
promotion, development and regulation of dependable
and coordinated networks of transportation and
communications systems as well as in the fast, safe,
efficient and reliable postal, transportation and
communications services (Administrative Code of
1987, Book IV, Title XV, Sec. 2). It is the Executive
department, DOTC in particular that has the power,
authority and technical expertise determine whether or
not a specific transportation or communication project
is necessary, viable and beneficial to the people. The
discretion to award a contract is vested in the
government agencies entrusted with that function
(Bureau Veritas v. Office of the President, 205 SCRA
705 [1992]).
WHEREFORE, the petition is DISMISSED.
SO ORDERED

It must be noted that as part of the EDSA LRT III

project, private respondent has been granted, for a
period of 25 years, exclusive rights over the depot and
the air space above the stations for development into
commercial premises for lease, sublease, transfer, or
advertising (Supplemental Agreement, Sec. 11; Rollo,
pp. 91-92). For and in consideration of these
development rights, private respondent shall pay DOTC
in Philippine currency guaranteed revenues generated
therefrom in the amounts set forth in the Supplemental
Agreement (Sec. 11;Rollo, p. 93). In the event that
DOTC shall be unable to collect the guaranteed
revenues, DOTC shall be allowed to deduct any
shortfalls from the monthly rent due private
respondent for the construction of the EDSA LRT III
(Supplemental Agreement, Sec. 11; Rollo, pp. 93-94).
All rights, titles, interests and income over all contracts
on the commercial spaces shall revert to DOTC upon
expiration of the 25-year period. (Supplemental
Agreement, Sec. 11; Rollo, pp. 91-92).
The terms of the agreements were arrived at after a
painstaking study by DOTC. The determination by the
proper administrative agencies and officials who have
acquired expertise, specialized skills and knowledge in
the performance of their functions should be accorded
respect absent any showing of grave abuse of
discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive
Secretary, 190 SCRA 673 [1990]; Board of Medical
Education v. Alfonso, 176 SCRA 304 [1989]).
Government officials are presumed to perform their
functions with regularity and strong evidence is
necessary to rebut this presumption. Petitioners have

G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation,
Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner
,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in
a building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese
military occupation, the building and insured
merchandise were burned. In due time the respondent
submitted to the petitioner its claim under the policy.
The salvage goods were sold at public auction and,
after deducting their value, the total loss suffered by
the respondent was fixed at P92,650. The petitioner
refused to pay the claim on the ground that the policy
in favor of the respondent had ceased to be in force on
the date the United States declared war against
Germany, the respondent Corporation (though
organized under and by virtue of the laws of the
Philippines) being controlled by the German subjects
and the petitioner being a company under American
jurisdiction when said policy was issued on October 1,
1941. The petitioner, however, in pursuance of the

order of the Director of Bureau of Financing, Philippine

Executive Commission, dated April 9, 1943, paid to the
respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the
Court of First Instance of Manila for the purpose of
recovering from the respondent the sum of P92,650
above mentioned. The theory of the petitioner is that
the insured merchandise were burned up after the
policy issued in 1941 in favor of the respondent
corporation has ceased to be effective because of the
outbreak of the war between the United States and
Germany on December 10, 1941, and that the
payment made by the petitioner to the respondent
corporation during the Japanese military occupation
was under pressure. After trial, the Court of First
Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court
of Appeals, the judgment of the Court of First Instance
of Manila was affirmed, with costs. The case is now
before us on appeal by certiorari from the decision of
the Court of Appeals.
The Court of Appeals overruled the contention of the
petitioner that the respondent corporation became an
enemy when the United States declared war against
Germany, relying on English and American cases which
held that a corporation is a citizen of the country or
state by and under the laws of which it was created or
organized. It rejected the theory that nationality of
private corporation is determine by the character or
citizenship of its controlling stockholders.
There is no question that majority of the stockholders
of the respondent corporation were German subjects.
This being so, we have to rule that said respondent
became an enemy corporation upon the outbreak of
the war between the United States and Germany. The
English and American cases relied upon by the Court of
Appeals have lost their force in view of the latest
decision of the Supreme Court of the United States in
Clark vs. Uebersee Finanz Korporation, decided on
December 8, 1947, 92 Law. Ed. Advance Opinions, No.
4, pp. 148-153, in which the controls test has been
adopted. In "Enemy Corporation" by Martin Domke, a
paper presented to the Second International
Conference of the Legal Profession held at the Hague
(Netherlands) in August. 1948 the following
enlightening passages appear:
Since World War I, the determination of enemy
nationality of corporations has been discussion
in many countries, belligerent and neutral. A
corporation was subject to enemy legislation
when it was controlled by enemies, namely
managed under the influence of individuals or
corporations, themselves considered as
enemies. It was the English courts which first
the Daimler case applied this new concept of
"piercing the corporate veil," which was
adopted by the peace of Treaties of 1919 and
the Mixed Arbitral established after the First
World War.
The United States of America did not adopt the
control test during the First World War. Courts
refused to recognized the concept whereby
American-registered corporations could be
considered as enemies and thus subject to
domestic legislation and administrative
measures regarding enemy property.

World War II revived the problem again. It was

known that German and other enemy interests
were cloaked by domestic corporation
structure. It was not only by legal ownership of
shares that a material influence could be
exercised on the management of the
corporation but also by long term loans and
other factual situations. For that reason,
legislation on enemy property enacted in
various countries during World War II adopted
by statutory provisions to the control test and
determined, to various degrees, the incidents
of control. Court decisions were rendered on
the basis of such newly enacted statutory
provisions in determining enemy character of
domestic corporation.
The United States did not, in the amendments
of the Trading with the Enemy Act during the
last war, include as did other legislations the
applications of the control test and again, as in
World War I, courts refused to apply this
concept whereby the enemy character of an
American or neutral-registered corporation is
determined by the enemy nationality of the
controlling stockholders.
Measures of blocking foreign funds, the so
called freezing regulations, and other
administrative practice in the treatment of
foreign-owned property in the United States
allowed to large degree the determination of
enemy interest in domestic corporations and
thus the application of the control test. Court
decisions sanctioned such administrative
practice enacted under the First War Powers
Act of 1941, and more recently, on December
8, 1947, the Supreme Court of the United
States definitely approved of the control theory.
In Clark vs. Uebersee Finanz Korporation, A. G.,
dealing with a Swiss corporation allegedly
controlled by German interest, the Court: "The
property of all foreign interest was placed
within the reach of the vesting power (of the
Alien Property Custodian) not to appropriate
friendly or neutral assets but to reach enemy
interest which masqueraded under those
innocent fronts. . . . The power of seizure and
vesting was extended to all property of any
foreign country or national so that no innocent
appearing device could become a Trojan
horse."
It becomes unnecessary, therefore, to dwell at length
on the authorities cited in support of the appealed
decision. However, we may add that, in Haw Pia vs.
China Banking Corporation,* 45 Off Gaz., (Supp. 9) 299,
we already held that China Banking Corporation came
within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries not
only because it was incorporated under the laws of an
enemy country but because it was controlled by
enemies.
The Philippine Insurance Law (Act No. 2427, as
amended,) in section 8, provides that "anyone except a
public enemy may be insured." It stands to reason that
an insurance policy ceases to be allowable as soon as
an insured becomes a public enemy.

Effect of war, generally. All intercourse

between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by
the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the
enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of
voluntary submission to it; or receiving its
protection; also all acts concerning the
transmission of money or goods; and all
contracts relating thereto are thereby nullified.
It further prohibits insurance upon trade with or
by the enemy, upon the life or lives of aliens
engaged in service with the enemy; this for the
reason that the subjects of one country cannot
be permitted to lend their assistance to protect
by insurance the commerce or property of
belligerent, alien subjects, or to do anything
detrimental too their country's interest. The
purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its
enemy's property and repay in insurance the
value of what has been so destroyed, or that it
should in such manner increase the resources
of the enemy, or render it aid, and the
commencement of war determines, for like
reasons, all trading intercourse with the
enemy, which prior thereto may have been
lawful. All individuals therefore, who compose
the belligerent powers, exist, as to each other,
in a state of utter exclusion, and are public
enemies. (6 Couch, Cyc. of Ins. Law, pp. 53525353.)
In the case of an ordinary fire policy, which
grants insurance only from year, or for some
other specified term it is plain that when the
parties become alien enemies, the contractual
tie is broken and the contractual rights of the
parties, so far as not vested. lost. (Vance, the
Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation
on December 10, 1941, the insurance policy issued in
its favor on October 1, 1941, by the petitioner (a
Philippine corporation) had ceased to be valid and
enforcible, and since the insured goods were burned
after December 10, 1941, and during the war, the
respondent was not entitled to any indemnity under
said policy from the petitioner. However, elementary
rules of justice (in the absence of specific provision in
the Insurance Law) require that the premium paid by
the respondent for the period covered by its policy
from December 11, 1941, should be returned by the
petitioner.
The Court of Appeals, in deciding the case, stated that
the main issue hinges on the question of whether the
policy in question became null and void upon the
declaration of war between the United States and
Germany on December 10, 1941, and its judgment in
favor of the respondent corporation was predicated on
its conclusion that the policy did not cease to be in
force. The Court of Appeals necessarily assumed that,
even if the payment by the petitioner to the
respondent was involuntary, its action is not tenable in
view of the ruling on the validity of the policy. As a
matter of fact, the Court of Appeals held that "any
intimidation resorted to by the appellee was not unjust
but the exercise of its lawful right to claim for and

received the payment of the insurance policy," and

that the ruling of the Bureau of Financing to the effect
that "the appellee was entitled to payment from the
appellant was, well founded." Factually, there can be
no doubt that the Director of the Bureau of Financing,
in ordering the petitioner to pay the claim of the
respondent, merely obeyed the instruction of the
Japanese Military Administration, as may be seen from
the following: "In view of the findings and conclusion of
this office contained in its decision on Administrative
Case dated February 9, 1943 copy of which was sent to
your office and the concurrence therein of the Financial
Department of the Japanese Military Administration,
and following the instruction of said authority, you are
hereby ordered to pay the claim of Messrs. Christern,
Huenefeld & Co., Inc. The payment of said claim,
however, should be made by means of crossed check."
(Emphasis supplied.)
It results that the petitioner is entitled to recover what
paid to the respondent under the circumstances on this
case. However, the petitioner will be entitled to recover
only the equivalent, in actual Philippines currency of
P92,650 paid on April 19, 1943, in accordance with the
rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed
and the respondent corporation is ordered to pay to
the petitioner the sum of P77,208.33, Philippine
currency, less the amount of the premium, in Philippine
currency, that should be returned by the petitioner for
the unexpired term of the policy in question, beginning
December 11, 1941. Without costs. So ordered.
G.R. No. L-3869

