Republic of the Philippines The plaintiff company filed its article incorporation with the Bureau of Commerce and

SUPREME COURT Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board
Manila of directors of said company adopted a resolution (Exhibit G) authorizing its president,
Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for
EN BANC P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed
of sale executed before a notary public by the terms of which the plaintiff sold ceded
G.R. No. L-43350 December 23, 1937 and transferred to the defendant all its right, titles, and interest in and to the four
parcels of land described in transfer certificate in turn obligated himself to shoulder
the three mortgages hereinbefore referred to. Exhibit C is a promisory note for
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from
vs.
the date thereof. Exhibit D is a deed of mortgage executed before a notary public in
TEODORO SANDIKO, defendant-appellee.
accordance with which the four parcels of land were given a security for the payment
of the promissory note, Exhibit C. All these three instrument were dated February 15,
Arsenio P. Dizon for appellant. 1932.
Sumulong, Lavides and Sumulong for appellee.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on
LAUREL, J.: January 25, 1934, brought this action in the Court of First Instance of Manila praying
that judgment be rendered against the defendant for the sum of P25,300, with interest
This is an appeal from a judgment of the Court of First Instance of Manila absolving at legal rate from the date of the filing of the complaint, and the costs of the suits.
the defendant from the plaintiff's complaint. After trial, the court below, on December 18, 1934, rendered judgment absolving the
defendant, with costs against the plaintiff. Plaintiff presented a motion for new trial on
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of January 14, 1935, which motion was denied by the trial court on January 19 of the
Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title same year. After due exception and notice, plaintiff has appealed to this court and
No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. makes an assignment of various errors.
To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August
14, 1929, executed in favor of the Philippine National Bank a first mortgage on the In dismissing the complaint against the defendant, the court below, reached the
four parcels of land above-mentioned. A second mortgage in favor of the same bank conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.
was in April of 1930 executed by Tabora over the same lands to guarantee the While we do not agree with this conclusion, we have however voted to affirm the
payment of another loan amounting to P7,000. A third mortgage on the same lands judgment appealed from the reasons which we shall presently state.
was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered and annotations The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
thereof appear at the back of transfer certificate of title No. 217. herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said
company was affected later on October 22, 1930 (Exhibit 2). In other words, the
On May 31, 1930, Tabora executed a public document entitled "Escritura de transfer was made almost five months before the incorporation of the company.
Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of Unquestionably, a duly organized corporation has the power to purchase and hold
land owned by him was sold to the plaintiff company, said to under process of such real property as the purposes for which such corporation was formed may
incorporation, in consideration of one peso (P1) subject to the mortgages in favor of permit and for this purpose may enter into such contracts as may be necessary (sec.
the Philippine National Bank and Severina Buzon and, to the condition that the 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to
certificate of title to said lands shall not be transferred to the name of the plaintiff be lawfully organized, many things have to be done. Among other things, the law
company until the latter has fully and completely paid Tabora's indebtedness to the requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although
Philippine National Bank. there is a presumption that all the requirements of law have been complied with (sec.
334, par. 31 Code of Civil Procedure), in the case before us it can not be denied that

1
the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A.
The contract itself referred to the plaintiff as "una sociedad en vias de incorporacion."
It was not even a de facto corporation at the time. Not being in legal existence then, it
did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in
the manner prescribed by law. As has already been stated, general law
authorizing the formation of corporations are general offers to any persons
who may bring themselves within their provisions; and if conditions
precedent are prescribed in the statute, or certain acts are required to be
done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired. (14 C. J., sec. 111, p.
118.)
That a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or
transact any business, would seem to be self evident. . . . A corporation, until
organized, has no being, franchises or faculties. Nor do those engaged in
bringing it into being have any power to bind it by contract, unless so
authorized by the charter there is not a corporation nor does it possess
franchise or faculties for it or others to exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance
Company, 107 Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel
Tabora as owner of the four parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporations on the other hand.
For reasons that are self-evident, these promoters could not have acted as agent for
a projected corporation since that which no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties. It is, as it were, a
child in ventre sa mere. This is not saying that under no circumstances may the acts
of promoters of a corporation be ratified by the corporation if and when subsequently
organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent
edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification
which would result in the commission of injustice or fraud to the candid and unwary.
(Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R.
A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick
Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co.,
182 Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the
registered owner of the four parcels of land, which he succeeded in mortgaging to the
Philippine National Bank so that he might have the necessary funds with which to
convert and develop them into fishery. He appeared to have met with financial
reverses. He formed a corporation composed of himself, his wife, and a few others.
From the articles of incorporation, Exhibit 2, it appears that out of the P48,700,
amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora
himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount
paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his
wife. Both Tabora and His wife were directors and the latter was treasurer as well. In
fact, to this day, the lands remain inscribed in Tabora's name. The defendant always
regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose
Ventura, president of the plaintiff corporation, intervened only to sign the contract,
Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of
the four parcels of land, always treated Tabora as the owner of the same.
(See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against
Tabora in the Court of First Instance of Manila and in both cases a writ of attachment
against the four parcels of land was issued. The Philippine National Bank threatened
to foreclose its mortgages. Tabora approached the defendant Sandiko and succeeded
in the making him sign Exhibits B, C, and D and in making him, among other things,
assume the payment of Tabora's indebtedness to the Philippine National Bank. The
promisory note, Exhibit C, was made payable to the plaintiff company so that it may
not attached by Tabora's creditors, two of whom had obtained writs of attachment
against the four parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by
sale to the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from
Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is
evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva),
namely, the payment of the mortgage debt of said Tabora to the Philippine National
Bank, and that this condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise
& Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having
arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing
Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this
point.lawphil.net
The decision of the lower court is accordingly affirmed, with costs against the
appellant. So Ordered.
2
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur. The petitioners claim that this order has no support in fact and law because they had
no contract whatsoever with the private respondent regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation that
was later created, they should not be held solidarily liable with the Filipinas Orient
Airways, a separate juridical entity, and with Barretto and Garcia, their co-defendants
in the lower court, ** who were the ones who requested the said services from the
private respondent. 3

We are not concerned here with the petitioners' co-defendants, who have not
appealed the decision of the respondent court and may, for this reason, be presumed
to have accepted the same. For purposes of resolving this case before us, it is not
necessary to determine whether it is the promoters of the proposed corporation, or
the corporation itself after its organization, that shall be responsible for the expenses
incurred in connection with such organization.

The only question we have to decide now is whether or not the petitioners themselves
are also and personallyliable for such expenses and, if so, to what extent.

The reasons for the said order are given by the respondent court in its decision in this
wise:

As to the 4th assigned error we hold that as to the remuneration due the
plaintiff for the preparation of the project study and the pre-organizational
G.R. No. L-48627 services in the amount of P50,000.00, not only the defendant corporation but
the other defendants including defendants Caram should be jointly and
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners severally liable for this amount. As we above related it was upon the request
vs. of defendants Barretto and Garcia that plaintiff handled the preparation of
THE HONORABLE COURT OF APPEALS and ALBERTO V. the project study which project study was presented to defendant Caram so
ARELLANO, respondents. the latter was convinced to invest in the proposed airlines. The project study
was revised for purposes of presentation to financiers and the banks. It was
on the basis of this study that defendant corporation was actually organized
and rendered operational. Defendants Garcia and Caram, and Barretto
became members of the Board and/or officers of defendant corporation.
Thus, not only the defendant corporation but all the other defendants who
CRUZ, J.: were involved in the preparatory stages of the incorporation, who caused the
preparation and/or benefited from the project study and the technical
services of plaintiff must be liable.4
We gave limited due course to this petition on the question of the solidary liability of
the petitioners with their co-defendants in the lower court 1 because of the challenge
to the following paragraph in the dispositive portion of the decision of the respondent It would appear from the above justification that the petitioners were not really
court: * involved in the initial steps that finally led to the incorporation of the Filipinas Orient
Airways. Elsewhere in the decision, Barretto was described as "the moving spirit."
The finding of the respondent court is that the project study was undertaken by the
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the private respondent at the request of Barretto and Garcia who, upon its completion,
amount of P50,000.00 for the preparation of the project study and his presented it to the petitioners to induce them to invest in the proposed airline. The
technical services that led to the organization of the defendant corporation, study could have been presented to other prospective investors. At any rate, the
plus P10,000.00 attorney's fees; 2 airline was eventually organized on the basis of the project study with the petitioners
as major stockholders and, together with Barretto and Garcia, as principal officers.

3
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization
work of defendant corporation based on his experience and expertise, hence
he was logically compensated in the amount of P200,000.00 shares of stock
not as industrial partner but more for his technical services that brought to
fruition the defendant corporation. By the same token, We find no reason
why the plaintiff should not be similarly compensated not only for having
actively participated in the preparation of the project study for several
months and its subsequent revision but also in his having been involved in
the pre-organization of the defendant corporation, in the preparation of the
franchise, in inviting the interest of the financiers and in the training and
screening of personnel. We agree that for these special services of the
plaintiff the amount of P50,000.00 as compensation is reasonable. 5
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly
and severally, under the first paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at this time the rules on
solidary obligations, which the parties-needlessly, as it turns out have belabored unto
death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under
the challenged decision, which is hereby modified accordingly. It is so ordered.
Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.
Gancayco, J., took no part.

The above finding bolsters the conclusion that the petitioners were not involved in the
initial stages of the organization of the airline, which were being directed by Barretto
as the main promoter. It was he who was putting all the pieces together, so to speak.
The petitioners were merely among the financiers whose interest was to be invited
and who were in fact persuaded, on the strength of the project study, to invest in the
proposed airline.

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As
a bona fide corporation, the Filipinas Orient Airways should alone be liable for its
corporate acts as duly authorized by its officers and directors.

In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in the
proposed airline. The most that can be said is that they benefited from such services,
but that surely is no justification to hold them personally liable therefor. Otherwise, all
the other stockholders of the corporation, including those who came in later, and
regardless of the amount of their share holdings, would be equally and personally
liable also with the petitioners for the claims of the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence.

Our impression is that it is opposed to the imposition of solidary responsibility upon
the Carams but seems to be willing, in a vague, unexpressed offer of compromise, to
accept joint liability. While it is true that it does here and there disclaim total liability,
the thrust of the petition seems to be against the imposition of solidary liability only
rather than against any liability at all, which is what it should have categorically
argued.

4
 OSTRAND, J.:

This is a petition for a writ of prohibition enjoining the respondent judge from making
cognizance of certain civil and criminal election cases in which the petitioners are
parties.

The petitioners allege that the respondent judge, previous to this date, was appointed
judge of the Court of First Instance of Oriental Negros, to hold office during good
behavior and until he should reach the age of 65 years; that he now has reached that
age and, therefore, under the provisions of section 148 of the Administrative Code as
amended, is disqualified from acting as a judge of the Court of First Instance. The
petitioners further allege that in view of the many election protests and criminal cases
for violation of the election law filed in the Court of First Instance of Oriental Negros
arising in the Court of First Instance of Oriental Negros arising from the last election
of June 5, 1928, the Honorable Sixto de la Costa was duly designated and acted as
auxiliary judge of the Province of Oriental Negros; that between the auxiliary judge
and the respondent judge herein there was an understanding, and the assignment of
the said auxiliary judge was made with this understanding, that the said auxiliary
judge so designated would hear and take cognizance of all election protests and
criminal actions then pending or to filed arising from the said last general election,
Republic of the Philippines and that the respondent Honorable Nicolas Capistrano would try and hear the
SUPREME COURT ordinary cases pending in the said court, but, notwithstanding this understanding or
Manila agreement, the respondent judge tried and is still trying to take cognizance of the
election protests an criminal actions in said court; that the respondent judge declared
EN BANC in open court that he will try the criminal cases herein mentioned for the reason that
the auxiliary judge refused to try the same on the ground that the preliminary
investigations were held before him, when, in truth and in fact, the said auxiliary judge
G.R. No. L-30188 October 2, 1928
did not make the statement imputed to him and was and is still willing to try the
election protests and criminal cases for violation of the election law pending in the
FELIPE TAYKO, EDUARDO BUENO, BAUTISTA TAYKO, BERNARDO SOLDE and
court of the Province of Oriental Negros; that the respondent Honorable Nicolas
VICENTE ELUM, petitioners,
Capistrano, in spite of the fact that he was holding and is now pretending to hold the
vs.
office of judge of the Court of First Instance of Oriental Negros, took great interest
NICOLAS CAPISTRANO, acting as Judge of First Instance of Oriental Negros.
and active part in the filing of criminal charges against the petitioners herein to the
ALFREDO B. CACNIO, as Provincial Fiscal of Oriental Negros, and JUAN
unjustifiable extent of appointing a deputy fiscal, who then filed the proper
GADIANI, respondents.
informations, when the provincial fiscal refused to file criminal charges against the
petitioners for violation of the election law for lack of sufficient evidence to sustain the
Abad Santos, Camus and Delgado and Teopisto Guingona for petitioners. same; that said respondent is neither a judge de jure nor de facto, but that,
Araneta and Zaragoza for respondents. notwithstanding this fact, he continues to hold the office of judge of the Court of First
The respondent Judge in his own behalf. Instance of Oriental Negros and pretends to be duly qualified and acting judge of the
said province; and that he has tried, and continues to try, to act as such judge and
that there is reasonable ground to believe that he will take cognizance of the cases in
question unless he be restrained by order of this court; that in acting as a duly
qualified judge notwithstanding the facts alleged in the fifth, sixth, and seventh
5
paragraphs hereof, the respondent judge acted and is about to act without and in
excess of jurisdiction and also after the loss of jurisdiction.
To this petition the respondents demur on the ground that the facts stated in that (1)
none of the facts alleged in the petition divest the respondent judge of his jurisdiction
to take cognizance of the cases referred to in the complaint, and (2) even admitting
as true, for the sake of this demurrer, the facts alleged in paragraph 7 of the petition,
the respondent judge is still a de facto judge and his title to the office and his
jurisdiction to hear the cases referred to in the petition cannot be questioned by
prohibition, as this writ, even when directed against persons acting as judges, cannot
be treated as a substitute for quo warranto, or be rightfully called upon to perform any
of the functions of that writ.
The ground upon which the petition rests may be reduced to three propositions. (1)
That the assignment of the Auxiliary Judge, Sixto de la Costa, to Dumaguete was
made with the understanding that the he was to hear and take cognizance of all
election contests and criminal causes for violation of the election law and that the
respondent judge was to take cognizance of the ordinary cases and that there was an
understanding between them that this arrangement was to be followed.
(2) That the respondent judge took great interest and an active part in the
filing of the criminal charges against the petitioners herein to the unjustifiable
extent of appointing a deputy fiscal who filed the proper informations when
the regular provincial fiscal refused to file them for lack of sufficient
evidence.
(3) That the respondent judge is already over 65 years of age and has,
therefore, automatically ceased as judge of the Court of First Instance of
Oriental Negros and that he is neither a judge de jure nor de facto.
(a) But little need be said as to the first proposition. A writ of
prohibition to a judge of an interior court will only lie in cases where
he acts without or in excess of his jurisdiction (section 226, Code of
Civil Procedure), and it is obvious that a mere "understanding" as to
the distribution of cases for trial did not deprive the respondent
judge of the jurisdiction conferred upon him by law. It may be noted
that it is not alleged that another judge had taken cognizance of the
cases in question or that they had been definitely assigned to trial
before such other judge.
(b) The second proposition is equally untenable.1awph!l.net That
the respondent judge took great interest and an active part in the
filing of the criminal charges against the petitioners to the extent of
appointing a deputy fiscal when the regular provincial fiscal refused
to file the proper informations, did not disqualify him from trying the
case in question. Section 1679 of the Administrative Code provides
that "when a provincial fiscal shall be disqualified by personal
interest to act in a particular case or when for any reason he shall
be unable, or shall fail, to discharge any of the duties of his
position, the judge of the Court of First Instance of the province
shall appoint an acting provincial fiscal, . . . ." (Emphasis ours.)
The determination of the question as to whether the fiscal has failed
to discharge his duty in the prosecution of a crime must necessarily,
to a large extent, lie within the sound discretion of the presiding
judge, and there is no allegation in the petition that such discretion
was abused in the present instance. It is true that it is stated that
the appointment of the acting fiscal was "unjustifiable," but that is
only a conclusion of law and not an allegation of facts upon which
such a conclusion can be formed and may, therefore, be
disregarded. It follows that in appointing an acting fiscal, the
respondent judge was well within his jurisdiction.
(c) The third ground upon which the petition is based is the most
important and merits some consideration. It is well settled that the
title to the office of a judge, whether de jure or de facto, can only be
determined in a proceeding in the nature of quo warranto and
cannot be tested by prohibition. But counsel for the petitioners
maintains that the respondent judge is neither a judge de
jure nor de facto and that, therefore, prohibition will lie. In this,
counsel is undoubtedly mistaken.
The respondent judge has been duly appointed to the office of Judge of the Court of
First Instance of Oriental Negros, but section 148 of the Administrative Code, as
amended, provides that "Judges of the Court of First Instance and auxiliary judges
shall be appointed to serve until they shall reach the age of sixty-five years." In view
of this provision and assuming, as we must, that the allegations of the petition are
true, it is evident that the respondent is no longer a judge de jure, but we do not think
that it can be successfully disputed that he is still a judge de facto.
Briefly defined, a de facto judge is one who exercises the duties of a judicial office
under color of an appointment or election thereto (Brown vs. O'Connell, 36 Conn.,
432). He differs, on the one hand, from a mere usurper who undertakes to act
officially without any color of right, and on the other hand, from a judge de jure who is
6
in all respects legally appointed and qualified and whose term of office has not
expired (State vs. Carroll, 38 Conn., 449; Denny vs. Matton, 2 Allen [Mass.], 361; Van
Slyke vs. Farmers' Mut. Fire Ins. Co., 39 Wis., 390).
Apart from any constitutional or statutory regulation on the subject there
seems to be a general rule of law that an incumbent of an office will hold
over after the conclusion of his term until the elction and qualification of a
successor (22 R. C. L., pp. 554-5). When a judge in good faith remains in
office after his title has ended, he is a de facto officer (Sheehan's Case, 122
Mass., 445).
Applying the principles stated to the facts set forth in the petition before us, we cannot
escape the conclusion that, on the assumption that said facts are true, the respondent
judge must be considered a judge de facto. His term of office may have expired, but
his successor has not been appointed, and as good faith is presumed, he must be
regarded as holding over in good faith. The contention of counsel for the petitioners
that the auxiliary judge present in the district must be considered the regular judge
seems obviously erroneous.
held that a party to an action before a special judge may question his title to the office
of a judge on the proceedings before him, and that the judgment will be reversed on
appeal, where proper exceptions are taken, if the person assuming to act as special
judge is not a judge de jure. The title of a de facto officer cannot be indirectly
questioned in a proceeding to obtain a writ of prohibition to prevent him from doing an
official act nor in a suit to enjoin the collection of a judgment rendered by him. Having
at least colorable right to the office his title can be determined only in a quo warranto
proceeding or information in the nature of a quo warranto at suit of the sovereign." (15
R. C. L., pp. 519-521.)
The demurrer to the petition is sustained, and inasmuch as it is evident that the
weakness of the petition cannot be cured by amendment the present proceedings are
hereby dismissed with the costs against the petitioners jointly and severally. The
preliminary injunction hereinbefore issued is dissolved. So ordered.
Avancea, C. J., Johnson, Street, Malcolm, Villamor, Romualdez, and Villa-Real, JJ.,
concur.