January 31, 1952

S. DAVIS WINSHIP, plaintiff-appellant,

vs.
PHILIPPINE TRUST COMPANY, defendant-appellee.
Francisco R. Capistrano for appellant.
Lao and Feria for appellee.
PARAS, J.:
Prior to December, 1941, the Eastern Isles Import
corporation organized under and existing by virtue of
the laws of the Philippines, all of the capital stock of
which was and has been owned by American citizens,
except one share with a par value of P100 in the name
of Antonia Sevilla and one share with a par value of
P100 in the name of Edmund A. Schwesinger, had a
current account deposit with the Philippine Trust
Company, and as of December 29, 1941, the balance
in favor of said depositor was P51,410.91. Prior to
December, 1941, the Eastern Isles, Inc., a corporation
organized under and existing by virtue of the laws of
the Philippines, all of the capital stock of which was
and has been owned by American citizens, except one
share with a par value of P100 in the name of F.
Capistrano, had a current account deposit with the
Philippine Trust Company, and as of December 29,
1941, the balance in favor of said depositor was
P34,827.74. The Eastern Isles, Incorporated made a
withdrawal of P204.37 which was debited to said
account on June 10, 1942.
On October 4, 1943, the Japanese Military
Administration in the Philippines issued an order
requiring all deposit accounts of the hostile people

(including corporations) to be transferred to the Bank

of Taiwan, as the depository of the Japanese Military
Administration, which order the Philippine Trust
Company was specifically directed to comply with. On
September 29, 1944, in compliance with said order, the
Philippine Trust Company transferred and paid the
credit balances of the current account deposits of the
Eastern Isles Import Corporation and of the Eastern
Isles, Inc. to the Bank of Taiwan.
The pre-war current deposit accounts of the Eastern
Isles Import Corporation and of the Eastern Isles, Inc.
were subsequently transferred to S. Davis Winship who,
on August 12, 1947, presented to the Philippine Trust
Company checks Nos. A-79212 and H-579401 covering
the aforesaid deposits. The Philippine Trust Company,
however, refused to pay said checks, whereupon, on
September 6, 1947, S. Davis Winship instituted the
present action against the Philippine Trust Company in
the Court of First Instance of Manila, to recover upon
the first cause of action the sum of P51,410.91 and
under the second cause of action the sum of
P34,827.74.
In its answer, the defendant Philippine trust Company
invoked the order of the Japanese Military
Administration by virtue of which it transferred the
current deposit accounts in question to the Bank of
Taiwan as the depository of the Bureau of Enemy
Property Custody of the Japanese Military
Administration. After trial, the Court of First Instance of
Manila rendered a decision upholding the contention of
the defendant and accordingly dismissing the
complaint. From this decision plaintiff appealed. In the
case of Everett Steamship Corporation vs. Bank of the
Philippine Islands, 84 Phil., 202; 47 O.G., No. 1 p. 165,
we made the following pronouncement: This Court
having ruled in the Haw Pia case that the collection by
the Bank of Taiwan of the China Banking Corporation's
credit from the latter's debtor, by order of the Japanese
Military Administration, was not a confiscation but a
mere sequestration of enemy's private personal
property, and therefore the payment by the plaintiff to
the Bank of Taiwan was valid and released his
obligation to the defendant bank, it follows that the
Bank of Taiwan of plaintiff's deposit, and by order of the
Japanese Military Administration, was valid and
released the defendant's obligation to the plaintiff.'
In view of this pronouncement, we have to affirm the
appealed judgment. As it has been stipulated by the
parties that the defendant transferred the deposits in
question to the Bank of Taiwan in compliance with the
order of the Japanese Military Administration, the
defendant was released from any obligation to the
depositors or their transferee. Appellant's contention
that there is no positive showing that the transfer was
made by the Philippine Trust Company in compliance
with the order of the Japanese Military Administration,
and its logical effect is to make such act binding on
said company. At any rate, the defendant corporation
has not impugned its validity.
In the case of Filipinas Compaia de Seguros vs.
Christern Henefeld and Co., Inc., Phil., 54, we held that
the nationality of a private corporation is determined
by the character or citizenship of its controlling
stockholders; and this pronouncement is of course
decisive as to the hostile character of the Eastern Isles,
Inc., as far as the Japanese Military Administration was
concerned, it being conceded that the controlling

stockholders of said corporations were American

citizens.
Wherefore, the appealed judgment is affirmed, with
costs against the appellant. So ordered.
G.R. No. L-554

April 9, 1948

HAW PIA, plaintiff-appellant,

vs.
THE CHINA BANKING CORPORATION, defendantappellee.
Fidel J. Silva for appellant.
Ross, Selph, Carrascoso and Janda for appellee.
DeWitt, Perkins, and Ponce Enrile; Gibbs, Gibbs,
Chuidian and Quasha; Ramon Diokno and Jose W.
Diokno; Claro M. Recto and Allan A. O'Gorman, as
amici curiae.
FERIA, J.:
Plaintiff-appellant instituted this action in the Court of
First Instance of Manila against the defendant-appellee,
China Banking Corporation, to compel the latter to
execute a deed of cancellation of the mortgage on the
property described in the complaint, and to deliver to
the said plaintiff the Transfer Certificate of Title No.
47634 of the Register of Deeds of Manila, with the
mortgage annotated therein already cancelled, as well
as to pay the plaintiff the sum of P1,000.00 for
damages as attorney's fees and to pay the costs of the
suit. The cause of action is that the plaintiff's
indebtedness to the China Banking Corporation in the
sum of P5,103.35 by way of overdraft in current
account payable on demand together with its interests,
has been completely paid, on different occasions, from
October 7, 1942, to August 29, 1944, to the defendant
Bank China Banking Corporation through the defendant
Bank of Taiwan, Ltd., that was appointed by the
Japanese Military authorities as liquidator of the China
Banking Corporation.
Upon having been served with summons the
defendant-appellee China Banking Corporation made a
demand from the plaintiff-appellant for the payment of
the sum of P5,103.35 with interests representing the
debt of the said appellant, and in the answer it set up a
counter claim against the plaintiff-appellant demanding
the payment, within 90 days from the latter to the
former by way of overdraft together with its interests
at the rate of 9 additional sum of P1,500 as attorney's
fees and the costs of the suits.
After the hearing of the case, the trial court rendered a
decision holding that, as there was no evidence
presented to show that the defendant China Banking
Corporation had authorized the Bank of Taiwan, Ltd., to
accept the payment of the plaintiff's debt to the said
defendant, and said Bank of Taiwan, as an agency of
the Japanese invading army, was not authorized under
the international law to liquidate the business of the
China Banking Corporation, the payment has not
extinguished the indebtedness of the plaintiff to the
said defendant under article 1162 of the Civil Code.
The court absolved the defendant China Banking
Corporation from the complaint of the plaintiff, and
sentenced the latter to pay the former the sum of
P5,103.35 with interests within the period of 90 days
from and after the above mentioned Executive Order

No. 32 had been repealed or set aside, and ordered

that, if the plaintiff failed to pay it within the said
period, the property mortgaged shall be sold at public
auction and the proceeds of the sale applied to the
payment of said obligations. The plaintiff appealed
from the decision to this Court.
The appellant's assignments of error may be reduced
to two, to wit: First, whether or not the Japanese
Military Administration had authority to order the
liquidation or winding up of the business of defendantappellee China Banking Corporation, and to appoint the
Bank of Taiwan liquidator authorized as such to accept
the payment by the plaintiff-appellant to said
defendant-appellee; and second, whether or not such
payment by the plaintiff-appellant has extinguished her
obligation to said defendant-appellee.
(1) As to the first question, we are Japanese military
opinion, and therefore hold, that the Japanese military
authorities had power, under the international law, to
order the liquidation of the China Banking Corporation
and to appoint and authorize the Bank of Taiwan as
liquidator to accept the payment in question, because
such liquidation is not confiscation of the properties of
the bank appellee, but a mere sequestration of its
assets which required the liquidation or winding up of
the business of said bank. All the arguments to the
contrary in support of the decision appealed from the
predicated upon the erroneous assumption that the
liquidation or winding up of the affairs of the China
Banking Corporation, in order to determine its liabilities
and net assets to be sequestrated or controlled, was an
act of confiscation or appropriation of private property
contrary to Article 46, section III of the Hague
Regulations of 1907.
The provisions of the Hague Regulations, section III, on
Military Authority over Hostile Territory, which is a part
of the Hague Convention respecting the laws and
customs of war on land, are intended to serve as
general rule of conduct for the belligerents in their
relations with each other and with the inhabitants, but
as it had not been found possible then to concert
regulations covering all the circumstances which occur
in practice, and on the other hand it could not have
been intended by the High Contracting Parties that the
unforeseen cases should, in the absence of a written
undertaking, be left to the arbitrary judgment of
military commanders, it was agreed that "Until a
complete code of the laws of war has been issued, the
High Contracting Parties deem it expedient to declare
that in cases not included in the Regulations adopted
by them, the inhabitants and the belligerents remain
under the protection and the rule of the principles of
international law, as they result for the usages
established among civilized peoples, from the laws of
humanity, and the dictates of public conscience."
Before the Hague Convention, it was the usage or
practice to allow or permit the confiscation or
appropriation by the belligerent occupant not only of
public but also of private property of the enemy in a
territory occupied by the belligerent hostile army; and
as such usage or practice was allowed, a fortiori, any
other act short of confiscation was necessarily
permitted. Section III of the Hague Regulations only
prohibits the confiscation of private property, article 53
provides that cash funds, and property liable to
requisition and all other movable property belonging to
the State susceptible of military use or operation, may

be confiscated or taken possession of as a booty and

utilized for the benefit of the invader's government (II
Oppenheim, 8th ed. section 137; 320 & 321, War
Department; Basic Field Manual, Rules of Land Warfare
FM 27-10). The belligerents in their effort to control
enemy property within their jurisdiction or in territories
occupied by their armed forces in order to avoid their
use in aid of the enemy and to increase their own
resources, after the Hague Convention and specially
during the first World War, had to resort to such
measures of prevention which do not amount to a
straight confiscation, as freezing, blocking, placing
under custody and sequestrating the enemy private
property. Such acts are recognized as not repugnant to
the Hague Regulations by well-known writers on
International Law, and are authorized in the Army and
Navy Manual of Military Government and Civil Affairs
not only of the United States, but also in tries, as well
as in the Trading with the Enemy Acts of said countries.
Hyde in his International Law chiefly as interpreted and
applied by the United States, Vol. 3, 6th ed., p. 1727,
has the following to say:
In examining the efforts of a belligerent to
control in various ways property within its
domain that has such a connection with
nationals of the enemy that it may be fairly
regarded as enemy property, it is important to
inquire whether the attempt is made to
appropriate property without compensation,
divesting him not only of title, but also of any
right or interest in what is taken, without
prospect of reimbursement, or whether those
efforts constitute an assumption of control
which, regardless of any transfer of title, is not
designated to produce such a deprivation. The
character of the belligerent acts in the two
situations is not identical. To refer to both as
confiscatory is not productive of clearness of
thought, unless a loose and broad signification
be attached to the term "confiscation." The
point to be noted is that a belligerent may in
fact deprive an alien enemy owner of property
by process that are into essentially
confiscatory, even though the taking and
retention may cause him severe loss and
hardship. Recourse to such non-confiscatory
retentions or deprivations has marked the
conduct of belligerents since the beginning of
the World War in 1914. They may perhaps be
appropriately referred to as sequestrations. The
propriety of what they have involved is,
therefore, hardly discernible by reference to
objections directed against confiscatory action
as such, and must be tested by other means or
standards.
A belligerent may fairly endeavor to prevent
enemy property of any kind within its territory
(or elsewhere within its reach) from being so
employed as to afford direct military aid to its
foe. Measures of prevention may, in a
particular case, assume a confiscatory aspect.
In such a situation the question may arise
whether those aspect. In such a situation the
question may arise whether those measures
are, nevertheless, excusable. It is believed that
they may be, and that they are not invariably
unlawful despite the absence of efforts to
compensate the owners.

And in the footnote of the same page, said author

adds:
This analysis differs sharply from that of those
who would regard almost all uncompensated
deprivations of property as essentially
confiscatory, and as, therefore, internationally
illegal because of the further assumption or
conclusion that confiscatory action must
inevitably be so regarded. Belligerent States
have not, however, generally acted on such a
theory. They have in fact proceeded, especially
since 1914, to exercise varying degrees of
control over vast amounts of enemy private
property by strictly non-confiscatory processes
from which they have felt no sense of legal
obligation to abstain. In so doing they have
been creative of relatively fresh practices
which logic has ordained and war-terminating
treaties have sanctioned. Thus it happens that
proper estimation of the place of confiscation
of enemy private property in the law of nations
has become of less importance than formerly,
because both of the reluctance of States and
notably of the United States to have recourse
to it, and of their preference for no-confiscatory
measures exemplified in sequestrations as a
desirable and sufficient means of utilizing such
property.
And Oppenheim in his International Law, Vol. 2, 6th ed.,
by Lauterpacht, says:
But the desire to eliminate the financial and
commercial influence of the enemy, and other
motives, presently led in most States to
exceptional war measures against the
businesses and property of enemies, which
though not confiscation, implicated great loss
and injury. Sometimes these measures stopped
short of divesting the enemy ownership of the
property; but in other cases the businesses or
property were liquidated, and were represented
at the close of hostilities by nothing else than
the proceeds of their realization, often enough
out of all proportion to their value. In the
Trading with the Enemy Act, 1939, provisions
was made for the appointment of custodians of
enemy property in order to prevent the
payment of money to enemies and preserve
enemy property in contemplation of
arrangements to be made at the conclusion of
peace.
The readjustment of rights of private property
on land was provided for by the Treaties of
Peace. The general principles underlying their
complicated arrangements were that the
validity of all completed war measures was
reciprocally confirmed; but that while
uncompleted liquidations on the territories of
the Central Powers were to be discontinued,
and the subjects of the victorious Powers were
to receive compensation for the loss or
damage inflicted on their property by the
emergency war measures, the property of
subjects of the vanquished Powers on the
territories of the Allied and Associated Powers
might be retained and liquidated, and the
owner was to look for compensation to his own
State. The proceeds of the realization of such

property were not to be handed over to him, or

to his State, but were to be credited to his
State as payment on account of the sums
payable by it under the treaties.
In paragraph 143 (p. 313) of the same work,
Oppenheim states that "Private personal property
which does not consist of war materials or means of
transport serviceable for military operations may not
be as a rule seized". It is obvious that the word
"seized" used therein signifies "confiscated" in view of
the above quoted paragraph, and therefore when
Oppenheim says, in footnote to said passage, "Nor may
the occupant liquidate the business of enemy subject
in occupied territories," he means "confiscate" by the
word "liquidate".
Ernest K. Feildchenfeld in his "The International
Economic Law of Belligerent Occupation (1942)"
supports the foregoing conclusion of Hyde, when he
says that "According to Article 46 of the Hague
Regulations, private property must be respected and
cannot be confiscated. This rule affords protection
against the loss of property, through outright
confiscation, but not against losses under lawful
requisition, contribution, seizure, fines, taxes, and
expropriation" (Par. 208, p. 51). And later on the adds:
"A complete nationalization of a corporation for the
benefit of the occupant could not be anything but a
permanent measure involving final effects beyond the
duration of the occupation. There is no military need
for it because the same practical results can be
achieved by temporary sequestration," (par. 385, p.
107).
Martin Domke in his Trading with the Enemy in World
War II, pp. 4 and 5, speaking of Warfare on Economic
and military fronts, says that "Freezing Control is but
one phase of the present war effort; it is but one
weapon on the total war which is now being waged on
both economic and military fronts. Coupled with
Freezing Control as a part of this nation's program of
economic warfare are to be found export control, the
promulgation of a Black List, censorship, seizure of
enemy-owned property, and financial and lend-lease
aid to allied and friendly nations. As to Japan, no official
information is available as yet on steps taken by the
Japanese Government. As a Commentary of April 11,
1942, points out, the Japanese Trading with the Enemy
legislation enacted during the last war against
Germany might throw some light on the views adopted
by Japan in this matter."
The sequestration or liquidation of enemy banks in
occupied territories is authorized expressly by the
United States Army and Navy Manual of Military
Government and Civil Affairs F.M. 2710 OPNAV 50-E-3,
which, mandatory and controlling upon the theatre
commanders of the U. S. forces in said territories,
provides in its paragraph 12 the following:
Functions of Civil Affairs Officers. In the
occupation of such territories for a
considerable period of time, the civil affairs
officers will in most cases be concerned with
the following and other activities:
1. MONEY AND BANKING. Closing, if
necessary and guarding of banks, bank funds,
safe deposit boxes, securities and records;

providing interim banking and credit

needs; liquidation; reorganization, and
reopening of banks at appropriate times;
regulations and supervisions of credit
cooperatives and other financial agencies and
organizations; execution of policies on currency
fixed by higher authority, such as the
designation of types of currency to be used and
rates of exchange supervision of the issue and
use of all types of money and credit;
declaration of debt moratoria; prevention of
financial transactions with enemy occupied
territory.
The civil affairs officers are concerned, that is,
entrusted with the performance of the functions
enumerated above, when so directed by the chief
commander of the occupant military forces.
Not only the United States Army and Navy Manual of
Military Government and Civil Affairs but similar
manuals of other countries authorize the liquidation or
impounding of the assets of enemy banks or the
freezing, blocking and impounding of enemy properties
in the occupied hostile territories without violating
article 46 or other articles of the Hague Regulations.
They do not amount to an outright confiscation of
private property, and were put into effect by the Allied
Army in the occupied hostile territories in Europe
during World War II.
The Combined Chiefs of Staff, in their Directive of May
31, 1943, on Military Government in Sicily, Italy,
addressed to the Supreme Allied Commander,
Mediterranean Theater, ordered: "(h) An Allied
Military Financial Agency under the control of the
Military Government shall be established with such
sub-agencies as considered necessary," "(i) Military
authorities on occupying an area shall immediately
take the following steps: '(1) All financial institutions
and banks shall be closed and put under the custody of
the military forces'," (2) a general moratorium shall be
declared. (j) ... all papers of value, foreign securities,
gold and foreign currencies shall be impounded with
receipts granted to recognized owners. (k) "The Allied
Military Financial Agency or any appointed agency by
the MG will take into immediate custody all foreign
securities and currencies, holding of gold, national
funds and holding of Fascist organizations for deposit."
(Appendix on American Military Government, its
Organization and Policies, by Hajo Holborn, 1947, pp.
116, 117.)
The Combined Directive of April 28, 1944, for Military
government in Germany Prior to Defeat or Surrender,
provided that the Allied Forces "Upon entering the area
of Germany will take the following steps and put into
effect only such further financial measures as they
deem necessary from a strictly military standpoint. (b)
"Banks should be placed under such control as deemed
necessary by them in order that adequate facilities or
military needs may be provided and to insure that
instructions and regulations issued by the military
authorities will be fully complied with." (c) "Pending
determination of future disposition, all gold, foreign
currencies, foreign securities, accounts in financial
institutions, credits, valuable papers, and all similar
assets held by or on behalf of the following, will be
impounded or blocked and will be used or otherwise
dealt with only as permitted under licenses or other
instructions which you may issue: (1) German national

state, provincial and local governments and agencies

and instrumentalities thereof." (4) "Nazi party
organizations including the party formations, affiliates
and supervised associations, and the officials, leading
members and supporters thereof; and (5) Persons
under detention or other types of custody by Allied
Military authorities and other persons whose activities
are hostile to the interest of military government"
(Holborn, supra, p. 141)
In the Allied Directive of June 27, 1945, to the
Commander in Chief of the United States forces of
occupation regarding the military government of
Austria, the Commanding General of the United States
forces of occupation in Austria, serving as United
States members of the Allied Council of the Allied
Commission for Austria, was authorized, subject to
agreed policies of the Allied Council to close banks,
insurance companies, and other financial institutions
for a period long enough to introduce satisfactory
control to ascertain their cash position and to issue
instructions for the determination of accounts and
assets to be blocked under paragraph 55 which
authorized him to impound or block all gold, silver,
currencies, securities accounts in financial institutions,
credits, valuable papers, and all other assets falling
within the following categories; a. Property owned or
controlled, directly or indirectly, in whole or in part, by
any of the following: (1) the governments, nationals or
residents of the German Reich, Italy, Bulgaria,
Rumania, Hungary, Finland and Japan, including those
of territories occupied by them; (3) the Nazi Party, its
formations, affiliated associations and supervised
organizations, its officials, leading members and
supporters; (4) all organizations, clubs and other
associations prohibited or dissolved by military
government; (5) absentee owners, including United
nations and neutral governments; (7) persons subject
to arrest under the provisions of paragraph 7, and all
other persons specified by military government by
inclusion in lists or otherwise, (Holborn, supra, p. 192).
On the other hand, the provisions of the Trading with
the Enemy Acts enacted by the United States and
almost all the principal nations since the first World
War, including England, Germany, France and other
European countries, as well as Japan, confirms that the
assets of enemy corporations, specially banks
incorporated under the laws of the country at war with
the occupant and doing business in the occupied
territory, may be legally sequestered, and the business
thereof wound up or liquidated. Such sequestration or
seizure of the properties is not an act for the
confiscation of enemy property, but for the
conservation of it, subject to further disposition by
treaty between the belligerents at the end of the war.
Section 12 of the Trading with the Enemy Act of the
United States provides that "after the end of the war
any claim of enemy or ally of an enemy to any money
or other property received and held by the Alien
Custodian or deposited in the United States Treasury,
shall be settled as Congress shall direct."
The purpose of such sequestration is well expounded in
the Annual Report of the Office of the Alien Custodian
for a period from March 11, 1943 to June 30, 1943. "In
the absence of effective measures of control, enemyowned property can be used to further the interest of
the enemy and to impede our own war effort. All
enemy-controlled assets can be used to finance
propaganda, epionage, and sabotage in this country or