In these circumstances the remedy prayed for cannot be granted. "The rightful
authority of a judge, in the full exercise of his public judicial function, cannot be
questioned by any merely private suitor, nor by any other, excepting in the form
especially provided by law. A judge de facto assumes the exercise of a part of the
prerogative of sovereignty, and the legality of that assumption is open to the attack of
the sovereign power alone. Accordingly, it is a well established principle, dating from
the earliest period and repeatedly confirmed by an unbroken current of decisions, that
the official acts of a de facto judge are just as valid for all purposes as those of a de
jure judge, so far as the public or third persons who are interested therein are
concerned. The rule is the same in civil criminal cases. The principle is one founded
in policy and convenience, for the right of no one claiming a title or interest under or
through the proceedings of an officer having an apparent authority to act would be
safe, if it were necessary in every case to examine the legality of the title of such
officer up to its original source, and the title or interest of such person were held to be
invalidated by some accidental defect or flaw in the appointment, election or
qualification of such officer, or in the rights of those from whom his appointment or
election emanated; nor could the supremacy of the laws be maintained, or their
execution enforced, if the acts of the judge having a colorable, but not a legal title,
were to be deemed invalid. As in the case of judges of courts of record, the acts of a
justice de facto cannot be called in question in any suit to which he is not a party. The
official acts of a de facto justice cannot b attacked collaterally. An exception to the
general rule that the title of a person assuming to act as judge cannot be questioned
in a suit before him is generally recognized in the case of a special judge, and it is

7
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED
BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of
the Far Eastern Lumber and Commercial Co., Inc.,respondents.

Claro M. Recto for petitioners.

Ramon Diokno and Jose W. Diokno for respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court
of First Instance of Leyte and to enjoin the respondent judge from further acting upon
the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella,
signed and acknowledged in Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to engage in a general lumber business
to carry on as general contractors, operators and managers, etc. Attached to the
article was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation
described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation
proceeded to do business with the adoption of by-laws and the election of its officers.

8
(3) On December 2, 1947, the said articles of incorporation were filed in the office of
the Securities and Exchange Commissioner, for the issuance of the corresponding
certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the
aforesaid governmental office, the respondents Fred Brown, Emma Brown, Hipolita
D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte
the civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.",
alleging among other things that the Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it dissolved because of bitter
dissension among the members, mismanagement and fraud by the managers and
heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a
motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause
of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the
company; and at the request of plaintiffs, appointed of the properties thereof, upon
the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the
discharge of the receiver, but the respondent judge refused to accept the offer and to
discharge the receiver. Whereupon, the present special civil action was instituted in
this court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the
company, because it being ade facto corporation, dissolution thereof may only be
ordered in a quo warranto proceeding instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are
informed that the Securities and Exchange Commission has not, so far, issued the
corresponding certificate of incorporation. All of them know, or sought to know, that
the personality of a corporation begins to exist only from the moment such certificate
is issued not before (sec. 11, Corporation Law). The complaining associates have
not represented to the others that they were incorporated any more than the latter
had made similar representations to them. And as nobody was led to believe anything
to his prejudice and damage, the principle of estoppel does not apply. Obviously this
is not an instance requiring the enforcement of contracts with the corporation through
the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far
Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the
Corporation Law applies, and therefore the court had not jurisdiction to take
cognizance of said civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a
corporation under this Act and its right to exercise corporate powers shall not
be inquired into collaterally in any private suit to which the corporation may
be a party, but such inquiry may be had at the suit of the Insular Government
on information of the Attorney-General.
There are least two reasons why this section does not govern the situation. Not
having obtained the certificate of incorporation, the Far Eastern Lumber and
Commercial Co. even its stockholders may not probably claim "in good faith" to
be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the
issuance of a certificate of incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation into being. The immunity if
collateral attack is granted to corporations "claiming in good faith to be a
corporation under this act." Such a claim is compatible with the existence of
errors and irregularities; but not with a total or substantial disregard of the
law. Unless there has been an evident attempt to comply with the law the
claim to be a corporation "under this act" could not be made "in good faith."
(Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between stockholders, without the intervention of the
state.
There might be room for argument on the right of minority stockholders to sue for
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter
for decision by the judge, subject to review on appeal. Whkch brings us to one
principal reason why this petition may not prosper, namely: the petitioners have their
remedy by appealing the order of dissolution at the proper time.
9
There is a secondary issue in connection with the appointment of a receiver. But it
must be admitted that receivership is proper in proceedings for dissolution of a
company or corporation, and it was no error to reject the counter-bond, the court
having declared the dissolution. As to the amount of the bond to be demanded of the
receiver, much depends upon the discretion of the trial court, which in this instance
we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary
injunction heretofore issued will be dissolved.

Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

SECTION 20
Sec. 20. De facto corporations. The due incorporation of any
corporation claiming in good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto proceeding.

HALL v PICCIO
86 Phil 603, GR No L-2598, June 29, 1950

Facts: On May 28, 1947, petitioners C. Arnold Hall and Bradley P. Hall, and
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella,
signed and acknowledged in Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to engage in a general lumber business
to carry on as general contractors, operators and managers, . Attached to the article
was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation. The
said articles of incorporation was filed in the office of SEC. Pending action of the
articles of incorporation by SEC, the respondents filed a civil case against the
petitioners alleging that Far Eastern Lumber and Commercial Co was an unregistered
partnership and that they wished it dissolved because of bitter dissension among the
members, mismanagement and fraud by the managers and heavy financial losses.
The court (thru Judge Piccio) ordered the dissolution of the company. Halls offered to

10
file a counter bond for the discharge of the receiver but the judge refused to accept
the offer and discharge the receiver.

Issue: W/N the court had jurisdiction to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a
quo warranto proceeding instituted in accordance with section 19 of the Corporation
Law.

Held: Yes, the court has jurisdiction to take cognizance of the case!

Section 20 of the Corporation Law does not apply in this situation

First, not having obtained the certificate of incorporation, the Far Eastern Lumber and
Commercial Co. even its stockholders may not probably claim "in good faith" to
be a corporation. (Under our statue it is to be noted (Corporation Law, sec. 11) that it
is the issuance of a certificate of incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation into being. The immunity if
collateral attack is granted to corporations "claiming in good faith to be a corporation
under this act." Such a claim is compatible with the existence of errors and
irregularities; but not with a total or substantial disregard of the law. Unless there has
been an evident attempt to comply with the law the claim to be a corporation "under
this act" could not be made "in good faith." )

Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between stockholders, without the intervention of the EN BANC
state.
[G.R. No. 141735. June 8, 2005]