in countries friendly to our cause. They can be used to

acquire stocks of strategic materials and supplies ...
use to the enemy, they will be diverted from our own
war effort.
The national safety requires the prohibition of all
unlicensed communication, direct or indirect, with
enemy and enemy-owned territories. To the extent that
this prohibition is effective, the residents of such
territory are prevented from exercising the rights and
responsibilities of ownership over property located in
the United States. Meanwhile, decisions affecting the
utilization of such property must be made and carried
out. Houses must be maintained and rents collected;
payments of principal and interest on mortgages must
be made for the account of foreign debtors and foreign
creditors; stranded stocks of material and equipment
must be sold; patents must be licensed, business
enterprises must be operated and liquidated, and
foreign interest must be represented in court actions.
The number of decisions to be made in connection with
property is in fact multiplied by a state of war, which
requires that productive resources be shifted from one
use to another so as to conform with the requirements
of a war economy."
The defendant-appellee, China Banking Corporation,
comes within the meaning of the word "enemy" as
used in the Trading with Enemy Act of civilized
countries, because not only it was controlled by Japan's
enemies, but it was, besides, incorporated under the
laws of a country with which Japan was at war.
Section 2 (1) of the Trading with the Enemy Act of
Great Britain provides that the expression "enemy"
means: "any body of persons (whether corporate or
incorporate) carrying on business in any place, if and
so long as the body is controlled by a person who,
under this section, is an "enemy". The control test has
also been expressly adopted in the French Trading with
the Enemy Act. The Italian Act regards as enemies
"legal persons when enemy subject have any prevalent
interest whatever in them." The Decree of the Dutch
Government-in-exile of June 7, 1940, also adopted the
control test by including in the term enemy subjects
"legal persons in which interest of an enemy state or
enemy subjects are predominantly involved." (Domke
Trading with the Enemy Act, pp. 127-130.)
In the United States, the Trading with the Enemy Act
has not adopted the control theory. But section 2-a of
the said Act says that the word enemy shall be deemed
to mean any "corporation incorporated within such
territory of any nation with which the United States is
at war." And the same definition is given to the word
"enemy" by the Trading with the Enemy Act of the
above-named countries. The British Act in Section 2 (1)
defines as enemy "any body of persons constituted or
incorporated in or under the laws of a state at war with
his Majesty," it being immaterial that they are under
the control of allied or neutral stockholders. Similarly
the French Act regards as enemies, corporations
incorporated in conformity with the laws of an enemy
state. The decree of the Dutch Government-in-exile on
June 7, 1940, considers as enemies legal persons
"organized or existing according to or governed by the
law of an enemy state." The German Act of January 15,
1940, I section 3 (1) 3, deems enemies all
corporations, "the original personality of which is based
on the laws of an enemy state." The Italian Act of 1938,
section 5, regards corporation as enemies if they are of

enemy nationality under the law of the enemy state.

So too the Japanese Act, Chapter 1, No. 25, deems
enemies "all corporations belonging to enemy
countries." (See Martin Domke, Trading with the Enemy
Act in World War II, pp. 120-122.)
Section 3-A of the Trading with the Enemy Act of the
United Kingdom of September 5, 1939, as amended up
to April 1, 1943, provides that "Where and business is
being carried in the United Kingdom by, on behalf of, or
under the jurisdiction of, persons all or any of whom
are enemies or enemy subjects or appear to the Board
of Trade to be associated with enemies, the Board of
Trade may, if they think it expedient so to do, make ...;"
(b) and order (hereinafter in this section referred to as
a winding up orders) requiring the business to be
wound up;" and section 14 (c) of the same Act (that
obviously makes it applicable to enemy territories
occupied by the United Kingdoms armed forces)
provides that "His Majesty may by order in council
direct that the provisions of this Act other than this
section shall extend, with such exceptions, adaptations
and modifications, if any, as may be prescribed by or
under the order ... (to the extent of His Majesty's
jurisdiction therein) to any of the country or territory
being a foreign country or territory, in which for the
time being His Majesty has jurisdiction." (The Trading
with the Enemy Act in World War II, p. 481, by Martin
Domke.)
Section 5 (b) of the Trading with the Enemy Act of the
United States provides that "during the time of war or
during any period in which national emergencies
declared by the President, the President may under any
agency that he may designate or otherwise under such
rule and regulation as he may prescribe," and "any
property or interest of any foreign country or national
thereof shall vest, when, as, and upon the terms,
directed by the President, in such agency or person as
may be designated from time to time by the President,
and upon such terms and conditions as the President
may prescribe, such interest or property shall be held,
used, administered, liquidated, etc." and section 6 (e)
of the same Act provides that "any payment, ... of
money or property made to the alien property
custodian hereunder shall be a full acquittance and
discharge for all purposes of the obligation of the
person making the same to the extent of same. .. and
shall, in any case of payment to the alien, property
custodian of any debt or obligation owed to an enemy
or ally of enemy, deliver up any notes, bonds, or other
evidences of indebtedness or obligation, ... with like
effect as if he or they, respectively, were duly
appointed by the enemy or ally of enemy, creditor, or
obligee."
It is evident that the Trading with the Enemy Act of the
United States, like that of the United Kingdom or Great
Britain above quoted, and those of other countries,
may be applied and enforced in a hostile territory
occupied by the United States armed forces, because
section 2 of said Act provides "That the words 'United
States', as used herein, shall be deemed to mean all
land and water, continental or insular, in any way
within the jurisdiction of the United States or occupied
by the military or naval forces thereof." After the
liberation of the Philippines during World War II,
properties belonging to Japanese Nationals located in
this country were taken possession of by the Alien
Property Custodian appointed by the President of the
United States under the Trading with the Enemy Act,

because, although the Philippines was not a territory or

within the jurisdiction or national domain of the United
States, it was then occupied by the military and naval
forces thereof.
Of course it is obvious that the obligations assumed by
the United States, in applying the Trading with the
Enemy Act of the United States to properties within her
national domain, is different and distinct from those
arising from the application thereof to enemy
properties located within the hostile territory occupied
by her armed forces. In the first case, Congress is
untramelled and free to authorize the seizure, use, or
appropriation of such properties without and
compensation to the owners, for although section 2 of
the Trading with the Enemy Act provides that "at the
end of the war any claim of an enemy or of an ally of
enemy to any money or other property received and
held by the alien property custodian or deposited in the
United States Treasury shall be settled by Congress,"
the owners of the properties seized within the national
domain of the United States are not entitled to demand
its release or compensation for its seizure, but what
could ultimately come back to them, might be secured,
not as a matter of right, but as matter of either grace
to the vanquished or exacted by the victor, for the case
is to be governed by the domestic laws of the United
States, and not by the Hague Regulations or
International Law (U.S.vs. Chemical Foundation Inc.,
272 U.S. 1; United States vs. S.S. White Dental
Manufacturing Company, 274 U.S., 402). While in the
latter case, when the properties are sequestered in a
hostile occupied territory by the armed forces of the
United States, Congress can not legally refuse to credit
the compensation for them to the States of the owners
as payment on the account of the sums payable by
said States under treaties, and the owners have to look
for compensation to their States, otherwise, they would
violate article 46 of the Hague Regulations or their
pledge of good faith implied in the act of sequestering
or taking control of such properties.
It is to be presumed that Japan, in sequestering and
liquidating the China Banking Corporation, must have
acted in accordance, either with her own Manual of the
Army and Navy and Civil Affairs, or with her Trading
with the Enemy Act, and even if not, it being permitted
to the Allied Nations, specially the United states and
England, to sequestrate, impound, and block enemy
properties found within their own domain or in enemy
territories occupied during the war by their armed
forces, and it not being contrary to the Hague
regulations or international law, Japan had also the
right to do the same in the Philippines by virtue of the
international law principle that "what is permitted to
one belligerent is also allowed to the other."
Taking into consideration the acts of the Japanese
Military Administration in treating the private
properties of the so-called enemy banks, it appears
evident that Japan did not intend to confiscate or
appropriate the assets of said banks or the debts due
them from their debtors, and thus violate article 46 or
any other article of the Hague Regulations. It is true
that as to private personal properties of the enemy,
freezing, blocking, or impounding thereof is sufficient
for the purpose of preventing their being used in aid of
the enemy; but with regard to the funds of commercial
banks like the so-called enemy banks, it was
impossible or impracticable to attain the purpose for
which the freezing, blocking or impounding are

intended, without liquidating the said banks and

collecting the loans given by then to the hundreds if
not thousands or persons scattered over the Islands.
Without doing so, their assets or money loaned to so
many persons can not properly be impounded or
blocked, in order to prevent their being used in aid to
the enemy through the intervention of their very
debtors, and successfully wage economic as well as
military war.
That the liquidation or winding up of the business of
the China Banking Corporation and other enemy banks
did not constitute a confiscation or appropriation of
their properties or of the debts due them from their
debtors, but a mere sequestration of their assets
during the duration of the war for the purposes already
stated, is evidenced conclusively by the following
uncontroverted facts set forth in the briefs of both
parties and amici curiae:
(1) Out of the sum of about P34,000,000 collected from
the debtors by the liquidator Bank of Taiwan, the latter
paid out to the depositors or creditors of the same
bank about P9,000,000; and its common sense that
this last amount should not have been disbursed or
taken out of the said amount of about P34,000,000 had
it been the intention of the Japanese Military
Administration to confiscate this amount collected by
the Bank of Taiwan.
(2) The members of Chinese Associations were
permitted to withdraw from their deposits with the
China Banking Corporation a considerable amount of
money which was paid out of the sum collected from
the debtors of said bank, in order that they may pay
the contribution legally exacted from them by the
military occupant in accordance with article 51 of the
Hague Regulations. And this showed the intention of
the belligerent occupant not to confiscate the bank's
assets and to act, at least in this respect, in accordance
with said Regulations; because otherwise the Japanese
Military Administration could have properly required
the Chinese to pay the contribution out of their own
funds, without diminishing or reducing the amounts
collected by the Bank of Taiwan from the debtors of the
China Bank.
(3) The collection of the aforementioned debts from the
bank's debtors, as well as the payment of withdrawal
by the depositors, were regularly entered into the
books of said Banks, so that after liberation they could
easily determine the respective amounts and the
persons who had made the payments, which enabled
all said banks to re-open and continue their business;
and the regular keeping of said books would have been
unnecessary or useless, were it the intention of the
military occupant to close definitely the enemy banks
and appropriate all their resources.
(4) There was absolutely no reason for confiscating the
funds of the banks collected from their debtors,
because by sequestrating or impounding their assets
or funds after the latter had been collected from their
debtors, the principal purpose of preventing the
possible use of the funds of the banks in aid of Japan's
enemy was completely accomplished. Absolutely no
other benefit could be derived by Japan from
confiscating or appropriating the payments made
in Japanese war military notes to the enemy banks by
their debtors, because the Japanese Government could
have them at will without cost, except that of the ink,