11
SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF
APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH
INVESTMENT BANK OF THE PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the
Decision[1] of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-
4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11 August 1994
and 11 April 1995, respectively, which in turn affirmed Resolution No. 2309 of the
Board of Directors of the Al-Amanah Islamic Investment Bank of the Philippines
(AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the
Service and dismissing him from the service, and its Resolution [2] of 15 December
1999 dismissing petitioners Motion for Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the first
employees of the Philippine Amanah Bank (PAB) when it was created by virtue of
Presidential Decree No. 264 on 02 August 1973. He rose through the ranks, working
his way up from his initial designation as security guard, to settling clerk, bookkeeper,
credit investigator, project analyst, appraiser/ inspector, and eventually, loans analyst.
[3]
In February 1988, while still designated as appraiser/investigator, Sawadjaan
was assigned to inspect the properties offered as collaterals by Compressed Air
Machineries and Equipment Corporation (CAMEC) for a credit line of Five Million
Pesos (P5,000,000.00). The properties consisted of two parcels of land covered by
Transfer Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of
his Inspection and Appraisal Report,[4] the PAB granted the loan application. When the
loan matured on 17 May 1989, CAMEC requested an extension of 180 days, but was
granted only 120 days to repay the loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.
[6]
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and
repealing P.D. No. 264 (which created the PAB). All assets, liabilities and capital
accounts of the PAB were transferred to the AIIBP,[7] and the existing personnel of the
PAB were to continue to discharge their functions unless discharged. [8] In the ensuing
reorganization, Sawadjaan was among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred
to as the AIIBP, discovered that TCT No. N-130671 was spurious, the property
described therein non-existent, and that the property covered by TCT No. C-52576
had a prior existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating
Committee to look into the CAMEC transaction, which had cost the bank Six Million
Pesos (P6,000,000.00) in losses.[9] The subsequent events, as found and decided
upon by the Court of Appeals,[10] are as follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP]
Chairman Roberto F. De Ocampo charging him with Dishonesty in the Performance of
Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and
preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the Investigating
Committee that he could not submit himself to the jurisdiction of the Committee
because of its alleged partiality. For his failure to appear before the hearing set on 17
September 1993, after the hearing of 13 September 1993 was postponed due to the
Manifestation of even date filed by petitioner, the Investigating Committee declared
petitioner in default and the prosecution was allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a decision, the
pertinent portions of which reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and
assigned tasks as appraiser/inspector, which resulted to the prejudice and substantial
damage to the Bank, respondent should be held liable therefore. At this juncture,
however, the Investigating Committee is of the considered opinion that he could not
be held liable for the administrative offense of dishonesty considering the fact that no
evidence was adduced to show that he profited or benefited from being remiss in the
performance of his duties. The record is bereft of any evidence which would show
that he received any amount in consideration for his non-performance of his official
duties.
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his
failure to perform his official duties resulted to the prejudice and substantial damage
to the Islamic Bank for which he should be held liable for the administrative offense of
CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that respondent
SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY
12
SUSPENSION from office in accordance with the Civil Service Commissions
Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted
Resolution No. 2309 finding petitioner guilty of Dishonesty in the Performance of
Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and
imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the
Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner
from dismissal to suspension for a period of six (6) months and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection
Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal
for lack of merit and affirming Resolution No. 2309 dated 13 December 1993 of the
Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners
Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on
the following assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines
has committed a grave abuse of discretion amounting to excess or lack of jurisdiction
when it initiated and conducted administrative investigation without a validly
promulgated rules of procedure in the adjudication of administrative cases at the
Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse
of discretion amounting to lack of jurisdiction when it prematurely and falsely
assumed jurisdiction of the case not appealed to it, but to the Merit System Protection
Board.
III. Both the Islamic Bank and the Civil Service Commission erred in finding
petitioner Sawadjaan of having deliberately reporting false information and therefore
guilty of Dishonesty and Conduct Prejudicial to the Best Interest of the Service and
penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this
Honorable Court pursuant to Revised Administrative Circular No. 1-95, which took
effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that
petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP] to
promulgate rules of procedure governing the adjudication and disposition of
administrative cases involving its personnel. It is a rule that issues not properly
brought and ventilated below may not be raised for the first time on appeal, save in
exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of
which, however, obtain in this case. Granting arguendo that the issue is of such
exceptional character that the Court may take cognizance of the same, still, it must
fail. Section 26 of Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest
powers to manage the Islamic Bank, x x x The Board shall adopt policy guidelines
necessary to carry out effectively the provisions of this Charter as well as internal
rules and regulations necessary for the conduct of its Islamic banking business and
all matters related to personnel organization, office functions and salary
administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing
Procedure and Sanctions to Ensure Speedy Disposition of Administrative Cases
directs, all administrative agencies to adopt and include in their respective Rules of
Procedure provisions designed to abbreviate administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the Islamic
Bank [AIIBP] to promulgate rules of procedure before administrative discipline may be
imposed upon its employees. The internal rules of procedures ordained to be adopted
by the Board refers to that necessary for the conduct of its Islamic banking business
and all matters related to personnel organization, office functions and salary
administration. On the contrary, Section 26 of RA 6848 gives the Board of Directors of
the Islamic Bank the broadest powers to manage the Islamic Bank. This grant of
broad powers would be an idle ceremony if it would be powerless to discipline its
employees.
The second assignment of error must likewise fail. The issue is raised for the first
time via this petition for certiorari. Petitioner submitted himself to the jurisdiction of the
CSC. Although he could have raised the alleged lack of jurisdiction in his Motion for
Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By filing the
13
Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction over
him, as it is settled rule that a party who asks for an affirmative relief cannot later on
impugn the action of the tribunal as without jurisdiction after an adverse result was
meted to him. Although jurisdiction over the subject matter of a case may be objected
to at any stage of the proceedings even on appeal, this particular rule, however,
means that jurisdictional issues in a case can be raised only during the proceedings
in said case and during the appeal of said case (Aragon v. Court of Appeals, 270
SCRA 603). The case at bar is a petition [for] certiorariand not an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution No.
93-2387 dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil service
appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e.,
Administrative Code of 1987) including personnel actions such as contested
appointments shall now be appealed directly to the Commission and not to the
MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically
held:
. . . The functions of the MSPB relating to the determination of administrative
disciplinary cases were, in other words, re-allocated to the Commission itself.
Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court
(in this case, administrative agency) has jurisdiction or not, the provisions of the law
should be inquired into. Furthermore, `the jurisdiction of the court must appear clearly
from the statute law or it will not be held to exist.(Azarcon v. Sandiganbayan, 268
SCRA 747, 757) From the provision of law abovecited, the Civil Service Commission
clearly has jurisdiction over the Administrative Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners
proposition that he should not be liable, as in the first place, he was not qualified to
perform the functions of appraiser/investigator because he lacked the necessary
training and expertise, and therefore, should not have been found dishonest by the
Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that
the position of appraiser/inspector is one of the most serious [and] sensitive job in the
banking operations. He should have been aware that accepting such a designation,
he is obliged to perform the task at hand by the exercise of more than ordinary
prudence. As appraiser/investigator, he is expected, among others, to check the
authenticity of the documents presented by the borrower by comparing them with the
originals on file with the proper government office. He should have made it sure that
the technical descriptions in the location plan on file with the Bureau of Lands of
Marikina, jibe with that indicated in the TCT of the collateral offered by CAMEC, and
that the mortgage in favor of the Islamic Bank was duly annotated at the back of the
copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner failed to
do, for which he must be held liable. That he did not profit from his false report is of
no moment. Neither the fact that it was not deliberate or willful, detracts from the
nature of the act as dishonest. What is apparent is he stated something to be a fact,
when he really was not sure that it was so.
WHEREFORE, above premises considered, the instant Petition is DISMISSED, and
the assailed Resolutions of the Civil Service Commission are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his change
of address,[11] but apparently neglected to notify his client of this fact. Thus, on 23 July
1999, Sawadjaan, by himself, filed a Motion for New Trial [12] in the Court of Appeals
based on the following grounds: fraud, accident, mistake or excusable negligence and
newly discovered evidence. He claimed that he had recently discovered that at the
time his employment was terminated, the AIIBP had not yet adopted its corporate by-
laws. He attached a Certification[13] by the Securities and Exchange Commission
(SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-laws to
the SEC, and that its registration was being held in abeyance pending certain
corrections being made thereon. Sawadjaan argued that since the AIIBP failed to file
its by-laws within 60 days from the passage of Rep. Act No. 6848, as required by Sec.
51 of the said law, the bank and its stockholders had already forfeited its franchise or
charter, including its license to exist and operate as a corporation, [14] and thus no
longer have the legal standing and personality to initiate an administrative case.
Sawadjaans counsel subsequently adopted his motion, but requested that it be
treated as a motion for reconsideration.[15] This motion was denied by the court a
quo in its Resolution of 15 December 1999.[16]
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule
65 of the Rules of Court challenging the above Decision and Resolution of the Court
of Appeals on the ground that the court a quo erred: i) in ignoring the facts and
evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts
and evidences that the Islamic Bank lost its juridical personality as a corporation on
16 April 1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank
and its alleged Board of Directors have no jurisdiction to act in the manner they did in
the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed Resolutions No. 94-4483 and
No. 95-2754 as a result of fraud, falsification and/or misrepresentations committed by
Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in affirming an
14
unconscionably harsh and/or excessive penalty; and vi) in failing to consider newly
discovered evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for
Additional Extension of Time to File a Reply (to the Comments of Respondent Al-
Amanah Investment Bank of the Philippines),[17] Reply (to Respondents Consolidated
Comment,)[18] and Reply (to the Alleged Comments of Respondent Al-Amanah Islamic
Bank of the Philippines).[19] On 13 October 2000, he informed this Court that he had
terminated his lawyers services, and, by himself, prepared and filed the following: 1)
Motion for New Trial; [20] 2) Motion to Declare Respondents in Default and/or Having
Waived their Rights to Interpose Objection to Petitioners Motion for New Trial;
[21]
3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega,
Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of
Court & to Inhibit them from Appearing in this Case Until they Can Present Valid
Evidence of Legal Authority;[22] 4) Opposition/Reply (to Respondent AIIBPs Alleged
Comment);[23] 5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for
Contempt of Court and the Issuance of a Commitment Order/Warrant for His Arrest;
[24]
6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel
as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners
Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance of a
Warrant of Arrest);[25] 7) Memorandum for Petitioner;[26] 8) Opposition to SolGens
Motion for Clarification with Motion for Default and/or Waiver of Respondents to File
their Memorandum;[27] 9) Motion for Contempt of Court and Inhibition/Disqualification
with Opposition to OGCCs Motion for Extension of Time to File Memorandum; [28] 10)
Motion for Enforcement (In Defense of the Rule of Law); [29] 11) Motion and Opposition
(Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G.
Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of Court and the
Issuance of a Warrant for their Arrest; and Opposition to their Alleged Manifestation
and Motion Dated February 5, 2002);[30] 12) Motion for Reconsideration of Item (a) of
Resolution dated 5 February 2002 with Supplemental Motion for Contempt of Court;
[31]
13) Motion for Reconsideration of Portion of Resolution Dated 12 March 2002;
[32]
14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum (To:
CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs Memorandum)
With Ex-Parte Urgent Motion for Additional Extension of time to File Reply
Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply Memorandum (To:
OGCCs Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for its procedural and
substantive flaws.
The general rule is that the remedy to obtain reversal or modification of the
judgment on the merits is appeal. This is true even if the error, or one of the errors,
ascribed to the court rendering the judgment is its lack of jurisdiction over the subject
matter, or the exercise of power in excess thereof, or grave abuse of discretion in the
findings of fact or of law set out in the decision.[36]
The records show that petitioners counsel received the Resolution of the Court
of Appeals denying his motion for reconsideration on 27 December 1999. The fifteen
day reglamentary period to appeal under Rule 45 of the Rules of Court therefore
lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of the
resolution denying his motion for reconsideration, the petitioner filed his petition
for certiorariunder Rule 65.
It is settled that a special civil action for certiorari will not lie as a substitute for
the lost remedy of appeal,[37] and though there are instances[38] where the
extraordinary remedy of certiorari may be resorted to despite the availability of an
appeal,[39] we find no special reasons for making out an exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat
this as a special civil action for certiorari under Rule 65,[40]the petition would
nevertheless be dismissed for failure of the petitioner to show grave abuse of
discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the
fact that since respondent AIIBP failed to file its by-laws within the designated 60 days
from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP and all
actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP and its
officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic
Bank, file administrative charges and investigate petitioner in the manner they did and
allegedly passed Board Resolution No. 2309 on December 13, 1993 which is null and
void for lack of an (sic) authorized and valid by-laws. The CIVIL SERVICE
COMMISSION was therefore affirming, erroneously, a null and void Resolution No.
2309 dated December 13, 1993 of the Board of Directors of Al-Amanah Islamic
Investment Bank of the Philippines in CSC Resolution No. 94-4483 dated August 11,
1994. A motion for reconsideration thereof was denied by the CSC in its Resolution
No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and misrepresentations of the alleged Chairman
and CEO Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his
group at the alleged Islamic Bank.[41]
Nowhere in petitioners voluminous pleadings is there a showing that the court a
quo committed grave abuse of discretion amounting to lack or excess of jurisdiction
reversible by a petition for certiorari. Petitioner already raised the question of AIIBPs
corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for
15
Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite the
volume of pleadings he has submitted thus far, he has added nothing substantial to
his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it
conducts business, has shareholders, corporate officers, a board of directors, assets,
and personnel. It is, in fact, here represented by the Office of the Government
Corporate Counsel, the principal law office of government-owned corporations, one of
which is respondent bank.[42] At the very least, by its failure to submit its by-laws on
time, the AIIBP may be considered a de facto corporation[43] whose right to exercise
corporate powers may not be inquired into collaterally in any private suit to which
such corporations may be a party.[44]
Moreover, a corporation which has failed to file its by-laws within the prescribed
period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations,[45] details the
procedures and remedies that may be availed of before an order of revocation can be
issued. There is no showing that such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a
corporate controversy, but a labor dispute; and it is an employers basic right to freely
select or discharge its employees, if only as a measure of self-protection against acts
inimical to its interest.[46] Regardless of whether AIIBP is a corporation, a partnership,
a sole proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the
petitioners employer. AIIBP chose to retain his services during its reorganization,
controlled the means and methods by which his work was to be performed, paid his
wages, and, eventually, terminated his services.[47]
And though he has had ample opportunity to do so, the petitioner has not
alleged that he is anything other than an employee of AIIBP. He has neither claimed,
nor shown, that he is a stockholder or an officer of the corporation. Having accepted
employment from AIIBP, and rendered his services to the said bank, received his
salary, and accepted the promotion given him, it is now too late in the day for
petitioner to question its existence and its power to terminate his services. One who
assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.[48]
Even if we were to consider the facts behind petitioner Sawadjaans dismissal
from service, we would be hard pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular
inspection of the properties offered by CAMEC as collaterals and check the copies of
the certificates of title against those on file with the Registry of Deeds. Not only did he
fail to conduct these routine checks, but he also deliberately misrepresented in his
appraisal report that after reviewing the documents and conducting a site inspection,
he found the CAMEC loan application to be in order. Despite the number of pleadings
he has filed, he has failed to offer an alternative explanation for his actions.
When he was informed of the charges against him and directed to appear and
present his side on the matter, the petitioner sent instead a memorandum questioning
the fairness and impartiality of the members of the investigating committee and
refusing to recognize their jurisdiction over him. Nevertheless, the investigating
committee rescheduled the hearing to give the petitioner another chance, but he still
refused to appear before it.
Thereafter, witnesses were presented, and a decision was rendered finding him
guilty of dishonesty and dismissing him from service. He sought a reconsideration of
this decision and the same committee whose impartiality he questioned reduced their
recommended penalty to suspension for six months and one day. The board of
directors, however, opted to dismiss him from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to
perform his official duties greatly prejudiced the AIIBP, for which he should be held
accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the
performance of his duties as appraiser/inspector. Had respondent performed his
duties as appraiser/inspector, he could have easily noticed that the property located
at Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the
properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had
respondent reflected such fact in his appraisal/inspection report on said property the
ISLAMIC BANK would not have approved CAMECs loan of P500,000.00 in 1987 and
CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks policy of
not accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he failed to
check and verify from the Registry of Deeds of Marikina the authenticity of the
property located at Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and
which is one of the properties offered as collateral by CAMEC for its P5 Million loan in
1988. If he only visited and verified with the Register of Deeds of Marikina the
authenticity of TCT No. N-130671 he could have easily discovered that TCT No. N-
130671 is fake and the property described therein non-existent.
...
16
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his
failure to perform his official duties resulted to the prejudice and substantial damage
to the ISLAMIC BANK for which he should be held liable for the administrative offense
of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.[49]

From the foregoing, we find that the CSC and the court a quo committed no
grave abuse of discretion when they sustained Sawadjaans dismissal from service. Republic of the Philippines
SUPREME COURT
Grave abuse of discretion implies such capricious and whimsical exercise of
Manila
judgment as equivalent to lack of jurisdiction, or, in other words, where the power is
exercised in an arbitrary or despotic manner by reason of passion or personal
EN BANC
hostility, and it must be so patent and gross as to amount to an evasion of positive
duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation
G.R. No. 22106 September 11, 1924
of law.[50] The records show that the respondents did none of these; they acted in
accordance with the law.
ASIA BANKING CORPORATION, plaintiff-appellee,
vs.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals STANDARD PRODUCTS, CO., INC., defendant-appellant.
of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil
Service Commission, and its Resolution of 15 December 1999 are Charles C. De Selms for appellant.
hereby AFFIRMED. Costs against the petitioner. Gibbs & McDonough and Roman Ozaeta for appellee.

SO ORDERED. OSTRAND, J.:

Davide, Jr., C.J., Panganiban, Quisumbing, Ynares-Santiago, Sandoval- This action is brought to recover the sum of P24,736.47, the balance due on the
Gutierrez, Carpio, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., Azcuna, following promissory note:
Tinga, and Garcia, JJ., concur.
P37,757.22
Puno, J., on official leave.

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

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

On demand, after date we promise to pay to the Asia Banking Corporation,

or order, the sum of thirty-seven thousand seven hundred fifty-seven and
22/100 pesos at their office in Manila, for value received, together with
interest at the rate of ten per cent per annum.

No. ________ Due __________

17
 THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER

By President

The court below rendered judgment in favor of the plaintiff for the sum demanded in
the complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the Republic of the Philippines
rate of 10 per cent per annum, and the costs. From this judgment the defendant SUPREME COURT
appeals to this court. Manila

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence EN BANC
of the parties and the appellant insists that under these circumstances the court erred
in finding that the parties were corporations with juridical personality and assigns
same as reversible error. G.R. No. L-11442 May 23, 1958

There is no merit whatever in the appellant's contention. The general rule is that in the MANUELA T. VDA. DE SALVATIERRA, petitioner,
absence of fraud a person who has contracted or otherwise dealt with an association vs.
in such a way as to recognize and in effect admit its legal existence as a corporate HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
body is thereby estopped to deny its corporate existence in any action leading out of
Instance of Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
or involving such contract or dealing, unless its existence is attacked for cause which
have arisen since making the contract or other dealing relied on as an estoppel and
this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Jimenez, Tantuico, Jr. and Tolete for petitioner.
Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.) Francisco Astilla for respondent Segundino Refuerzo.

The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore
estopped to deny said plaintiff's corporate existence. It is, of course, also estopped
from denying its own corporate existence. Under these circumstances it was
unnecessary for the plaintiff to present other evidence of the corporate existence of
either of the parties. It may be noted that there is no evidence showing circumstances
taking the case out of the rules stated.
The judgment appealed from is affirmed, with the costs against the appellant. So
ordered.
Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify
the order of the Court of First Instance of Leyte in Civil Case No. 1912, dated March
21, 1956, relieving Segundino Refuerzo of liability for the contract entered into
between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo
is the president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located
at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered
into a contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a
corporation "duly organized and existing under the laws of the Philippines, domiciled
at Burauen, Leyte, Philippines, and with business address therein, represented in this
instance by Mr. Segundino Q. Refuerzo, the President". It was provided in said
contract, among other things, that the lifetime of the lease would be for a period of 10
18
years; that the land would be planted to kenaf, ramie or other crops suitable to the
soil; that the lessor would be entitled to 30 per cent of the net income accruing from
the harvest of any, crop without being responsible for the cost of production thereof;
and that after every harvest, the lessee was bound to declare at the earliest possible
time the income derived therefrom and to deliver the corresponding share due the
lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were
not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with
the Court of First Instance of Leyte a complaint against the Philippine Fibers
Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and
damages (Civil Case No. 1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased property which crop was, at the
time of the commencement of the action, already harvested, processed and sold by
defendants; that notwithstanding that fact, defendants refused to render an
accounting of the income derived therefrom and to deliver the lessor's share; that the
estimated gross income was P4,500, and the deductible expenses amounted to
P1,000; that as defendants' refusal to undertake such task was in violation of the
terms of the covenant entered into between the plaintiff and defendant corporation, a
rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they
were allegedly notified, the Court declared them in default and proceeded to receive
plaintiff's evidence. On June 8, 1955, the lower Court rendered judgment granting
plaintiff's prayer, and required defendants to render a complete accounting of the
harvest of the land subject of the proceeding within 15 days from receipt of the
decision and to deliver 30 per cent of the net income realized from the last harvest to
plaintiff, with legal interest from the date defendants received payment for said crop. It
was further provide that upon defendants' failure to abide by the said requirement, the
gross income would be fixed at P4,200 or a net income of P3,200 after deducting the
expenses for production, 30 per cent of which or P960 was held to be due the plaintiff
pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court,
upon motion of plaintiff, issued a writ of execution, in virtue of which the Provincial
Sheriff of Leyte caused the attachment of 3 parcels of land registered in the name of
Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was
found available for attachment. On January 31, 1956, defendant Segundino Refuerzo
filed a motion claiming that the decision rendered in said Civil Case No. 1912 was null
and void with respect to him, there being no allegation in the complaint pointing to his
personal liability and thus prayed that an order be issued limiting such liability to
defendant corporation. Over plaintiff's opposition, the Court a quo granted the same
and ordered the Provincial Sheriff of Leyte to release all properties belonging to the
movant that might have already been attached, after finding that the evidence on
record made no mention or referred to any fact which might hold movant personally
liable therein. As plaintiff's petition for relief from said order was denied, Manuela T.
Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing
the order complained of, acted with grave abuse of discretion and prayed that same
be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified
was issued by tile respondent Judge upon motion of defendant Refuerzo, obviously
pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however, in
providing for the period within which such a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A
petition provided for in either of the preceding sections of this rule must be
verified, filed within sixty days after the petitioner learns of the judgment,
order, or other proceeding to be set aside, and not more than six months
after such judgment or order was entered, or such proceeding was taken;
and must be must be accompanied with affidavit showing the fraud,
accident, mistake, or excusable negligence relied upon, and the facts
constituting the petitioner is good and substantial cause of action or defense,
as the case may be, which he may prove if his petition be granted". (Rule
38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of
the judgment, and not more than 6 months after the judgment or order was rendered,
both of which must be satisfied. As the decision in the case at bar was under date of
June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January
31, 1956, or after the lapse of 7 months and 23 days, the filing of the aforementioned
motion was clearly made beyond the prescriptive period provided for by the rules. The
remedy allowed by Rule 38 to a party adversely affected by a decision or order is
certainly an alert of grace or benevolence intended to afford said litigant a penultimate
opportunity to protect his interest. Considering the nature of such relief and the
purpose behind it, the periods fixed by said rule are non-extendible and never
interrupted; nor could it be subjected to any condition or contingency because it is of
itself devised to meet a condition or contingency (Palomares vs. Jimenez, * G.R. No.
L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ
of certiorari filed herein may be granted. However, taking note of the question
presented by the motion for relief involved herein, We deem it wise to delve in and
pass upon the merit of the same.
19
Refuerzo, in praying for his exoneration from any liability resulting from the non-
fulfillment of the obligation imposed on defendant Philippine Fibers Producers Co.,
Inc., interposed the defense that the complaint filed with the lower court contained no
allegation which would hold him liable personally, for while it was stated therein that
he was a signatory to the lease contract, he did so in his capacity as president of the
corporation. And this allegation was found by the Court a quo to be supported by the
records. Plaintiff on the other hand tried to refute this averment by contending that her
failure to specify defendant's personal liability was due to the fact that all the time she
was under the impression that the Philippine Fibers Producers Co., Inc., represented
by Refuerzo was a duly registered corporation as appearing in the contract, but a
subsequent inquiry from the Securities and Exchange Commission yielded otherwise.
While as a general rule a person who has contracted or dealt with an association in
such a way as to recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction or dealing, (Asia
Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de
Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49
Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part
in the said transaction. In the instant case, on plaintiff's charge that she was unaware
of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality,
defendant Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable conclusion that
plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such
corporation was duly organized in accordance with law.
Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690).
Considering that defendant Refuerzo, as president of the unregistered corporation
Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation
of the lease agreement by acting as its representative, his liability cannot be limited or
restricted that imposed upon corporate shareholders. In acting on behalf of a
corporation which he knew to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous
decision on this matter and ordering the Provincial Sheriff of Leyte to release any and
all properties of movant therein which might have been attached in the execution of
such judgment, is hereby set aside and nullified as if it had never been issued. With
costs against respondent Segundino Refuerzo. It is so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

There can be no question that a corporation with registered has a juridical personality
separate and distinct from its component members or stockholders and officers such
that a corporation cannot be held liable for the personal indebtedness of a
stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R.
No. 42420) and conversely, a stockholder or member cannot be held personally liable
for any financial obligation be, the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association. The
reason behind this doctrine is obvious-since an organization which before the law is Republic of the Philippines
non-existent has no personality and would be incompetent to act and appropriate for SUPREME COURT
itself the powers and attribute of a corporation as provided by law; it cannot create Manila
agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own EN BANC
risk. And as it is an elementary principle of law that a person who acts as an agent
without authority or without a principal is himself regarded as the principal, possessed
G.R. No. L-19118 January 30, 1965
of all the rights and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and comes personally liable for contracts entered into
or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188.
20
MARIANO A. ALBERT, plaintiff-appellant,
vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff
entitled to damages (for breach of contract) but reduced the amount from P23,000.00
to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held
that the judgment for P15,000.00 which had become final and executory, should be
executed to its full amount, since in fixing it, payment already made had been
considered.
Now we are asked whether the judgment may be executed against Jose M. Aruego,
supposed President of University Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University
Publishing Co., Inc. Plaintiff allegedinter alia that defendant was a corporation duly
organized and existing under the laws of the Philippines; that on July 19, 1948,
defendant, through Jose M. Aruego, its President, entered into a contract with
plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the
exclusive right to publish his revised Commentaries on the Revised Penal Code and
for his share in previous sales of the book's first edition; that defendant had
undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948;
that per contract failure to pay one installment would render the rest due; and that
defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted
the execution and terms of the contract dated July 19, 1948; but alleged that it was
plaintiff who breached their contract by failing to deliver his manuscript. Furthermore,
defendant counterclaimed for damages.1wph1.t
Plaintiff died before trial and Justo R. Albert, his estate's administrator, was
substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954,
stating in the dispositive portion
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of
the plaintiff and against the defendant the University Publishing Co., Inc.,
ordering the defendant to pay the administrator Justo R. Albert, the sum of
P23,000.00 with legal [rate] of interest from the date of the filing of this
complaint until the whole amount shall have been fully paid. The defendant
shall also pay the costs. The counterclaim of the defendant is hereby
dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in
full. Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution
writ against University Publishing Co., Inc. Plaintiff, however, on August 10, 1961,
petitioned for a writ of execution against Jose M. Aruego, as the real defendant,
stating, "plaintiff's counsel and the Sheriff of Manila discovered that there is no such
entity as University Publishing Co., Inc." Plaintiff annexed to his petition a certification
from the securities and Exchange Commission dated July 31, 1961, attesting: "The
records of this Commission do not show the registration of UNIVERSITY
PUBLISHING CO., INC., either as a corporation or partnership." "University
Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law
firm), a "manifestation" stating that "Jose M. Aruego is not a party to this case," and
that, therefore, plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through
counsel, would not want Jose M. Aruego to be considered a party to the present case:
should a separate action be now instituted against Jose M. Aruego, the plaintiff will
have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this,
plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and
Exchange Commission has not been disputed. Defendant would only raise the point
that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant;
thereby assuming that "University Publishing Co., Inc." is an existing corporation with
an independent juridical personality. Precisely, however, on account of the non-
registration it cannot be considered a corporation, not even a corporation de
facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose
M. Aruego; it cannot be sued independently.
21
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-existent entity and induced not only the
plaintiff but even the court to believe in such representation. He signed the contract
as "President" of "University Publishing Co., Inc.," stating that this was "a corporation
duly organized and existing under the laws of the Philippines," and obviously misled
plaintiff (Mariano A. Albert) into believing the same. One who has induced another to
act upon his wilful misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim the principle of
corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the complaint
and litigating upon the merits. But as stated, "University Publishing Co., Inc." has no
independent personality; it is just a name. Jose M. Aruego was, in reality, the one who
answered and litigated, through his own law firm as counsel. He was in fact, if not, in
name, the defendant.
Even with regard to corporations duly organized and existing under the law, we have
in many a case pierced the veil of corporate fiction to administer the ends of
justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or
purporting to act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent." Had Jose M. Aruego been named as
party defendant instead of, or together with, "University Publishing Co., Inc.," there
would be no room for debate as to his personal liability. Since he was not so named,
the matters of "day in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who have a
right to control the proceedings, to make defense, to adduce and cross-examine
witnesses, and to appeal from a decision" (67 C.J.S. 887) and Aruego was, in
reality, the person who had and exercised these rights. Clearly, then, Aruego had his
day in court as the real defendant; and due process of law has been substantially
observed.
By "due process of law" we mean " "a law which hears before it condemns; which
proceeds upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S.
518, 581.)"; or, as this Court has said, " "Due process of law" contemplates notice and
opportunity to be heard before judgment is rendered, affecting one's person or
property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023,
Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process"
clause of the Constitution is designed to secure justice as a living reality; not to
sacrifice it by paying undue homage to formality. For substance must prevail
over form. It may now be trite, but none the less apt, to quote what long ago we said
in Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more deeply
schooled and skilled in the subtle art of movement and position, entraps and
destroys the other. It is, rather, a contest in which each contending party fully
and fairly lays before the court the facts in issue and then, brushing side as
wholly trivial and indecisive all imperfections of form and technicalities of
procedure, asks that Justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapier's thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be no
vested rights in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative of a non-
existent principal, was the real party to the contract sued upon; that he was the one
who reaped the benefits resulting from it, so much so that partial payments of the
consideration were made by him; that he violated its terms, thereby precipitating the
suit in question; and that in the litigation he was the real defendant. Perforce, in line
with the ends of justice, responsibility under the judgment falls on him.
We need hardly state that should there be persons who under the law are liable to
Aruego for reimbursement or contribution with respect to the payment he makes
under the judgment in question, he may, of course, proceed against them through
proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and the case
remanded ordering the lower court to hold supplementary proceedings for the
purpose of carrying the judgment into effect against University Publishing Co., Inc.
and/or Jose M. Aruego. So ordered.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala,
Makalintal and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.
22
 That on or before March 2, 1992, and subsequently thereafter, in
the Municipality of Mandaluyong, Metro Manila, Philippines, a place
within the jurisdiction of this Honorable Court, the above-named
accused, conspiring and confederating together and mutually
helping and aiding each other, representing themselves to have
authority, license and/or permit to contract, enlist and recruit
workers for overseas employment, did then and there willfully,
unlawfully and feloniously for a fee, recruit and promise job
placement/employment abroad to the following individuals, to wit:
Republic of the Philippines
SUPREME COURT 1. Gloria Silaras y Barbero
Baguio City
2. Rolando Consigna y Ogana
SECOND DIVISION
3. Ma. Carmen Daluaidao

4. Zosimo La Puebla, Jr.

G.R. No. 117010 April 18, 1997
5. Mario Espada y Melodia
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs. 6. Arnel Santilla y Villalos
ENGR. CARLOS GARCIA y PINEDA, PATRICIO BOTERO y VALES, LUISA
MIRAPLES (at large), accused, 7. Elsa Delubio

PATRICIO BOTERO y VALES, accused-appellant. 8. Abener Siriban y Abatuan

9. Franklin Cabingan y Casalla

PUNO, J.: 10. Jose Erwin Estinoso

Before us is an appeal from the decision of the Regional Trial Court in Criminal Case 11. Edgardo Belen y Juanillo
No. 93871 convicting accused-appellant Patricio Botero of illegal recruitment in large
scale and sentencing him to suffer the penalty of life imprisonment. 1
12. Ariel Rivada y Pascual

In an Information dated July 21, 1992, accused-appellant Patricio Botero together

13. Sunny Pinco y Pascua
with Carlos P. Garcia and Luisa Miraples were charged with the crime of illegal
recruitment in large scale defined by Article 38 (b) and penalized under Article 39 (a)
of the Labor Code, as amended by Presidential Decree Nos. 1920 and 2018, 14. Rolando Santiago y Magno
committed as follows:
15. Alfredo Estinoso y Estrada