paper and labor necessary for printing and issuing

them.
(5) The annual Report, 31st December, 1945, of the
Chartered Bank of India, Australia, and China (pp. 1112), which had a branch in Manila liquidated by
Japanese Military authorities as one of enemy banks,
clearly shows that the liquidation of said branch was a
mere sequestration, impounding or control of its
assets, and not a confiscation or appropriation thereof
during the occupation by the Japanese. It says that
during the enemy occupation the cash balance of our
Branches were seized, their assets
realized and repayment of varying amounts, but up to
100 per cent in one Branch at least, made to
depositors. Said report reads, in its pertinent part, as
follows:
I informed you, when commenting upon the
Balance Sheet figures for the year ending 31st
December, 1942, that we had reason to believe
that accounts of some of our occupied
Branches had been partly or wholly liquidated,
and that the liquidation of such accounts would
ultimately bring about shrinkage in both Assets
and Liabilities in the Balance Sheet figures. The
information now in our possession and the
various changes in the Balance Sheet figures to
which I have referred to above, confirm the
correctness of this statement, for during the
enemy occupation the cash balances of our
Branches were seized, their assets
realized where possible, and repayment of
varying amounts, but up to 100 per cent in one
Branch at least, made to depositors. Even so,
the business of the offices of the Bank which
remained under our own control throughout the
war was steadily increased and has offset to a
great extent decreases brought about by the
partial liquidation of Branches which were in
Japanese control. (Emphasis supplied.)
It is obvious that the fact that Japanese Military
authorities failed to pay the enemy banks the balance
of the money collected by the Bank of Taiwan from the
debtors of the said banks, did not and could not
change the sequestration or impounding by them of
the bank's assets during the war, into an outright
confiscation or appropriation thereof. Aside from the
fact that it was physically impossible for the Japanese
Military authorities to do so because they were forcibly
driven out of the Philippines or annihilated by the
forces of liberation, following the readjustment of rights
of private property on land seized by the enemy
provided by the Treaty of Versailles and other peace
treaties entered into at the close of the first World War,
the general principles underlying such arrangements
are that the owners of properties seized, sequestrated
or impounded who are nationals of the victorious
belligerent are entitled to receive compensation for the
loss or damage inflicted on their property by the
emergency war measures taken by the enemy, through
their respective States or Governments who may
officially intervene and demand the payment of he
claim on behalf of their nationals (VI Hackworth Digest
of International Law, pages 232, 233; 11 Oppenheim,
sixth edition, page 263). Naturally, as the Japanese war
notes were issued as legal tender for payment of all
kinds at par with the Philippine peso, by the Japanese
Imperial Government, which in its proclamations of
January 3, 1942, and February 1, 1942, "takes full

responsibility for their usage having the correct amount

to back them up" (See said Proclamations and their
official explanation, O.T. IMA, Vol, 1, pp. 39, 40), Japan
is bound to indemnify the aggrieved banks for the loss
or damage on their property, in terms of Philippine
pesos or U.S. dollars at the rate of one dollar for two
pesos.
(2) The second question is, we may say, corollary of
the first. It having been shown above that the Japanese
Military Forces had power to sequestrate and impound
the assets or funds of the China Banking Corporation,
and for that purpose to liquidate it by collecting the
debts due to said bank from its debtors, and paying its
creditors, and therefore to appoint the Bank of Taiwan
as liquidator with the consequent authority to make the
collection, it follows evidently that the payments by the
debtors to the Bank of Taiwan of their debts to the
China Banking Corporation have extinguished their
obligation to the latter. Said payments were made to a
person, the Bank of Taiwan, authorized to receive them
in the name of the bank creditor under article 1162, of
the Civil Code. Because it is evident the words "a
person authorized to receive it," as used therein,
means not only a person authorized by the same
creditor, but also a person authorized by law to do so,
such as guardian, executor or administrator of estate
of a deceased, and assignee or liquidator of a
partnership or corporation, as well as any other who
may be authorized to do so by law (Manresa, Civil
Code, 4th ed. p. 254.)
The fact that the money with which that debts have
been paid were Japanese war notes doe not affect the
validity of the payments. The provision of article 1170
of our Civil Code to the effect that "payment of debts of
money must be made in the species stipulated and if it
not to deliver such specie in silver or gold coins which
is legal tender," in not applicable to the present case,
because the contract between the parties was to pay
Philippine pesos and not some specifically defined
species of money. The Philippine peso and half-pesos
including the Philippine Treasury Certificate was and is
legal tender in the Philippines under section 612 of the
Administrative Code, as amended by Act No. 4199. As
well stated by the Supreme Court of the United States
in Knox vs. Lee and Parker (Legal Tender Cases, 12
Wall., 457-681, 20 Law. ed., 287). "The expectation of
the creditor and the anticipation of the debtor may
have been that the contract would be discharged by
the payment of coined metals, but neither the
expectation of one party to the contract, respecting its
fruits, nor the anticipation of the other, constitutes its
obligation. There is a well-recognized distinction
between the expectation of the parties to a contract
and the duty imposed by it. Aspdin vs. Austin, 5 Ad. &
Bl. (N.S.) 671; Dunn vs. Sayles, Ibid. 685; Coffin vs.
Landis, 46 Pa. 426. Were it not so, the expectation of
results would be always equivalent to a binding
engagement that they should follow. But the obligation
of contract to pay money is to pay that which the law
shall recognize as money when the payment is made. If
there is anything settled by decision it is this, and we
do not understand it to be controverted." (Knox vs.
Exchange Bank of Virginia, 12 Wall., 457; 20 U.S.
Supreme Court Reports, 20 L. ed., 287, 311.) In said
case it was held that the legal tender for payment of
debts contracted before and after their passage were
not inappropriate for carrying into execution the
legitimate purpose of the Government. And this Court,
in Rogers vs. Smith Bell (10 Phil., 319), held that "A

debt of 12,000 pesos created in 1876 can now (1908)

be paid by 12,000 of the Philippine pesos authorized by
the Act of Congress of March 2, 1903, although at the
time the loan was made which created the debt, the
creditor delivered to the debtor 12,000 pesos in gold
coin."
The power of the military governments established in
occupied enemy territory to issue military currency in
the exercise of their governmental power has never
been seriously questioned. Such power is based, not
only on the occupant's general power to maintain law
and order recognized in article 43 of the Hague
Regulations (Feilchenfeld of Belligerent Occupation,
paragraph 6), but on military necessity as shown by
the history of the use of money or currency in wars.
As early as the year 1122, during the siege of Tyre,
Doge Micheli paid his troops in leather money which he
promised to redeem when he returned to Venice (Del
Mar, Money and Civilization, 26), and when Frederick II
besieged Milan he also used leather money to pay his
troops, as well as in payment of wages (id. 33). When
the French forces occupied the Ruhr in 1923, they
finished the printing of some Reichsbank notes in
process and issued them. (Nussbaum, Money in the
Law, note 6, 158-59.) The British during the Boer War
issued receipts for requisitioned goods and made such
receipts readily negotiable, an arrangement very
similar to the issuance of currency (Spaight, War Rights
on Land, 396). During the American Revolution, the
Continental Congress issued currency even before the
issuance of the Declaration of Independence, when the
territory controlled by Congress was held in military
occupation against the then legitimate government.
(Dewey, Financial History of the United States, 37-38;
Morrison and Commager, Growth of the American
Republic, 207; Nussbaum, op. cit. supra note, 6, 172173.) The Confederacy issued its own currency in
Confederate territory (Thorington vs. Smith, 8 Wall., 1)
and also in northern areas occupied from time to time
during the war. (Spaight, op. cit. supra, note 19, 392.)
The Japanese issued special occupation currency in
Korea and Manchuria during the Russo-Japanese War of
1905. (Takahashi, International Law Applied to RussoJapanese War, 1908, 260-61; Spaight, op. cit. note
19,397; Ariga, La Guerre Rossu-Japanese, 1908, 450 et
seq.) The British also issued currency notes
redeemable in Sterling in London at a fixed rate of
exchange, in their occupation of Archangel during and
after the first World War. (White, Currency of the Great
War, 66; League of Nations, Currency After the War,
100.)
During the World War II, the Germans had been using a
variety of occupation currencies as legal tenders on a
large scale, the currency initially used in most occupied
areas being the Reichskroditkassa mark, a paper
currency printed in German and denominated in
German monetary units, which circulated side by side
with the local currency at decreased rate of exchange.
And the Allies have introduced notes as legal currency
in Sicily, Germany, and Austria. The Combined
Directive of the combined Chief of Staffs to the
Supreme Allied Commander issued on June 24, 1943,
directed that the task forces of the U.S. will use,
besides regular U.S. coins, yellow seal dollars, and the
forces of Great Britain will use besides British coins,
British Military Notes (BMA), to supplement the local
lire currency then in use (Hajo Holborn, American
Military Government, 1947, pp. 115-116). The