23
 16. Luisito Vargas y Quizon
without first securing the required license or authority from the
Department of Labor and Employment.
Contrary to law. 2 (Emphasis supplied.)
Accused Garcia and Botero pleaded not guilty upon arraignment on January 19, 1993
and March 31, 1993, respectively. Miraples remained at large as the warrant of arrest
against her was returned unserved. A joint trial was conducted against the two (2)
accused considering that their cases involve the same parties and issues. 3
Six (6) out of the sixteen (16) complainants testified as prosecution
witnesses. 4 These complainants were Edgardo Belen, Gloria Silaras, Alfredo
Estinoso, Jose Erwin Esclada, Elsa Delubio and Ariel Rivada. They testified that on
various dates in March 1992, they went to Ricorn Philippine International Shipping
Lines, Inc. (hereinafter Ricorn), an entity which recruits workers for overseas
employment, with office at Rm. 410, Jovan Building, 600 Shaw Blvd., Mandaluyong,
Metro Manila. They applied as seamen, cook, waiter, chambermaid or laundrywoman
overseas. 5 Esclada applied to accused Botero. All the other complainants coursed
their application to accused Garcia who represented himself as president of
Ricorn. 6 Complainants were required to submit their NBI and police clearance, birth
certificate, passport, seaman's book and Survival of Life at Sea (SOLAS). 7 As they
did not have the last three (3) documents, they were asked to pay five thousand
pesos (P5,000.00) as processing fee. They paid to Ricorn's treasurer, Luisa
Miraples. 8 They were issued receipts signed by Miraples. The receipts were under
Ricorn's heading. 9
Garcia and Botero assured complainants of employment after the May 11, 1992
election. Accused Botero, as the vice-president of Ricorn, followed-up their passports,
seaman's book and SOLAS. He told some applicants to wait for their papers and
informed the others that their papers were in order.
After the election, complainants went back to Ricorn to check on their applications.
They discovered that Ricorn had abandoned its office at Jovan Building for non-
payment of rentals. 10 Hoping against hope, they went back to the building several
times to recover their money. Their persistence was to no avail for Garcia and Botero
were nowhere to be found. They then went to the Mandaluyong Police Station and
filed their complaints. 11 They also checked with the Securities and Exchange
Commission (SEC) and discovered that Ricorn was not yet incorporated. They also
found that Ricorn was not licensed by the Department of Labor and Employment
(DOLE) to engage in recruitment activities. 12
Accused Garcia testified that he is an electrical engineer by profession. According to
him, the group of Teresita Celso, Patricio Botero, Alice Mayonte, Luisa Miraples and
Edna Hemolaga approached him at a baptismal party to join Ricorn. He was asked to
contribute one hundred thousand pesos (P100,000.00). He told them he would
borrow the money from his brother in the United States.
In February 1992, accused Garcia saw the group again in a small apartment in San
Juan which they utilized as their office. He met them once more at Ricorn's office at
Jovan Bldg. where there were many applicants for overseas jobs. This time, they
asked him to become Ricorn's president and to contribute only twenty thousand
pesos (P20,000.00). He declined the offer. Allegedly, he already knew that Ricorn was
not licensed by the Philippine Overseas Employment Agency (POEA) or registered as
a corporation with the Securities and Exchange Commission (SEC). He denied he
issued receipts to complainants in this case. 13
Accused-appellant Botero is a marine engineer by profession but was working as a
barber when the trial took place. He testified that he became acquainted with Ricorn
when he applied for overseas employment as a machinist. He dealt with accused
Garcia who claimed to be the President of Ricorn. Eventually, he gained the trust of
Garcia and became an employee of Ricorn. Three (3) times a week, he reported for
work at Jovan Building. 14As a former seaman, he was familiar with the processing of
passport, seaman's book and SOLAS. His job consisted in following-up these
documents. He left Ricorn when he discovered it was not licensed by the POEA nor
was it registered with the SEC. 15 He denied he recruited the complainants and
received any money from them. 16 However, on cross-examination, he admitted that in
February 1992, he met Garcia in TADE recruitment agency. Garcia convinced him to
become one of the incorporators of Ricorn. He gave money to Garcia for Ricorn's
registration with the SEC. They held office at Jovan Building from March 2, 1992 to
April 20, 1992. 17
After trial, accused Garcia and Botero were convicted in a decision dated April 19,
1995, to wit:
WHEREFORE, in view of the foregoing, accused CARLOS P.
GARCIA and PATRICIO BOTERO are found guilty beyond
reasonable doubt of the offense of illegal recruitment on (sic) a
large scale constituting economic sabotage under Article 38 (b) and
punishable under Article 39 (a) of the Labor Code as amended and
are sentenced to suffer the penalty of life imprisonment and to pay
a fine of P100,000.00 each. They are also ordered to indemnify and
pay jointly and severally each of the six (6) complainants the
24
 amount of P5,000.00. Both accused are also ordered to pay the Appellant Botero predicates his appeal on the alleged insufficiency of evidence to
cost of suit. support his conviction. More particularly, he assails the credibility of witness Esclada.

SO ORDERED. 18 Esclada initially testified that he dealt with accused Garcia when he filed his
application with Ricorn as a seaman. On cross-examination, however, he admitted it
The case against accused Miraples was archived by the court. 19
She has was really accused Botero with whom he transacted, viz:
remained at large.
Q: But I thought you stated earlier on the third
Only accused Botero, thru counsel, filed a Notice of Appeal. In his Brief, he raises the time, you talked to a certain Edna because
following assignments of error, to wit: 20 Carlos Garcia is not around (sic) on the same
time, it was Carlos Garcia who instructed you to
I give P5,000.00.

THE LOWER COURT ERRED IN HOLDING THAT THE A I have told a lie, sir. My conscience could not
EVIDENCE PRESENTED BY THE PROSECUTION AGAINST take it.
ACCUSED-APPELLANT PATRICIO BOTERO IS SUFFICIENT
FOR CONVICTION. COURT TO THE WITNESS

II Q. So, what is the truth now because I will put

you in jail?
THE LOWER COURT ERRED IN NOT HOLDING THAT IN TRUTH
AND IN FACT THE ACCUSED-APPELLANT PATRICIO BOTERO A. When I applied at Ricorn (Phil.) with Mr.
DID NOT CONSPIRE WITH CO-ACCUSED CARLOS P. GARCIA. Botero, Mr. Garcia
was not around but it was Botero who said that
III my papers were alright. 21

THE LOWER COURT ERRED IN NOT HOLDING THAT In effect, accused-appellant Botero wants this court to apply the doctrine of falsus in
ACCUSED-APPELLANT PATRICIO BOTERO IS NOT uno, falsus in omnibus (false in one part, false in everything) and to disregard the
RESPONSIBLE FOR ILLEGAL RECRUITMENT ACTIVITIES OF entire testimony of Esclada.
CO-ACCUSED CARLOS P. GARCIA.
Under present jurisprudence, this maxim of law is rarely adhered to by the courts. 22 It
IV is possible to admit and lend credence to the testimony of a witness whom the Court
has earlier found to have willfully perjured himself. ". . . (T)he testimony of a witness
may be believed in part and disbelieved in part, depending upon the corroborative
THE LOWER COURT ERRED IN GIVING CREDENCE TO THE
evidence and the probabilities and improbabilities of the case." 23 In the case at bar,
TESTIMONY OF JOSE ERWIN ESCLADA WHICH IS NOT
we hold that the trial court did not err in giving credence to the testimony of Esclada
ADMISSIBLE FOR BEING INCONSISTENT , HIGHLY
against appellant Botero since it was corroborated on its material points by the
IMPROBABLE AND EXAGGERATED AND IN NOT GIVING
testimony of other witnesses. In fact, Esclada's testimony against Botero is
WEIGHT TO THE ACCUSED-APPELLANT PATRICIO BOTERO'S
trustworthy as he gave it after his conscience bothered him for not telling the truth.
EVIDENCE.

We sustain appellant's conviction.

25
We reject appellant Botero's pretense that he is also a victim rather than a culprit in
this case. He insist he was a mere applicant of Ricorn and not a conspirator of the
other accused who defrauded the complainants. He claims that even as a Ricorn
employee, he merely performed "minimal activities" like following-up applicants'
passports, seaman's book and SOLAS, and conducting simple interviews. He denies
he had a hand in the selection of workers to be employed abroad. 24 These
submissions are at war with the evidence on record. His co-accused Garcia
introduced him to the complainants as the vice-president of Ricorn. He used a table
with a nameplate confirming he was the vice-president of Ricorn. 25 He procured the
passports, seaman's books and SOLAS for the applicants. It was from him that the
complainants inquired about the status of their applications. 26 He also admitted he
gave money to accused Garcia for Ricorn's incorporation.
Beyond any reasonable doubt, appellant Botero engaged in recruitment and
placement activities in that he, through Ricorn, promised the complainants
employment abroad. Under the Labor Code, recruitment and placement refers to "any
act of canvassing, enlisting, contracting, transporting, utilizing, hiring or procuring
workers, and includes referrals, contract services, promising or advertising for
employment, locally or abroad whether for profit or not: Provided, That any person or
entity which in any manner, offers or promises for a fee employment to two or more
persons shall be deemed engaged in recruitment, and placement." 27
All the essential elements of the crime of illegal recruitment in large scale are present
in this case, to wit:
(1) the accused engages in the recruitment and placement of
workers, as defined under Article 13 (b) or in any prohibited
activities under Article 34 of the Labor Code;
(2) accused has not complied with the guidelines issued by the
Secretary of Labor and Employment, particularly with respect to the
securing of a license or an authority to recruit and deploy workers,
either locally or overseas; and
(3) accused commits the same against three (3) or more persons,
individually or as a group. 28
It is a fact that Ricorn had no license to recruit from DOLE. In the office of Ricorn, a
notice was posted informing job applicants that its recruitment license is still being
processed. Yet, Ricorn already entertained applicants and collected fees for
processing their travel documents. 29
For engaging in recruitment of workers without obtaining the necessary license from
the POEA, Boteros should suffer the consequences of Ricorn's illegal act for "(i)f the
offender is a corporation, partnership, association or entity, the penalty shall be
imposed upon the officer or officers of the corporation, partnership, association or
entity responsible for violation; . . . " 30 The evidence shows that appellant Botero was
one of the incorporators of Ricorn. For reasons that cannot be discerned from the
records, Ricorn's incorporation was not consummated. Even then, appellant cannot
avoid his liabilities to the public as an incorporator of Ricorn. He and his co-accused
Garcia held themselves out to the public as officers of Ricorn. They received money
from applicants who availed of their services. They are thus estopped from claiming
that they are not liable as corporate officials of Ricorn. 31 Section 25 of the
Corporation Code provides that "(a)ll persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all the
debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality."
Appellant Botero is guilty of the crime of illegal recruitment in a large scale
considering it was proven that he, together with his cohorts, were able to defraud the
six complainant-witnesses in this case. Under Article 38 (b) of the Labor Code, illegal
recruitment in large scale is perpetrated if committed against three (3) or more
persons individually or as a group. And under Article 39 (a) of the same Code,
accused-appellant's crime is punishable by life imprisonment and a fine of one
hundred thousand pesos (P100,000.00).
Finally, it is fruitless for appellant to deny he conspired with his co-accused to commit
the crime at bar. The fact that all the accused were co-conspirators in defrauding the
complainants could be inferred from their acts. They played different roles in
defrauding complainants: accused Garcia was the president, appellant Botero was
the vice-president and accused-at-large Miraples was the treasurer of Ricorn. 32 Each
one played a part in the recruitment of complainants. They were indispensable to
each other.
IN VIEW WHEREOF, the decision of the Regional Trial Court convicting accused-
appellant Patricio Botero of the crime of illegal recruitment in large scale is affirmed in
all respects. Costs against accused-appellant.
SO ORDERED.
Regalado, Romero, Mendoza and Torres, Jr., JJ., concur.
26
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to
pursue a business and to divide the profits or losses that may arise therefrom, even if
it is shown that they have not contributed any capital of their own to a "common fund."
Their contribution may be in the form of credit or industry, not necessarily cash or
fixed assets. Being partner, they are all liable for debts incurred by or on behalf of the
partnership. The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have directly
transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November
26, 1998 Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed

decision, the same is hereby affirmed. 2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:

27
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment
issued by this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by
reason of the special and unique facts and circumstances and the
proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid
purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the
unpaid price of the floats not covered by said
Agreement;
b. 12% interest per annum counted from date of
plaintiff's invoices and computed on their
respective amounts as follows:
i. Accrued interest of
P73,221.00 on Invoice No.
14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest for
P27,904.02 on Invoice No.
14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of
P12,920.00 on Invoice No.
14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus
P8,500.00 representing P500.00 per appearance
in court;
d. P65,000.00 representing P5,000.00 monthly
rental for storage charges on the nets counted
from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the
principal obligation or for the unpaid price of nets and
floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this
Court noted that these items were attached to guarantee
any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case,
it was ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and
winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of
P900,000.00 replaced the attached property as a guaranty
for any judgment that plaintiff may be able to secure in this
case with the ownership and possession of the nets and
floats awarded and delivered by the sheriff to plaintiff as
the highest bidder in the public auction sale. It has also
been noted that ownership of the nets [was] retained by
the plaintiff until full payment [was] made as stipulated in
the invoices; hence, in effect, the plaintiff attached its own
properties. It [was] for this reason also that this Court
earlier ordered the attachment bond filed by plaintiff to
guaranty damages to defendants to be cancelled and for
the P900,000.00 cash bidded and paid for by plaintiff to
serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that
whatever judgment the plaintiff may be entitled to in this
case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets
and floats. Considering, however, that the total judgment
obligation as computed above would amount to only
P840,216.92, it would be inequitable, unfair and unjust to
award the excess to the defendants who are not entitled to
damages and who did not put up a single centavo to raise
the amount of P900,000.00 aside from the fact that they
are not the owners of the nets and floats. For this reason,
28
 the defendants are hereby relieved from any and all
liabilities arising from the monetary judgment obligation
enumerated above and for plaintiff to retain possession
and ownership of the nets and floats and for the
reimbursement of the P900,000.00 deposited by it with the
Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990, for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent).
They claimed that they were engaged in a business venture with Petitioner Lim Tong
Lim, who however was not a signatory to the agreement. The total price of the nets
amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold
to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with
a prayer for a writ of preliminary attachment. The suit was brought against the three in
their capacities as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a Certification from the
Securities and Exchange Commission. 5 On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the
fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability
and requesting a reasonable time within which to pay. He also turned over to
respondent some of the nets which were in his possession. Peter Yao filed an
Answer, after which he was deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6The
trial court maintained the Writ, and upon motion of private respondent, ordered the
sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won the
bidding and deposited with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and
Lim, as general partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1)
on the testimonies of the witnesses presented and (2) on a Compromise Agreement
executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao had brought
against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a declaration of ownership
of fishing boats; (d) an injunction and (e) damages. 10 The Compromise Agreement
provided:
a) That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will
be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into 3:
1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter
Yao;
c) If the proceeds of the sale the vessels will be
less than P5,750,000.00 whatever the deficiency
shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature of
their obligations, but that joint liability could be presumed from the equal distribution of
the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the
RTC.
Ruling of the Court of Appeals
29
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao
in a fishing business and may thus be held liable as a such for the fishing nets and
floats purchased by and for the use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein
appellant Lim Tong Lim undertook a partnership for a specific
undertaking, that is for commercial fishing . . . . Oviously, the
ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is . . . .
By a contract of partnership, two or more persons bind themselves
to contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves (Article 1767,
New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision
on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT
A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE
WAS ACTING FOR OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING,
THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE
AND ATTACHMENT OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats
from respondent, the Court must resolve this key issue: whether by their acts, Lim,
Chua and Yao could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed between
him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the
Compromise Agreement alone. Furthermore, he disclaims any direct participation in
the purchase of the nets, alleging that the negotiations were conducted by Chua and
Yao only, and that he has not even met the representatives of the respondent
company. Petitioner further argues that he was a lessor, not a partner, of Chua and
Yao, for the "Contract of Lease " dated February 1, 1990, showed that he had merely
leased to the two the main asset of the purported partnership the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25
percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two
lower courts clearly showed that there existed a partnership among Chua, Yao and
him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 By the contract of partnership, two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a partnership among the three existed based
on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was
engaged in commercial fishing to join him, while Antonio Chua was
already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao
verbally agreed to acquire two fishing boats, the FB Lourdes and
the FB Nelson for the sum of P3.35 million;
30
 (3) That they borrowed P3.25 million from Jesus Lim, brother of
Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation,
which executed a Deed of Sale over these two (2) boats in favor of
Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-
equipping, repairing, dry docking and other expenses for the boats
would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again
extended a loan to the partnership in the amount of P1 million
secured by a check, because of which, Yao and Chua entrusted the
ownership papers of two other boats, Chua's FB Lady Anne
Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and
Antonio Chua bought nets from Respondent Philippine Fishing
Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against
Lim Tong Lim for (a) declaration of nullity of commercial documents;
(b) reformation of contracts; (c) declaration of ownership of fishing
boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise
Agreement executed between the parties-litigants the terms of
which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's
brother. In their Compromise Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and to divide equally among
them the excess or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term "common fund" under Article 1767.
The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit from
the sale and operation of the boats would be divided equally among them also shows
that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the
boat, but also to that of the nets and the floats. The fishing nets and the floats, both
essential to fishing, were obviously acquired in furtherance of their business. It would
have been inconceivable for Lim to involve himself so much in buying the boat but not
in the acquisition of the aforesaid equipment, without which the business could not
have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao,
a partnership engaged in the fishing business. They purchased the boats, which
constituted the main assets of the partnership, and they agreed that the proceeds
from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should
involve only questions of law. Thus, the foregoing factual findings of the RTC and the
CA are binding on this Court, absent any cogent proof that the present action is
embraced by one of the exceptions to the rule. 16 In assailing the factual findings of
the two lower courts, petitioner effectively goes beyond the bounds of a petition for
review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was
entered into only to end the dispute among them, but not to adjudicate their
preexisting rights and obligations. His arguments are baseless. The Agreement was
but an embodiment of the relationship extant among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have
found, correctly, a preexisting partnership among the parties. In implying that the
lower courts have decided on the basis of one piece of document alone, petitioner
fails to appreciate that the CA and the RTC delved into the history of the document
and explored all the possible consequential combinations in harmony with law, logic
and fairness. Verily, the two lower courts' factual findings mentioned above nullified
petitioner's argument that the existence of a partnership was based only on the
Compromise Agreement.
31
 Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly
finds support in the Contract of Lease and the registration papers showing that he
was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the
excess of the proceeds to be divided among the three of them. No lessor would do
what petitioner did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with
Chua and Yao, in which debts were undertaken in order to finance the acquisition and
the upgrading of the vessels which would be used in their fishing business. The sale
of the boats, as well as the division among the three of the balance remaining after
the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in
his name, was not his own property but an asset of the partnership. It is not
uncommon to register the properties acquired from a loan in the name of the person
the lender trusts, who in this case is the petitioner himself. After all, he is the brother
of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for petitioner to sell his
property to pay a debt he did not incur, if the relationship among the three of them
was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided however, That
when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that there
was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a
party may be estopped from denying its corporate existence. "The reason behind this
doctrine is obvious an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation
as provided by law; it cannot create agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that
a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of
a principal, a person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and becomes personally
liable for contracts entered into or for other acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation and to a
third party. In the first instance, an unincorporated association, which represented
itself to be a corporation, will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation. It cannot
allege lack of personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the alleged corporation.
In such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts
they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled
to be paid for the nets it sold. The only question here is whether petitioner should be
held jointly 18 liable with Chua and Yao. Petitioner contests such liability, insisting that
only those who dealt in the name of the ostensible corporation should be held liable.
Since his name does not appear on any of the contracts and since he never directly
transacted with the respondent corporation, ergo, he cannot be held liable.
32
Unquestionably, petitioner benefited from the use of the nets found inside F/B stipulated in the invoices is proper. Besides, by specific agreement, ownership of the
Lourdes, the boat which has earlier been proven to be an asset of the partnership. He nets remained with Respondent Philippine Fishing Gear, until full payment thereof.
in fact questions the attachment of the nets, because the Writ has effectively stopped
his use of the fishing vessel. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to
form a corporation. Although it was never legally formed for unknown reasons, this SO ORDERED.
fact alone does not preclude the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are
held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation.
However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said
association and is covered by the scope of the doctrine of corporation by estoppel.
We reiterate the ruling of the Court in Alonso v. Villamor: 19

A litigation is not a game of technicalities in which one, more deeply

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

Third Issue:

Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic.
As previously discussed, F/B Lourdes was an asset of the partnership and that it was
placed in the name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically manufactured and tailor-
made according to their own design, and were bought and used in the fishing venture
they agreed upon. Hence, the issuance of the Writ to assure the payment of the price

33
 GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in
G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was
dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

Republic of the Philippines
SUPREME COURT WHEREFORE, judgment is rendered against defendant Jacob S.
Manila Lim requiring Lim to pay plaintiff the amount of P311,056.02, with
interest at the rate of 12% per annum compounded monthly; plus
THIRD DIVISION 15% of the amount awarded to plaintiff as attorney's fees from July
2,1966, until full payment is made; plus P70,000.00 moral and
G.R. No. 84197 July 28, 1989 exemplary damages.

PIONEER INSURANCE & SURETY CORPORATION, petitioner, It is found in the records that the cross party plaintiffs incurred
vs. additional miscellaneous expenses aside from Pl51,000.00,,making
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, a total of P184,878.74. Defendant Jacob S. Lim is further required
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. to pay cross party plaintiff, Bormaheco, the Cervanteses one-half
LIM, respondents. and Maglana the other half, the amount of Pl84,878.74 with interest
from the filing of the cross-complaints until the amount is fully paid;
G.R. No. 84157 July 28, 1989 plus moral and exemplary damages in the amount of P184,878.84
with interest from the filing of the cross-complaints until the amount
is fully paid; plus moral and exemplary damages in the amount of
JACOB S. LIM, petitioner,
P50,000.00 for each of the two Cervanteses.
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and Furthermore, he is required to pay P20,000.00 to Bormaheco and
MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents. the Cervanteses, and another P20,000.00 to Constancio B.
Maglana as attorney's fees.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
xxx xxx xxx
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses and
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Constancio B. Maglana, is dismissed. Instead, plaintiff is required to
indemnify the defendants Bormaheco and the Cervanteses the
Leonardo B. Lucena for Constancio Maglana.
amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.

34
 Furthermore, the plaintiff is required to pay Constancio B. Maglana
the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this
action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment, is
not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment prayed
for by the plaintiff Pioneer. If an insurance company would be liable
for damages in performing an act which is clearly within its power
and which is the reason for its being, then nobody would engage in
the insurance business. No further claim or counter-claim for or
against anybody is declared by this Court. (Rollo - G.R. No. 24197,
pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered
into and executed a sales contract (Exhibit A) for the sale and purchase of two (2)
DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed
price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry
No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C)
in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to
a new corporation proposed by Lim to expand his airline business. They executed two
(2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one
signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may
incur in consequence of having become surety upon the bond/note and to pay,
reimburse and make good to Pioneer, its successors and assigns, all sums and
amounts of money which it or its representatives should or may pay or cause to be
paid or become liable to pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in
favor of the former. It was stipulated therein that Lim transfer and convey to the surety
the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the
Register of Deeds of the City of Manila and with the Civil Aeronautics Administration
pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act
No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however,
filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for
a writ of preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims
against Lim alleging that they were not privies to the contracts signed by Lim and, by
way of counterclaim, sought for damages for being exposed to litigation and for
recovery of the sums of money they advanced to Lim for the purchase of the aircrafts
in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.
35
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED
WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE
SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED
THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A
REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand to
be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the action
is utterly devoid of merit. Plaintiff did not even present any evidence
that it is the attorney-in-fact of the reinsurance company, authorized
to institute an action for and in behalf of the latter. To qualify a
person to be a real party in interest in whose name an action must
be prosecuted, he must appear to be the present real owner of the
right sought to be enforced (Moran, Vol. I, Comments on the Rules
of Court, 1979 ed., p. 155). It has been held that the real party in
interest is the party who would be benefited or injured by the
judgment or the party entitled to the avails of the suit (Salonga v.
Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in
interest is meant a present substantial interest as distinguished
from a mere expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669,
quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 the bulk of defendants'
alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to foreclose
extra-judicially one of the subject airplanes and its spare engine,
realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds
of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering
that the total amount it had paid to JDA totals to only P298,666.28.
To allow plaintiff Pioneer to recover from defendants the amount in
excess of P298,666.28 would be tantamount to unjust enrichment
as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-
vis defendant Lim's liability to JDA. Well settled is the rule that no
person should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its
finding that petitioner was paid by its reinsurer in the aforesaid amount, as this matter
has never been raised by any of the parties herein both in their answers in the court
below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even
assuming hypothetically that it was paid by its reinsurer, still none of the respondents
had any interest in the matter since the reinsurance is strictly between the petitioner
and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the
indemnity agreements, the petitioner is entitled to recover from respondents
Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable
considering that whatever amount he would recover from the co-indemnitor will be
paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money
was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
36
 xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to
so much of its obligations to JDA as has been paid with reinsurance
money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the proceeds
of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to
collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as the
amount paid to it by the reinsurers Pioneer is suing defendants as
their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the
benefit of the reinsurers. It is well-settled that an action brought by
an attorney-in-fact in his own name instead of that of the principal
will not prosper, and this is so even where the name of the principal
is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be prosecuted in
the name of the real party in interest.' This
provision is mandatory. The real party in interest
is the party who would be benefitted or injured by
the judgment or is the party entitled to the avails
of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest, that
there is no law permitting an action to be brought
by an attorney-in-fact. Arroyo v. Granada and
Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco
and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
Corporation v. San Diego G.R. No. L-
22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized
from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that cropped up
was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance contract
as this is strictly between the petitioner as insured and the reinsuring company
pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in
general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
37
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila
Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the
insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not fully
cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the real
party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-
in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner
was not the real party in interest in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does not,
however, cite any grounds except its allegation that respondent "Maglanas defense
and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable to the
petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare
parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to cover
the bond, and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the
mortgaged properties have impaired and
rendered insufficient the security under the
chattel mortgage and there is thus no other
sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel mortgage there
is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage.
These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to
the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
38
Independently of the preceding proposition Pioneer's election of the
remedy of foreclosure precludes any further action to recover any
unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the
contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp.
No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates of
the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments,
the first of which shall be due and payable 25
August 1965, the remainder of which ... shall be
due and payable on the 26th day x x x of each
succeeding three months and the last of which
shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum
executed by SAL or Lim and JDA, modifying the maturity dates of
the obligations, as follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the
first of which shall be due and payable 4
September 1965, the remainder of which ... shall
be due and payable on the 4th day ... of each
succeeding months and the last of which shall be
due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the
last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity
dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that
these defendants and defendant Maglana knew of and consented
to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a
written notice to as well as written conformity of these defendants,
and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by
the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the
case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and
the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty The mere failure on
the part of the creditor to demand payment after
the debt has become due does not of itself
constitute any extension time referred to herein,
(New Civil Code).'
39
 Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
of action to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an express
stipulation in the surety bond, the failure of JDA to present its claim
to Pioneer within ten days from default of Lim or SAL on every
installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-debtors
if such payment is made after the obligation has
prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the instant
case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record
on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate vehicle
but who failed to incorporate the entity in which they had chosen to
invest? How are the losses to be treated in situations where their
contributions to the intended 'corporation' were invested not
through the corporate form? This Petition presents these
fundamental questions which we believe were resolved erroneously
by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure
of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner
Lim to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the
appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119 P.
229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as
members of the company to the property acquired by the company
will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where
40
 certain persons associated themselves as a corporation for the
development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third
the difference in the proportionate value of the land conveyed by
him, and no stock was ever issued in the corporation, it was treated
as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets,
sold, and the proceeds distributed among them in proportion to the
value of the property contributed by each (Shorb v. Beaudry, 56
Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be
implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and other stockholders, who were
also directors, will not be implied in the absence of an agreement,
so as to make the former liable to contribute for payment of debts
illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses
and Maglana. The trial court and the appellate court, however, found through Exhibit
58, that the petitioner received the amount of P151,000.00 representing the
participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the
subject airplanes and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation
with the respondents despite his representations to them. This gives credence to the
cross-claims of the respondents to the effect that they were induced and lured by the
petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-
claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then up
to the filing of this answer, Lim has refused, failed and still refuses
to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim.
Down payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the
agreement among the defendants, defendant Lim in connivance
with the plaintiff, signed and executed the alleged chattel mortgage
and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the
first time of this trickery and misrepresentation of the other, Jacob
Lim, when the herein plaintiff chattel mortgage (sic) allegedly
executed by defendant Lim, thereby forcing them to file an adverse
claim in the form of third party claim. Notwithstanding repeated oral
demands made by defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the two planes and
their accessories and or return the amount advanced by the former
amounting to an aggregate sum of P 178,997.14 as evidenced by a
statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which would
41
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not in
behalf of his other would-be incorporators in transacting the sale of the airplanes and
spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-30646 January 30, 1929

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE MANILA RAILROAD COMPANY and JOSE PAEZ as Manager of said
Company, respondents.