Combined directive for Military Government in

Germany, prior to defeat or surrender, of April 28,
1944, directed the United States, British and other
Allied Forces to use Allied military mark and
Reichsmark currency in circulation in Germany as legal
tender and the Allied Military Marks will be
interchangeable with the Reichsmark currency at the
rate of Allied Mark for Reichsmark; and that in the
event adequate supplies of them were not available,
the United States forces will use Yellow seal dollars and
the British forces will use British Military Authority
(BMN) notes. (Holborn, op. cit. supra, p. 140.) And the
American Directive on the Military Government of
Austria of June 27, 1945, ordered that the United
States forces and other Allied forces within Austria will
use only Allied Military Schillings for pay of troops and
other military requirements, declaring it legal tender in
Austria interchangeably with Reichsmarks at a rate of
one Allied military schilling for one Reichsmarks.
(Holborn, op. cit. supra, p. 192.)
In the above cited case of Thorington vs. Smith, the
Supreme Court of the United States said:
. . . While the war lasted, however, they had a
certain contingent value, and were used as
money in nearly all business transactions of
many millions of people. They must be
regarded, therefore, as a currency, imposed on
the community by irresistible force.
It seems to follows as a necessary
consequence from this actual supremacy of the
insurgent government, as a belligerent, within
the territory where it circulated, and from the
necessity of civil obedience on the part of all
who remained in it, that this currency must be
considered in courts of law in the same light as
it has been issued by a foreign government,
temporarily occupying a part of the territory of
the United States."
According to Feilchenfeld in his book "The International
Economic Law of Belligerent Occupation," the occupant
in exercising his powers in regard to money and
currency, may adopt one of the following methods
according to circumstances: (1) When the coverage of
the currency of the territory occupied has become
inadequate as found in several Balkan countries during
the War of 1914-18, and "the local currency continues
to be used, an occupant may reorganize the national
currency by appropriate methods, such as the creation
of new types and supplies of coverage" (paragraph
272). (2) The occupant may, and not infrequently, use
his own currency, in the occupied region. But this
method may be found inconvenient if the coverage for
their national currency had already become
inadequate, and for that reason authorities are afraid
of exposing it to additional strain, and for that reason
an occupant may not replace the local currency by his
own currency for all currency for all purposes, and
enforce its use not only for his own payment but also
for payments among inhabitants (paragraph 285). (3)
Where the regional currency has become inadequate
and it is deemed inadvisable by the occupant to
expose his own currency to further strain, new types of
money may be created by the occupant. Such new
currency may have anew name and may be issued by
institution created for that purpose (paragraph 296).
This last method was the one adopted by Japan in this
country, because the coverage of the Philippine

Treasury Certificate of the territory occupied had

become inadequate, for most if not all of the said
coverage had been taken to the United States and
many millions of silver pesos were buried or thrown
into the sea near Corregidor, and Japan did not want to
use her national currency, and expose it to additional
strains.
But be that as it may, whatever might have been the
intrinsic or extrinsic worth of the Japanese war-notes
which the Bank of Taiwan has received as full
satisfaction of the obligations of the appellee's debtors
to it, is of no consequence in the present case. As we
have already stated, the Japanese war-notes were
issued as legal tender at par with the Philippine peso,
and guaranteed by Japanese Government "which takes
full responsibility for their usage having the correct
amount to back them up (Proclamation of January 3,
1942). Now that the outcome of the war has turned
against Japan, the enemy banks have the right to
demand from Japan, through their States or
Governments, payments or compensation in Philippine
peso or U.S. dollars as the case may be, for the loss or
damage inflicted on the property by the emergency
war measure taken by the enemy. If Japan had won the
war of were the victor, the property or money of said
banks sequestrated or impounded by her might be
retained by Japan and credited to the respective State
of which the owners of said banks were nationals, as a
payment on the account of the sums payable by them
as indemnity under the treaties, and the said owners
were to look for compensation in Philippine pesos or
U.S. dollars to their respective States. (Treaty of
Versailles and other peace treaties entered at the close
of the first world war; VI Hackworth Digest of
International Law, p. 232.) And if they cannot et any or
sufficient compensation either from the enemy or from
their States, because of their insolvency or
impossibility to pay, they have naturally to suffer, as
everyone else, the losses incident to all wars.
In view of all the foregoing, the judgement appealed
from is reversed, and the defendant-appellee is
sentenced to execute the deed of cancellation of
mortgage of the property described in the complaint,
and to deliver to the plaintiff-appellant the Transfer
Certificate of Title No. 47634 of the Register of Deeds
in Manila with the annotation of mortgage therein
already cancelled, without pronouncement as to costs.
So ordered.
G.R. No. L-14441

December 17, 1966

PEDRO R. PALTING, petitioner,

vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29,
1958, later supplemented and amplified by another
dated September 9, 1958, of the Securities and
Exchange Commission denying the opposition to, and
instead, granting the registration, and licensing the
sale in the Philippines, of 5,000,000 shares of the
capital stock of the respondent-appellee San Jose
Petroleum, Inc. (hereafter referred to as SAN JOSE
PETROLEUM), a corporation organized and existing in
the Republic of Panama.

On September 7, 1956, SAN JOSE PETROLEUM filed

with the Philippine Securities and Exchange
Commission a sworn registration statement, for the
registration and licensing for sale in the Philippines
Voting Trust Certificates representing 2,000,000 shares
of its capital stock of a par value of $0.35 a share, at
P1.00 per share. It was alleged that the entire proceeds
of the sale of said securities will be devoted or used
exclusively to finance the operations of San Jose Oil
Company, Inc. (a domestic mining corporation
hereafter to be referred to as SAN JOSE OIL) which has
14 petroleum exploration concessions covering an area
of a little less than 1,000,000 hectares, located in the
provinces of Pangasinan, Tarlac, Nueva Ecija, La Union,
Iloilo, Cotabato, Davao and Agusan. It was the express
condition of the sale that every purchaser of the
securities shall not receive a stock certificate, but a
registered or bearer-voting-trust certificate from the
voting trustees named therein James L. Buckley and
Austin G.E. Taylor, the first residing in Connecticut,
U.S.A., and the second in New York City. While this
application for registration was pending consideration
by the Securities and Exchange Commission, SAN JOSE
PETROLEUM filed an amended Statement on June 20,
1958, for registration of the sale in the Philippines of its
shares of capital stock, which was increased from
2,000,000 to 5,000,000, at a reduced offering price of
from P1.00 to P0.70 per share. At this time the par
value of the shares has also been reduced from $.35 to
$.01 per share.1
Pedro R. Palting and others, allegedly prospective
investors in the shares of SAN JOSE PETROLEUM, filed
with the Securities and Exchange Commission an
opposition to registration and licensing of the securities
on the grounds that (1) the tie-up between the issuer,
SAN JOSE PETROLEUM, a Panamanian corporation and
SAN JOSE OIL, a domestic corporation, violates the
Constitution of the Philippines, the Corporation Law
and the Petroleum Act of 1949; (2) the issuer has not
been licensed to transact business in the Philippines;
(3) the sale of the shares of the issuer is fraudulent,
and works or tends to work a fraud upon Philippine
purchasers; and (4) the issuer as an enterprise, as well
as its business, is based upon unsound business
principles. Answering the foregoing opposition of
Palting, et al., the registrant SAN JOSE PETROLEUM
claimed that it was a "business enterprise" enjoying
parity rights under the Ordinance appended to the
Constitution, which parity right, with respect to mineral
resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only
through the medium of a corporation organized under
the laws of the Philippines. Thus, registrant which is
allegedly qualified to exercise rights under the Parity
Amendment, had to do so through the medium of a
domestic corporation, which is the SAN JOSE OIL. It
refused the contention that the Corporation Law was
being violated, by alleging that Section 13 thereof
applies only to foreign corporations doing business in
the Philippines, and registrant was not doing business
here. The mere fact that it was a holding company of
SAN JOSE OIL and that registrant undertook the
financing of and giving technical assistance to said
corporation did not constitute transaction of business
in the Philippines. Registrant also denied that the
offering for sale in the Philippines of its shares of
capital stock was fraudulent or would work or tend to
work fraud on the investors. On August 29, 1958, and
on September 9, 1958 the Securities and Exchange

Commissioner issued the orders object of the present

appeal.
The issues raised by the parties in this appeal are as
follows:
1. Whether or not petitioner Pedro R. Palting, as
a "prospective investor" in respondent's
securities, has personality to file the present
petition for review of the order of the Securities
and Exchange Commission;
2. Whether or not the issue raised herein is
already moot and academic;
3. Whether or not the "tie-up" between the
respondent SAN JOSE PETROLEUM, a foreign
corporation, and SAN JOSE OIL COMPANY, INC.,
a domestic mining corporation, is violative of
the Constitution, the Laurel-Langley
Agreement, the Petroleum Act of 1949, and the
Corporation Law; and
4. Whether or not the sale of respondent's
securities is fraudulent, or would work or tend
to work fraud to purchasers of such securities
in the Philippines.
1. In answer to the notice and order of the Securities
and Exchange Commissioner, published in 2
newspapers of general circulation in the Philippines, for
"any person who is opposed" to the petition for
registration and licensing of respondent's securities, to
file his opposition in 7 days, herein petitioner so filed
an opposition. And, the Commissioner, having denied
his opposition and instead, directed the registration of
the securities to be offered for sale, oppositor Palting
instituted the present proceeding for review of said
order.
Respondent raises the question of the personality of
petitioner to bring this appeal, contending that as a
mere "prospective investor", he is not an "Aggrieved"
or "interested" person who may properly maintain the
suit. Citing a 1931 ruling of Utah State Supreme
Court2 it is claimed that the phrase "party aggrieved"
used in the Securities Act3 and the Rules of Court4 as
having the right to appeal should refer only to issuers,
dealers and salesmen of securities.

It is true that in the cited case, it was ruled that the

phrase "person aggrieved" is that party "aggrieved by
the judgment or decree where it operates on his rights
of property or bears directly upon his interest", that the
word "aggrieved" refers to "a substantial grievance, a
denial of some personal property right or the
imposition upon a party of a burden or obligation." But
a careful reading of the case would show that the
appeal therein was dismissed because the court held
that an order of registration was not final and therefore
not appealable. The foregoing pronouncement relied
upon by herein respondent was made in construing the
provision regarding an order of revocation which the
court held was the one appealable. And since the law
provides that in revoking the registration of any
security, only the issuer and every registered dealer of
the security are notified, excluding any person or group
of persons having no such interest in the securities,
said court concluded that the phrase "interested
person" refers only to issuers, dealers or salesmen of
securities.
We cannot consider the foregoing ruling by the Utah
State Court as controlling on the issue in this case. Our
Securities Act in Section 7(c) thereof, requires the
publication and notice of the registration statement.
Pursuant thereto, the Securities and Exchange
Commissioner caused the publication of an order in
part reading as follows:
. . . Any person who is opposed with this
petition must file his written opposition with
this Commission within said period (2
weeks). . . .
In other words, as construed by the administrative
office entrusted with the enforcement of the Securities
Act, any person (who may not be "aggrieved" or
"interested" within the legal acceptation of the word) is
allowed or permitted to file an opposition to the
registration of securities for sale in the Philippines. And
this is in consonance with the generally accepted
principle that Blue Sky Laws are enacted to protect
investors and prospective purchasers and to prevent
fraud and preclude the sale of securities which are in
fact worthless or worth substantially less than the
asking price. It is for this purpose that herein petitioner
duly filed his opposition giving grounds therefor.
Respondent SAN JOSE PETROLEUM was required to
reply to the opposition. Subsequently both the petition
and the opposition were set for hearing during which
the petitioner was allowed to actively participate and
did so by cross-examining the respondent's witnesses
and filing his memorandum in support of his
opposition. He therefore to all intents and purposes
became a party to the proceedings. And under the New
Rules of Court,5 such a party can appeal from a final
order, ruling or decision of the Securities and Exchange
Commission. This new Rule eliminating the word
"aggrieved" appearing in the old Rule, being procedural
in nature,6 and in view of the express provision of Rule
144 that the new rules made effective on January 1,
1964 shall govern not only cases brought after they
took effect but all further proceedings in cases
then pending, except to the extent that in the opinion
of the Court their application would not be feasible or
would work injustice, in which event the former
procedure shall apply, we hold that the present appeal
is properly within the appellate jurisdiction of this
Court.