42
Attorney-General Jaranilla for petitioner.
Jose Abreu for respondents.
JOHNSON, J.:
This is a petition in the Supreme Court of the extraordinary legal writ
of mandamus presented by the Government of the Philippine Islands, praying that the
writ be issued to compel the Manila Railroad Company and Jose Paez, as its
manager, to provide and equip the telegraph poles of said company between the
municipality of Paniqui, Province of Tarlac, and the Municipality of San Fernando,
Province of La Union, with crosspieces for six telegraph wires belonging to the
Government, which, it is alleged, are necessary for public service between said
municipalities.
The only question raised by the petition is whether the dependant company is
required to provide and equip its telegraph poles with crosspieces to carry six
telegraph wires of the Government, or whether it is only required to furnish poles with
crosspieces sufficient to carry four wires only.
It is admitted that the present poles and crosspieces between said municipalities are
sufficient to carry four telegraph wires and that they do now carry four telegraph
wires, by virtue of an agreement between the respondents and the Bureau of the
Posts of the Philippine Government. It is admitted that the poles and not sufficient to
carry six telegraph wires.
The petitioner relies upon the provisions of section 84 of act No. 1459. Act No. 1459
is the General Corporation Law and was adopted by the United States Philippine
Commission on March 1, 1906. (Vol. 5, Pub. Laws, pp. 224-268.) Section 84 of the
said Act provides:
The railroad corporation shall establish along the whole length of the road a
telegraph line for the use of the railroad. The posts of this line may be used
for Government wires and shall be of sufficient length and strength and
equipped with sufficient crosspiece to carry the number of wires which the
Government may consider necessary for the public service. The
establishment, protection, and maintenance of the wires and stations
necessary for the public service shall be at the cost of the Government. (Vol.
5, P. L., p. 247.)
The plaintiff contends that under said section 84 the defendant company is required
to erect and maintain posts for its telegraph wires, of sufficient length and strength,
and equipped with sufficient crosspieces to carry the number of wires which the
Government may consider necessary for the public service, and that six wires are
now necessary for the public service.
The respondents answered by a general and special defense. In their special defense
they contend that section 84 of Act No. 1459 has been repealed by section 1,
paragraph 8 of Act No. 1510 of the United States Philippine Commission (vol. 5, P. L.,
pp. 350-358), and that under the provisions of said Act No. 1510 the Government is
entitled to place on the poles of the company four wires only. Act No. 1510 is the
charter of the Manila Railroad Company. It was adopted by the United States
Philippine Commission on July 7, 1906. Section 1, paragraph 8, of said Act No. 1510
provides:
8. The grantee (the Manila Railroad Company) shall have the right to
construct and operate telegraph, telephone, and electrical transmission lines
over said railways for the use of the railways and their business, and also,
with the approval of the Secretary of War, for public service and commercial
purposes but these latter privileges shall be subject to the following
provisions:
In the construction of telegraph or telephone lines along the right of way the
grantee (the Manila Railroad Company) shall erect and maintain poles with
sufficient space thereon to permit the Philippine Government, at the expense
of said Government, to place, operate, and maintain four wires for telegraph,
telephone, and electrical transmission for any Government purposes
between the termini of the lines of railways main or branch; and the
Philippine Government reserves to itself the right to construct, maintain, and
operate telegraph, telephone, or electrical transmission lines over the right of
way of said railways for commercial military, or government purposes,
without unreasonably interfering with the construction, maintenance, and
operation by the grantee of its railways, telegraph, telephone, and electrical
transmission lines.
To answer the question above stated, it becomes necessary to determine whether
section 84 of Act No. 1459 is applicable to the Manila Railroad Company, or whether
the manila Railroad Company is governed by section 1, paragraph 8, of Act No. 1510.
As has been said, Act No. 1459 is a general law applicable to corporations generally,
while Act No. 1510 is the charter of the Manila Railroad Company and constitute a
contract between it and the Government.
Inasmuch as Act No. 1510 is the charter of Manila Railroad Company and constitute a
contract between it and the Governmemnt, it would seem that the company is
governd by its contract and not by the provisions of any general law upon questions
43
covered by said contract. From a reading of the said charter or contract it would be
seen that there is no indication that the Government intended to impose upon said
company any other conditions as obligations not expressly found in said charter or
contract. If that is true, then certainly the Government cannot impose upon said
company any conditions or obligations found in any general law, which does not
expressly modify said contract.
The petitioner, in view of all the foregoing facts and the law applicable thereto, has not
shown itself entitled to the remedy prayed for. The prayer of the petition must,
therefore, be denied. And without any finding as to costs, it is so ordered.
Street, Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

Section 84 of the Corporation Law (Act No. 1459) was intended to apply to all
railways in the Philippine Islands which did not have a special charter contract. Act
No. 1510 applies only to the Manila Railroad Company, one of the respondents, and
being a special charter of said company, its adoption had the effect of superseding
the provisions of the general Corporation Law which are applicable to railraods in
general. The special charter (Act No. 1510) had the effect of superseding the general
Corporation Law upon all matters covered by said special charter. Said Act, inasmuch
as it contained a special provision relating to the erection of telegraph and telephone
poles, and the number of wires which the Government might place thereon,
superseded the general law upon that question.

Act No. 1510 is a special charter of the respondent company. It constitutes a contract
between the respondent company and the state; and the state and the grantee of a
charter are equally bound by its provisions. For the state to impose an obligation or a
duty upon the respondent company, which is not expressly provided for in the charter
(Act No. 1510), would amount to a violation of said contract between the state and the
respondent company. The provisions of Act No. 1459 relating to the number of wires
which the Government may place upon the poles of the company are different and
more enerous than the provisions of the charter upon the same question. Therefore,
to allow the plaintiff to require of the respondent company a compliance with said
section 84 of Act No. 1459, would be to require of the respondent company and the
performance of an obligation which is not imposed upon it by its charter. The charter
of a corporation is a contract between three parties: (a) it is a contract between the
state and the corporation to which the charter is granted; (b) it is a contact between
the stockholders and the state and (c) it is also a contract between the corporation
and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and cases cited.)

The question is not whether Act No. 1510 repealed Act No. 1459; but whether, after
the adoption of Act No. 1510, the respondents are obliged to comply with the special
provision above mentioned, contained in Act No. 1459. We must answer that question
in the native. Both laws are still in force, unless otherwise repealed. Act No. 1510 is
applicable to respondents upon the question before us, while Act No. 1459 is not
applicable.

44
 (a) a pending controversy over the ownership of the certificates of
stock with the Regional Trial Court;

(b) claims that the Deeds of Assignment covering the subject

Republic of the Philippines
certificates of stock were fictitious and antedated; and
SUPREME COURT
Manila
(c) claims on a resultant possible deprivation of inheritance share in
relation with a conflicting claim over the subject certificates of stock.
SECOND DIVISION

The facts are not disputed.

On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas,
G.R. No. 96674 June 26, 1992
Inc., executed a Special Power of Attorney in favor of his wife, private respondent
Melania Guerrero, giving and granting the latter full power and authority to sell or
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in
FRANCISCO TRIAS, petitioners, his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to
execute the proper documents therefor, and to receive and sign receipts for the
vs. dispositions.

COURT OF APPEALS*, SECURITIES AND EXCHANGE COMMISSION, MELANIA
A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M.
GUERRERO, JR., and FRANCISCO GUERRERO , SR.,respondents.
On February 27, 1980, and pursuant to said Special Power of Attorney, private
respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of
Assignment for 472 shares out of the 473 shares, in favor of private respondents Luz
Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5
shares).

PARAS, J.:
The basic controversy in this case is whether or not the respondent court erred in
sustaining the Securities and Exchange Commission when it compelled
by Mandamus the Rural Bank of Salinas to register in its stock and transfer book the
transfer of 473 shares of stock to private respondents. Petitioners maintain that the
Petition forMandamus should have been denied upon the following grounds.
(1) Mandamus cannot be a remedy cognizable by the Securities and Exchange
Commission when the purpose is to register certificates of stock in the names of
claimants who are not yet stockholders of a corporation:
(2) There exist valid reasons for refusing to register the transfer of the subject of
stock, namely:
Almost four months later, or two (2) days before the death of Clemente Guerrero on
June 24, 1980, private respondent Melania Guerrero, pursuant to the same Special
Power of Attorney, executed a Deed of Assignmentfor the remaining one (1) share of
stock in favor of private respondent Francisco Guerrero, Sr.
Subsequently, private respondent Melania Guerrero presented to petitioner Rural
Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the
transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned,
the cancellation of stock certificates in the name of Clemente G. Guerrero, and the
issuance of new stock certificates covering the transferred shares of stocks in the
name of the new owners thereof. However, petitioner Bank denied the request of
respondent Melania Guerrero.
On December 5, 1980, private respondent Melania Guerrero filed with the Securities
and Exchange Commission" (SEC) an action for mandamus against petitioners Rural

45
Bank of Salinas, its President and Corporate Secretary. The case was docketed as
SEC Case No. 1979.
Petitioners filed their Answer with counterclaim on December 19, 1980 alleging the
upon the death of Clemente G. Guerrero, his 473 shares of stock became the
property of his estate, and his property and that of his widow should first be settled
and liquidated in accordance with law before any distribution can be effected so that
petitioners may not be a party to any scheme to evade payment of estate or
inheritance tax and in order to avoid liability to any third persons or creditors of the
late Clemente G. Guerrero.
On January 29, 1981, a motion for intervention was filed by Maripol Guerrero, a
legally adopted daughter of the late Clemente G. Guerrero and private respondent
Melania Guerrero, who stated therein that on November 26, 1980 (almost two weeks
before the filing of the petition for Mandamus) a Petition for the administration of the
estate of the late Clemente G. Guerrero had been filed with the Regional Trial Court,
Pasig, Branch XI, docketed as Special Proceedings No. 9400. Maripol Guerrero
further claimed that the Deeds of Assignment for the subject shares of stock are
fictitious and antedated; that said conveyances are donations since the
considerations therefor are below the book value of the shares, the assignees/private
respondents being close relatives of private respondent Melania Guerrero; and that
the transfer of the shares in question to assignees/private respondents, other than
private respondent Melania Guerrero, would deprive her (Maripol Guerrero) of her
rightful share in the inheritance. The SEC hearing officer denied the Motion for
Intervention for lack of merit. On appeal, the SEC En Banc affirmed the decision of
the hearing officer.
Intervenor Guerrero filed a complaint before the then Court of First Instance of Rizal,
Quezon City Branch, against private respondents for the annulment of the Deeds of
Assignment, docketed as Civil Case No. Q-32050. Petitioners, on the other hand,
filed a Motion to Dismiss and/or to Suspend Hearing of SEC Case No. 1979 until after
the question of whether the subject Deeds of Assignment are fictitious, void or
simulated is resolved in Civil Case No. Q-32050. The SEC Hearing Officer denied
said motion.
On December 10, 1984, the SEC Hearing Officer rendered a Decision granting the
writ of Mandamus prayed for by the private respondents and directing petitioners to
cancel stock certificates nos. 26, 49 and 65 of the Bank, all in the name of Clemente
G. Guerrero, and to issue new certificates in the names of private respondents,
except Melania Guerrero. The dispositive, portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the
petitioners and against the respondents, directing the latter,
particularly the corporate secretary of respondent Rural Bank of
Salinas, Inc., to register in the latter's Stock and Transfer Book the
transfer of 473 shares of stock of respondent Bank and to cancel
Stock Certificates Nos. 26, 45 and 65 and issue new Stock
Certificates covering the transferred shares in favor of petitioners,
as follows:
1. Luz Andico 457 shares
2. Wilhelmina Rosales 10 shares
3. Francisco Guerrero, Jr. 5 shares
4. Francisco Guerrero, Sr. 1 share
and to pay to the above-named petitioners, the dividends for said
shares corresponding to the years 1981, 1982, 1983 and 1984
without interest.
No pronouncement as to costs.
SO ORDERED. (p. 88, Rollo)
On appeal, the SEC En Banc affirmed the decision of the Hearing Officer. Petitioner
filed a petition for review with the Court of Appeals but said Court likewise affirmed
the decision of the SEC.
We rule in favor of the respondents.
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive
jurisdiction to hear and decide cases involving intracorporate controversies. An
intracorporate controversy has been defined as one which arises between a
stockholder and the corporation. There is no distinction, qualification, nor any
exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at bar
involves shares of stock, their registration, cancellation and issuances thereof by
petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to
adjudicate.
46
Respondent SEC correctly ruled in favor of the registering of the shares of stock in
question in private respondent's names. Such ruling finds support under Section 63 of
the Corporation Code, to wit:
Sec. 63. . . . Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is recorded in
the books of the corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted
Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation
Code]) contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be
created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property, is
at liberty, under said section to dispose them in favor of whomever
he pleases, without limitation in this respect, than the general
provisions of law. . . .
The only limitation imposed by Section 63 of the Corporation Code is when
the corporation holds any unpaid claim against the shares intended to be
transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source in
legislative enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are
always subject to the charter of the corporation. The corporation, in
the absence of such power, cannot ordinarily inquire into or pass
upon the legality of the transactions by which its stock passes from
one person to another, nor can it question the consideration upon
which a sale is based. . . . (Tomson on Corporation Sec.
4137, citedin Fleisher vs. Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock in
cases like the present, mandamuswill lie to compel the officers of
the corporation to transfer said stock in the books of the
corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher
vs. Botica Nolasco, 47 Phil. 583, 594).
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of
ownership. (Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial one and if it
refuses to make such transaction without good cause, it may be
compelled to do so by mandamus. (See. 5518, 12 Fletcher 394)
For the petitioner Rural Bank of Salinas to refuse registration of the transferred
shares in its stock and transfer book, which duty is ministerial on its part, is to render
nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code.
Thus, respondent Court of Appeals did not err in upholding the Decision of
respondent SEC affirming the Decision of its Hearing Officer directing the registration
of the 473 shares in the stock and transfer book in the names of private respondents.
At all events, the registration is without prejudice to the proceedings in court to
determine the validity of the Deeds of Assignment of the shares of stock in question.
WHEREFORE, the petition is DISMISSED for lack of merit.
SO ORDERED.
47
 CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and
VALLEY GOLF and COUNTRY CLUB, INC., respondents.

DECISION

KAPUNAN, J.:

Through a petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioner China Banking Corporation seeks the reversal of the decision of the
Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange
Commission's order and resolution dated 4 June 1993 and 7 December 1993,
respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's motion for
reconsideration.