The order allowing the registration and sale of

respondent's securities is clearly a final order that is
appealable. The mere fact that such authority may be
later suspended or revoked, depending on future
developments, does not give it the character of an
interlocutory or provisional ruling. And the fact that
seven days after the publication of the order, the
securities are deemed registered (Sec. 7, Com. Act 83,
as amended), points to the finality of the order. Rights
and obligations necessarily arise therefrom if not
reviewed on appeal.
Our position on this procedural matter that the order
is appealable and the appeal taken here is proper is
strengthened by the intervention of the Solicitor
General, under Section 23 of Rule 3 of the Rules of
Court, as the constitutional issues herein presented
affect the validity of Section 13 of the Corporation Law,
which, according to the respondent, conflicts with the
Parity Ordinance and the Laurel-Langley Agreement
recognizing, it is claimed, its right to exploit our
petroleum resources notwithstanding said provisions of
the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took
effect 30 days from September 3, 1958, and since no
stay order has been issued by the Supreme Court,
respondent's shares became registered and licensed
under the law as of October 3, 1958. Consequently, it
is asserted, the present appeal has become academic.
Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August
29 and that of September 9, 1958 are not final orders
and therefor are not appealable. Then when these
orders, according to its theory became final and were
implemented, it argues that the orders can no longer
be appealed as the question of registration and
licensing became moot and academic.
But the fact is that because of the authority to sell, the
securities are, in all probabilities, still being traded in
the open market. Consequently the issue is much alive
as to whether respondent's securities should continue
to be the subject of sale. The purpose of the inquiry on
this matter is not fully served just because the
securities had passed out of the hands of the issuer
and its dealers. Obviously, so long as the securities are
outstanding and are placed in the channels of trade
and commerce, members of the investing public are
entitled to have the question of the worth or legality of
the securities resolved one way or another.
But more fundamental than this consideration, we
agree with the late Senator Claro M. Recto, who
appeared asamicus curiae in this case, that while
apparently the immediate issue in this appeal is the
right of respondent SAN JOSE PETROLEUM to dispose of
and sell its securities to the Filipino public, the real and
ultimate controversy here would actually call for the
construction of the constitutional provisions governing
the disposition, utilization, exploitation and
development of our natural resources. And certainly
this is neither moot nor academic.
3. We now come to the meat of the controversy the
"tie-up" between SAN JOSE OIL on the one hand, and
the respondent SAN JOSE PETROLEUM and its
associates, on the other. The relationship of these
corporations involved or affected in this case is
admitted and established through the papers and

documents which are parts of the records: SAN JOSE

OIL, is a domestic mining corporation, 90% of the
outstanding capital stock of which is owned by
respondent SAN JOSE PETROLEUM, a foreign
(Panamanian) corporation, the majority interest of
which is owned by OIL INVESTMENTS, Inc., another
foreign (Panamanian) company. This latter corporation
in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C.A., and PANCOASTAL PETROLEUM
COMPANY, C.A., both organized and existing under the
laws of Venezuela. As of September 30, 1956, there
were 9,976 stockholders of PANCOASTAL PETROLEUM
found in 49 American states and U.S. territories,
holding 3,476,988 shares of stock; whereas, as of
November 30, 1956, PANTEPEC OIL COMPANY was said
to have 3,077,916 shares held by 12,373 stockholders
scattered in 49 American state. In the two lists of
stockholders, there is no indication of the citizenship of
these stockholders,7 or of the total number of
authorized stocks of each corporation, for the purpose
of determining the corresponding percentage of these
listed stockholders in relation to the respective capital
stock of said corporation.
Petitioner, as well as the amicus curiae and the
Solicitor General8 contend that the relationship
between herein respondent SAN JOSE PETROLEUM and
its subsidiary, SAN JOSE OIL, violates the Petroleum
Law of 1949, the Philippine Constitution, and Section
13 of the Corporation Law, which inhibits a mining
corporation from acquiring an interest in another
mining corporation. It is respondent's theory, on the
other hand, that far from violating the Constitution;
such relationship between the two corporations is in
accordance with the Laurel-Langley Agreement which
implemented the Ordinance Appended to the
Constitution, and that Section 13 of the Corporation
Law is not applicable because respondent is not
licensed to do business, as it is not doing business, in
the Philippines.
Article XIII, Section 1 of the Philippine Constitution
provides:
SEC. 1. All agricultural, timber, and mineral
lands of the public domain, waters, minerals,
coal, petroleum, and other mineral oils, all
forces of potential energy, and other natural
resources of the Philippines belong to the
State, and their disposition, exploitation,
development, or utilization shall be limited to
citizens of the Philippines, or to corporations or
associations at least sixty per centum of the
capital of which is owned by such citizens,
subject to any existing right, grant, lease or
concession at the time of the inauguration of
this Government established under this
Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution,
this right (to utilize and exploit our natural resources)
was extended to citizens of the United States, thus:
Notwithstanding the provisions of section one,
Article Thirteen, and section eight, Article
Fourteen, of the foregoing Constitution, during
the effectivity of the Executive Agreement
entered into by the President of the Philippines
with the President of the United States on the
fourth of July, nineteen hundred and forty-six,
pursuant to the provisions of Commonwealth

Act Numbered Seven hundred and thirty-three,

but in no case to extend beyond the third of
July, nineteen hundred and seventy-four, the
disposition, exploitation, development, and
utilization of all agricultural, timber, and
mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, and other
natural resources of the Philippines, and the
operation of public utilities shall, if open to any
person, be open to citizens of the United
States, and to all forms of business enterprises
owned or controlled, directly or indirectly, by
citizens of the United States in the same
manner as to, and under the same conditions
imposed upon, citizens of the Philippines or
corporations or associations owned or
controlled by citizens of the
Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded
between the United States and the Philippines, also
known as the Laurel-Langley Agreement, embodied in
Republic Act 1355, the following provisions appear:
ARTICLE VI
1. The disposition, exploitation, development
and utilization of all agricultural, timber, and
mineral lands of the public domain, waters,
minerals, coal, petroleum and other mineral
oils, all forces and sources of potential energy,
and other natural resources of either Party, and
the operation of public utilities, shall, if open to
any person, be open to citizens of the other
Party and to all forms of business enterprise
owned or controlled, directly or indirectly, by
citizens of such other Party in the same
manner as to and under the same conditions
imposed upon citizens or corporations or
associations owned or controlled by citizens of
the Party granting the right.
2. The rights provided for in Paragraph 1 may
be exercised, . . . in the case of citizens of the
United States, with respect to natural resources
in the public domain in the Philippines, only
through the medium of a corporation organized
under the laws of the Philippines and at least
60% of the capital stock of which is owned or
controlled by citizens of the United States. . . .
3. The United States of America reserves the
rights of the several States of the United States
to limit the extent to which citizens or
corporations or associations owned or
controlled by citizens of the Philippines may
engage in the activities specified in this
Article. The Republic of the Philippines
reserves the power to deny any of the rights
specified in this Article to citizens of the United
States who are citizens of States, or to
corporations or associations at least 60% of
whose capital stock or capital is owned or
controlled by citizens of States, which deny like
rights to citizens of the Philippines, or to
corporations or associations which are owned
or controlled by citizens of the
Philippines. . . . (Emphasis supplied.)

Re-stated, the privilege to utilize, exploit, and develop

the natural resources of this country was granted, by
Article XIII of the Constitution, to Filipino citizens or to
corporations or associations 60% of the capital of
which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was
extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly,
by citizens of the United States.
There could be no serious doubt as to the meaning of
the word "citizens" used in the aforementioned
provisions of the Constitution. The right was granted to
2 types of persons: natural persons (Filipino or
American citizens) and juridical persons (corporations
60% of which capital is owned by Filipinos and business
enterprises owned or controlled directly or indirectly,
by citizens of the United States). In American law,
"citizen" has been defined as "one who, under the
constitution and laws of the United States, has a right
to vote for representatives in congress and other public
officers, and who is qualified to fill offices in the gift of
the people. (1 Bouvier's Law Dictionary, p. 490.) A
citizen is
One of the sovereign people. A constituent
member of the sovereignty, synonymous with
the people." (Scott v. Sandford, 19 Ho. [U.S.]
404, 15 L. Ed. 691.)
A member of the civil state entitled to all its
privileges. (Cooley, Const. Lim. 77. See U.S. v.
Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v.
Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN
JOSE PETROLEUM an American business enterprise
entitled to parity rights in the Philippines? The answer
must be in the negative, for the following reasons:
Firstly It is not owned or controlled directly by
citizens of the United States, because it is owned and
controlled by a corporation, the OIL INVESTMENTS,
another foreign (Panamanian) corporation.
Secondly Neither can it be said that it is indirectly
owned and controlled by American citizens through the
OIL INVESTMENTS, for this latter corporation is in turn
owned and controlled, not by citizens of the United
States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and
PANCOASTAL PETROLEUM.
Thirdly Although it is claimed that these two last
corporations are owned and controlled respectively by
12,373 and 9,979 stockholders residing in the different
American states, there is no showing in the
certification furnished by respondent that the
stockholders of PANCOASTAL or those of them holding
the controlling stock, are citizens of the United States.
Fourthly Granting that these individual stockholders
are American citizens, it is yet necessary to establish
that the different states of which they are citizens,
allow Filipino citizens or corporations or associations
owned or controlled by Filipino citizens, to engage in
the exploitation, etc. of the natural resources of these
states (see paragraph 3, Article VI of the LaurelLangley Agreement, supra). Respondent has presented
no proof to this effect.

Fifthly But even if the requirements mentioned in

the two immediately preceding paragraphs are
satisfied, nevertheless to hold that the set-up disclosed
in this case, with a long chain of intervening foreign
corporations, comes within the purview of the Parity
Amendment regarding business enterprises indirectly
owned or controlled by citizens of the United States, is
to unduly stretch and strain the language and intent of
the law. For, to what extent must the word "indirectly"
be carried? Must we trace the ownership or control of
these various corporationsad infinitum for the purpose
of determining whether the American ownershipcontrol-requirement is satisfied? Add to this the
admitted fact that the shares of stock of the PANTEPEC
and PANCOASTAL which are allegedly owned or
controlled directly by citizens of the United States, are
traded in the stock exchange in New York, and you
have a situation where it becomes a practical
impossibility to determine at any given time, the
citizenship of the controlling stock required by the law.
In the circumstances, we have to hold that the
respondent SAN JOSE PETROLEUM, as presently
constituted, is not a business enterprise that is
authorized to exercise the parity privileges under the
Parity Ordinance, the Laurel-Langley Agreement and
the Petroleum Law. Its tie-up with SAN JOSE OIL is,
consequently, illegal.
What, then, would be the Status of SAN JOSE OIL,
about 90% of whose stock is owned by SAN JOSE
PETROLEUM? This is a query which we need not resolve
in this case as SAN JOSE OIL is not a party and it is not
necessary to do so to dispose of the present
controversy. But it is a matter that probably the
Solicitor General would want to look into.
There is another issue which has been discussed
extensively by the parties. This is whether or not an
American mining corporation may lawfully "be in
anywise interested in any other corporation (domestic
or foreign) organized for the purpose of engaging in
agriculture or in mining," in the Philippines or whether
an American citizen owning stock in more than one
corporation organized for the purpose of engaging in
agriculture or in mining, may own more than 15% of
the capital stock then outstanding and entitled to vote,
of each of such corporations, in view of the express
prohibition contained in Section 13 of the Philippine
Corporation Law. The petitioner in this case contends
that the provisions of the Corporation Law must be
applied to American citizens and business enterprise
otherwise entitled to exercise the parity privileges,
because both the Laurel-Langley Agreement (Art. VI,
par. 1) and the Petroleum Act of 1948 (Art. 31),
specifically provide that the enjoyment by them of the
same rights and obligations granted under the
provisions of both laws shall be "in the same manner
as to, and under the same conditions imposed upon,
citizens of the Philippines or corporations or
associations owned or controlled by citizens of the
Philippines." The petitioner further contends that, as
the enjoyment of the privilege of exploiting mineral
resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the
Philippines (which corporation must necessarily be
organized under the Corporation Law), is made subject
to the limitations provided in Section 13 of the
Corporation Law, so necessarily the exercise of the
parity rights by citizens of the United States or
business enterprise owned or controlled, directly or
indirectly, by citizens of the United States, must

equally be subject to the same limitations contained in

the aforesaid Section 13 of the Corporation Law.
In view of the conclusions we have already arrived at,
we deem it not indispensable for us to pass upon this
legal question, especially taking into account the
statement of the respondent (SAN JOSE PETROLEUM)
that it is essentially a holding company, and as found
by the Securities and Exchange Commissioner, its
principal activity is limited to the financing and giving
technical assistance to SAN JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of
stock were allowed registration for sale in the
Philippines, was incorporated under the laws of
Panama in April, 1956 with an authorized capital stock
of $500,000.00, American currency, divided into
50,000,000 shares at par value of $0.01 per share. By
virtue of a 3-party Agreement of June 14, 1956,
respondent was supposed to have received from OIL
INVESTMENTS 8,000,000 shares of the capital stock of
SAN JOSE OIL (at par value of $0.01 per share), plus a
note for $250,000.00 due in 6 months, for which
respondent issued in favor of OIL INVESTMENTS
16,000,000 shares of its capital stock, at $0.01 per
share or with a value of $160,000.00, plus a note for
$230,297.97 maturing in 2 years at 6% per annum
interest,9 and the assumption of payment of the unpaid
price of 7,500,000 (of the 8,000,000 shares of SAN
JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE
PETROLEUM was increased from $500,000.00 to
$17,500,000.00 by increasing the par value of the
same 50,000,000 shares, from $0.01 to $0.35. Without
any additional consideration, the 16,000,000 shares of
$0.01 previously issued to OIL INVESTMENTS with a
total value of $160,000.00 were changed with
16,000,000 shares of the recapitalized stock at $0.35
per share, or valued at $5,600,000.00. And, to make it
appear that cash was received for these re-issued
16,000,000 shares, the board of directors of
respondent corporation placed a valuation of
$5,900,000.00 on the 8,000,000 shares of SAN JOSE
OIL (still having par value of $0.10 per share) which
were received from OIL INVESTMENTS as partconsideration for the 16,000,000 shares at $0.01 per
share.
In the Balance Sheet of respondent, dated July 12,
1956, from the $5,900,000.00, supposedly the value of
the 8,000,000 shares of SAN JOSE OIL, the sum of
$5,100,000.00 was deducted, corresponding to the
alleged difference between the "value" of the said
shares and the subscription price thereof which is
$800,000.00 (at $0.10 per share). From this
$800,000.00, the subscription price of the SAN JOSE
OIL shares, the amount of $319,702.03 was deducted,
as allegedly unpaid subscription price, thereby giving a
difference of $480,297.97, which was placed as the
amount allegedly paid in on the subscription price of
the 8,000,000 SAN JOSE OIL shares. Then, by adding
thereto the note receivable from OIL INVESTMENTS, for
$250,000.00 (part-consideration for the 16,000,000
SAN JOSE PETROLEUM shares), and the sum of
$6,516.21, as deferred expenses, SAN JOSE
PETROLEUM appeared to have assets in the sum of
$736,814.18.
These figures are highly questionable. Take the item
$5,900,000.00 the valuation placed on the 8,000,000

shares of SAN JOSE OIL. There appears no basis for

such valuation other than belief by the board of
directors of respondent that "should San Jose Oil
Company be granted the bulk of the concessions
applied for upon reasonable terms, that it would have a
reasonable value of approximately
$10,000,000." 10 Then, of this amount, the subscription
price of $800,000.00 was deducted and called it
"difference between the (above) valuation and the
subscription price for the 8,000,000 shares." Of this
$800,000.00 subscription price, they deducted the sum
of $480,297.97 and the difference was placed as the
unpaid portion of the subscription price. In other words,
it was made to appear that they paid in $480,297.97
for the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid
by OIL INVESMENTS for 7,500,000 shares of SAN JOSE
OIL, embodied in the June 14 Agreement, and a sum of
$230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an
item among respondent's liabilities, for $230,297.97
appearing as note payable to Oil Investments,
maturing in two (2) years at six percent (6%) per
annum. 11 As far as it appears from the records, for the
16,000,000 shares at $0.35 per share issued to OIL
INVESTMENTS, respondent SAN JOSE PETROLEUM
received from OIL INVESTMENTS only the note for
$250,000.00 plus the 8,000,000 shares of SAN JOSE
OIL, with par value of $0.10 per share or a total of
$1,050,000.00 the only assets of the corporation. In
other words, respondent actually lost $4,550,000.00,
which was received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles
of Incorporation of respondent SAN JOSE PETROLEUM
are noteworthy; viz:
(1) the directors of the Company need not be
shareholders;
(2) that in the meetings of the board of
directors, any director may be represented and
may vote through a proxy who also need not
be a director or stockholder; and
(3) that no contract or transaction between the
corporation and any other association or
partnership will be affected, except in case of
fraud, by the fact that any of the directors or
officers of the corporation is interested in, or is
a director or officer of, such other association
or partnership, and that no such contract or
transaction of the corporation with any other
person or persons, firm, association or
partnership shall be affected by the fact that
any director or officer of the corporation is a
party to or has an interest in, such contract or
transaction, or has in anyway connected with
such other person or persons, firm, association
or partnership; and finally, that all and any of
the persons who may become director or
officer of the corporation shall be relieved from
all responsibility for which they may otherwise
be liable by reason of any contract entered into
with the corporation, whether it be for his
benefit or for the benefit of any other person,
firm, association or partnership in which he
may be interested.
These provisions are in direct opposition to our
corporation law and corporate practices in this country.

These provisions alone would outlaw any corporation

locally organized or doing business in this jurisdiction.
Consider the unique and unusual provision that no
contract or transaction between the company and any
other association or corporation shall be affected
except in case of fraud, by the fact that any of the
directors or officers of the company may be interested
in or are directors or officers of such other association
or corporation; and that none of such contracts or
transactions of this company with any person or
persons, firms, associations or corporations shall be
affected by the fact that any director or officer of this
company is a party to or has an interest in such
contract or transaction or has any connection with such
person or persons, firms associations or corporations;
and that any and all persons who may become
directors or officers of this company are hereby
relieved of all responsibility which they would
otherwise incur by reason of any contract entered into
which this company either for their own benefit, or for
the benefit of any person, firm, association or
corporation in which they may be interested.
The impact of these provisions upon the traditional
judiciary relationship between the directors and the
stockholders of a corporation is too obvious to escape
notice by those who are called upon to protect the
interest of investors. The directors and officers of the
company can do anything, short of actual fraud, with
the affairs of the corporation even to benefit
themselves directly or other persons or entities in
which they are interested, and with immunity because
of the advance condonation or relief from responsibility
by reason of such acts. This and the other provision
which authorizes the election of non-stockholders as
directors, completely disassociate the stockholders
from the government and management of the business
in which they have invested.
To cap it all on April 17, 1957, admittedly to assure
continuity of the management and stability of SAN
JOSE PETROLEUM, OIL INVESTMENTS, as holder of the
only subscribed stock of the former corporation and
acting "on behalf of all future holders of voting trust
certificates," entered into a voting trust
agreement12 with James L. Buckley and Austin E. Taylor,
whereby said Trustees were given authority to vote the
shares represented by the outstanding trust
certificates (including those that may henceforth be
issued) in the following manner:
(a) At all elections of directors, the Trustees will
designate a suitable proxy or proxies to vote
for the election of directors designated by the
Trustees in their own discretion, having in mind
the best interests of the holders of the voting
trust certificates, it being understood that any
and all of the Trustees shall be eligible for
election as directors;
(b) On any proposition for removal of a
director, the Trustees shall designate a suitable
proxy or proxies to vote for or against such
proposition as the Trustees in their own
discretion may determine, having in mind the
best interest of the holders of the voting trust
certificates;
(c) With respect to all other matters arising at
any meeting of stockholders, the Trustees will
instruct such proxy or proxies attending such

meetings to vote the shares of stock held by

the Trustees in accordance with the written
instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement
shall be binding upon the parties thereto, their
successors, and upon all holders of voting trust
certificates.
And these are the voting trust certificates that are
offered to investors as authorized by Security and
Exchange Commissioner. It can not be doubted that the
sale of respondent's securities would, to say the least,
work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the

motion of respondent to dismiss this appeal, is denied
and the orders of the Securities and Exchange
Commissioner, allowing the registration of
Respondent's securities and licensing their sale in the
Philippines are hereby set aside. The case is remanded
to the Securities and Exchange Commission for
appropriate action in consonance with this decision.
With costs. Let a copy of this decision be furnished the
Solicitor General for whatever action he may deem
advisable to take in the premises. So ordered.