The case unfolds thus:

On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder

of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged
his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for
brevity).[1]

On 16 September 1974, petitioner wrote VGCCI requesting that the

aforementioned pledge agreement be recorded in its books.[2]

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge
executed by Calapatia in petitioner's favor was duly noted in its corporate books.[3]

On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner,

payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner.[4]

Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed
a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of
Manila, requesting the latter to conduct a public auction sale of the pledged stock.[5]

FIRST DIVISION
On 14 May 1985, petitioner informed VGCCI of the above-mentioned
foreclosure proceedings and requested that the pledged stock be transferred to its
[G.R. No. 117604. March 26, 1997]
(petitioner's) name and the same be recorded in the corporate books. However, on 15
July 1985, VGCCI wrote petitioner expressing its inability to accede to petitioner's
request in view of Calapatia's unsettled accounts with the club.[6]

48
 Despite the foregoing, Notary Public de Vera held a public auction on 17
September 1985 and petitioner emerged as the highest bidder atP20,000.00 for the
pledged stock. Consequently, petitioner was issued the corresponding certificate of
sale.[7]
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment
of his overdue account in the amount of P18,783.24.[8] Said notice was followed by a
demand letter dated 12 December 1985 for the same amount[9] and another notice
dated 22 November 1986 forP23,483.24.[10]
On 4 December 1986, VGCCI caused to be published in the newspaper Daily
Express a notice of auction sale of a number of its stock certificates, to be held on 10
December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock
(Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the
termination of his membership due to the sale of his share of stock in the 10
December 1986 auction.[11]
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's
Stock Certificate No. 1219 by virtue of being the highest bidder in the 17 September
1985 auction and requested that a new certificate of stock be issued in its name.[12]
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's
stock was sold at the public auction held on 10 December 1986 for P25,000.00.[13]
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of
stock and thereafter filed a case with the Regional Trial Court of Makati for the
nullification of the 10 December 1986 auction and for the issuance of a new stock
certificate in its name.[14]
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for
lack of jurisdiction over the subject matter on the theory that it involves an intra-
corporate dispute and on 27 August 1990 denied petitioner's motion for
reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and
Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the
issuance of a new certificate in petitioner's name; and for damages, attorney's fees
and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision
in favor of VGCCI, stating in the main that "(c)onsidering that the said share is
delinquent, (VGCCI) had valid reason not to transfer the share in the name of the
petitioner in the books of (VGCCI) until liquidation of delinquency."[15] Consequently,
the case was dismissed.[16]
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for
reconsideration.[17]
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission
issued an order reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the pledged
share and because of pledgor's failure to pay the principal debt upon maturity, appellant-
petitioner can proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are
hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December
10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue
another membership certificate in the name of appellant-petitioner bank.
SO ORDERED.[18]
VGCCI sought reconsideration of the abovecited order. However, the SEC
denied the same in its resolution dated 7 December 1993.[19]
The sudden turn of events sent VGCCI to seek redress from the Court of
Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and
setting aside the orders of the SEC and its hearing officer on ground of lack of
jurisdiction over the subject matter and, consequently, dismissed petitioner's original
complaint. The Court of Appeals declared that the controversy between CBC and
VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case, the controversy must
pertain to any of the following relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation, partnership or association and its
stockholders, partners, members, or officers; (c) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned,
and (d) among the stockholders, partners or associates themselves (Union Glass and Container
Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the
relationship mentioned will not necessarily always confer jurisdiction over the dispute on the
49
Securities and Exchange Commission to the exclusion of the regular courts. The statement
made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions
or distinctions is not that absolute. The better policy in determining which body has
jurisdiction over a case would be to consider not only the status or relationship of the parties
but also the nature of the question that is the subject of their controversy (Viray vs. Court of
Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which involves ownership of
the stock that used to belong to Calapatia, Jr. is not within the competence of respondent
Commission to decide. It is not any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of
respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its
hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all
nullified and set aside for lack of jurisdiction over the subject matter of the case. Accordingly,
the complaint of respondent China Banking Corporation (Annex Q, petition) is DISMISSED.
No pronouncement as to costs in this instance.
SO ORDERED.[20]
Petitioner moved for reconsideration but the same was denied by the Court of
Appeals in its resolution dated 5 October 1994.[21]
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division)
GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993
AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES
AND EXCHANGE COMMISSION EN BANC, AND WHEN IT
DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION
OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND
EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993
DESPITE PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the
controversy, the regular courts or the SEC.
P.D. No. 902-A conferred upon the SEC the following pertinent powers:
SECTION 3. 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, and in the
exercise of its authority, it shall have the power to enlist the aid and support of and to deputize
any and all enforcement agencies of the government, civil or military as well as any private
institution, corporation, firm, association or person.
xxx
SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental to
the interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers, or managers of
such corporations, partnerships or associations.
50
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses
property to cover all of its debts but foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the Management Committee created
pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA[22] and in the recent
cases of Mainland Construction Co., Inc. v. Movilla[23] and Bernardo v. CA,[24] thus:
. . . The better policy in determining which body has jurisdiction over a case would be to
consider not only the status or relationship of the parties but also the nature of the question
that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal
has jurisdiction we have to determine therefore whether or not petitioner is a
stockholder of VGCCI and whether or not the nature of the controversy between
petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share
or membership certificate at public auction by petitioner (and the issuance to it of the
corresponding Certificate of Sale) transferred ownership of the same to the latter and
thus entitled petitioner to have the said share registered in its name as a member of
VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has
in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner and has even noted
said agreement in its corporate books. [25] In addition, Calapatia, the original owner of
the subject share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder
of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly
exemplies an intra-corporate controversy between a corporation and its stockholder
under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between
petitioner and private respondent corporation. VGCCI claims a prior right over the
subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that
"after a member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the Club . . ." [26] It is pursuant to this
provision that VGCCI also sold the subject share at public auction, of which it was the
highest bidder. VGCCI caps its argument by asserting that its corporate by-laws
should prevail. The bone of contention, thus, is the proper interpretation and
application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the
special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz:[27]
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so
expressly state in the law. The Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction . . . the courts cannot or will not determine a controversy
involving a question which is within the jurisdiction of an administrative tribunal, where the
question demands the exercise of sound administrative discretion requiring the special
knowledge, experience, and services of the administrative tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of
the regulatory statute administered."
In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual matters, subject to judicial review
in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the
Court noted that "between the power lodged in an administrative body and a court, the
unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and unequivocably, the choice should
fall on [an administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman,
noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their
jurisdiction to award all kinds of damages in labor cases, as against the previous P.D.
amendment splitting their jurisdiction with the regular courts, "evidently,. . . had second
thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award
damages in labor cases because that setup would mean duplicity of suits, splitting the cause of
action and possible conflicting findings and conclusions by two tribunals on one and the same
claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as
it does the meticulous analysis and correct interpretation of a corporation's by-laws as well as
the applicable provisions of the Corporation Code in order to determine the validity of
VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier
position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112)
that there is no intra-corporate relations between itself and VGCCI.
51
 VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,[28] this Court, through Mr. Justice Isagani A. Cruz,
declared that:
It follows that as a rule the filing of a complaint with one court which has no jurisdiction over
it does not prevent the plaintiff from filing the same complaint later with the competent court.
The plaintiff is not estopped from doing so simply because it made a mistake before in the
choice of the proper forum . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it
categorically stated (in its motion to dismiss) that the case between itself and
petitioner is intra-corporate and insisted that it is the SEC and not the regular courts
which has jurisdiction. This is precisely the reason why the said court dismissed
petitioner's complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case
to the Court of Appeals, this Court likewise deems it procedurally sound to proceed
and rule on its merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for
review on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner
specifically raised questions on the merits of the case. In turn, in its responsive
pleadings, private respondent duly answered and countered all the issues raised by
petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs
of Crisanta Gabriel-Almoradie v. Court of Appeals,[29] citing Escudero v. Dulay[30] and
The Roman Catholic Archbishop of Manila v. Court of Appeals:[31]
In the interest of the public and for the expeditious administration of justice the issue on
infringement shall be resolved by the court considering that this case has dragged on for years
and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a
single proceeding leaving no root or branch to bear the seeds of future litigation. No useful
purpose will be served if a case or the determination of an issue in a case is remanded to the
trial court only to have its decision raised again to the Court of Appeals and from there to the
Supreme Court.
We have laid down the rule that the remand of the case or of an issue to the lower court for
further reception of evidence is not necessary where the Court is in position to resolve the
dispute based on the records before it and particularly where the ends of justice would not be
subserved by the remand thereof. Moreover, the Supreme Court is clothed with ample
authority to review matters, even those not raised on appeal if it finds that their consideration
is necessary in arriving at a just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al.,
[32]
this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that that since the filing of this suit
before the trial court, none of the substantial issues have been resolved. To avoid and gloss
over the issues raised by the parties, as what the trial court and respondent Court of Appeals
did, would unduly prolong this litigation involving a rather simple case of foreclosure of
mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist
the parties in obtaining just, speedy and inexpensive determination of every action or
proceeding. The Court, therefore, feels that the central issues of the case, albeit unresolved by
the courts below, should now be settled specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file have amply ventilated their various
positions and arguments on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the
proceedings before the SEC) sufficient to enable us to render a sound judgment and
since only questions of law were raised (the proper jurisdiction for Supreme Court
review), we can, therefore, unerringly take cognizance of and rule on the merits of the
case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in
petitioner's favor. It contends that the same was null and void for lack of consideration
because the pledge agreement was entered into on 21 August 1974 [33] but the loan or
promissory note which it secured was obtained by Calapatia much later or only on 3
August 1983.[34]
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting
parties explicitly stipulated therein that the said pledge will also stand as security for
any future advancements (or renewals thereof) that Calapatia (the pledgor) may
procure from petitioner:
52
 xxx
This pledge is given as security for the prompt payment when due of all loans, overdrafts,
promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind
which have heretofore been contracted, or which may hereafter be contracted, by the
PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including
discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further
endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND
(P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided, plus
the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE may
incur in connection with the collection thereof. [35] (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot
thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory
note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first
promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent
accounts, it had the right to sell the share in question in accordance with the express
provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that
VGCCI began sending notices of delinquency to Calapatia after it was informed by
petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings
initiated against Calapatia's pledged share, although Calapatia has been delinquent
in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom
VGCCI had officially recognized as the pledgee of Calapatia's share, was neither
informed nor furnished copies of these letters of overdue accounts until VGCCI itself
sold the pledged share at another public auction. By doing so, VGCCI completely
disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of
said auction sale. Such actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its
by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the by-laws of a corporation
since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to
this is when third persons have actual or constructive knowledge of the same. In the case at
bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner
foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed
on September 17, 1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985
petitioner even quoted a portion of private respondent's by-laws which is material to the issue
herein in a letter it wrote to private respondent. Because of this actual knowledge of such by-
laws then the same bound the petitioner as of the time when petitioner purchased the share.
Since the by-laws was already binding upon petitioner when the latter purchased the share of
Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the
right of the private respondent to sell the said share for reasons of delinquency and the right of
private respondent to have a first lien on said shares as these rights are provided for in the by-
laws very very clearly.[36]
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco
Co.:[37]
And moreover, the by-law now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by said by-
law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law
cannot operate to defeat his rights as a purchaser.
"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them
to the corporation for a period of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and took part in its adoption." (10
Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
"When no restriction is placed by public law on the transfer of corporate stock, a purchaser is
not affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris
Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
"The assignment of shares of stock in a corporation by one who has assented to an
unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor;
the assignee is not bound by such by-law by virtue of the assignment alone." (Ireland vs.
Globe Milling Co., 21 R.I., 9.)
"A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for the
protection of the corporation against worthless stockholders, cannot be made available to
defeat the rights of third persons." (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48
Iowa, 336.) (Underscoring ours.)
In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third party
and the shareholder was entered into, in this case, at the time the pledge agreement
was executed. VGCCI could have easily informed petitioner of its by-laws when it
sent notice formally recognizing petitioner as pledgee of one of its shares registered
53
in Calapatia's name. Petitioner's belated notice of said by-laws at the time of
foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their
relation to it. In other words, by-laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs, in whole or in
part, in the management and control of its affairs and activities. (9 Fletcher 4166. 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or constructively. In the case of
Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the
transfer of shares cannot have any effect on the the transferee of the shares in question as he
"had no knowledge of such by-law when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to the contract created by the
by-law between the shareholder x x x and the Botica Nolasco, Inc. Said by-law cannot operate
to defeat his right as a purchaser." (Underscoring supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be
bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript
of stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent
only in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was
contracted.
The Commission en banc also believes that for the exception to the general accepted rule that
third persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at the
time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil
Code provides that it is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists maybe alienated for the
payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued
an opinion to the effect that:
According to the weight of authority, the pledgee's right is entitled to full protection without
surrender of the certificate, their cancellation, and the issuance to him of new ones, and when
done, the pledgee will be fully protected against a subsequent purchaser who would be
charged with constructive notice that the certificate is covered by the pledge. (12-A Fletcher
502)
The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to
him the amount due on the debt secured. In other words, the pledgee has the right to resort to
its collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new certificate to a third person
who purchased the same certificate covered by the pledge, will certainly defeat the right of the
pledgee to resort to its collateral for the payment of the debt. The pledgor or his representative
or registered stockholders has no right to require a return of the pledged stock until the debt
for which it was given as security is paid and satisfied, regardless of the length of time which
have elapsed since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the
corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it
free of liens or claims that may subsequently arise in favor of the corporation if it has notice of
the pledge, although no demand for a transfer of the stock to the pledgee on the corporate
books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75
F2d739)[38]
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws
because of Art. 2099 of the Civil Code which stipulates that the creditor must take
care of the thing pledged with the diligence of a good father of a family, fails to
convince. The case of Cruz & Serrano v. Chua A. H . Lee,[39] is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind that the ordinary
pawn ticket is a document by virtue of which the property in the thing pledged passes from
hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore,
absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination
over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite
different in character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's by-
laws.
54
 Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers
to "any unpaid claim arising from unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the corporation arising from any other
transaction."[40] In the case at bar, the subscription for the share in question has been
fully paid as evidenced by the issuance of Membership Certificate No. 1219. [41] What
Calapatia owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of
Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is
hereby AFFIRMED.
SO ORDERED.
THIRD DIVISION
[G.R. No. 132390. May 21, 2004]
BPI FAMILY SAVINGS BANK, INC., petitioner, vs. FIRST METRO INVESTMENT
CORPORATION, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, assailing the Decision [1] dated July 4,
1997 and Resolution[2] dated January 28, 1998 of the Court of Appeals in CA-G.R. CV
No. 44986, First Metro Investment Corporation vs. BPI Family Bank.
The facts as found by the trial court and affirmed by the Court of Appeals are as
follows:
First Metro Investment Corporation (FMIC), respondent, is an investment house
organized under Philippine laws. Petitioner, Bank of Philippine Islands Family Savings
Bank, Inc. is a banking corporation also organized under Philippine laws.
On August 25, 1989, FMIC, through its Executive Vice President Antonio Ong,
opened current account no. 8401-07473-0 and deposited METROBANK check no.
898679 of P100 million with BPI Family Bank * (BPI FB) San Francisco del Monte
Branch (Quezon City). Ong made the deposit upon request of his friend, Ador de Asis,
a close acquaintance of Jaime Sebastian, then Branch Manager of BPI FB San
Francisco del Monte Branch. Sebastians aim was to increase the deposit level in his
Branch.
BPI FB, through Sebastian, guaranteed the payment of P14,667,687.01
representing 17% per annum interest of P100 million deposited by FMIC. The latter,
in turn, assured BPI FB that it will maintain its deposit of P100 million for a period of
one year on condition that the interest of 17% per annum is paid in advance.
This agreement between the parties was reached through their communications
in writing.
Subsequently, BPI FB paid FMIC 17% interest or P14,667,687.01 upon
clearance of the latters check deposit.
However, on August 29, 1989, on the basis of an Authority to Debit signed by
Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferred P80
million from FMICs current account to the savings account of Tevesteco Arrastre
Stevedoring, Inc. (Tevesteco).
FMIC denied having authorized the transfer of its funds to Tevesteco, claiming
that the signatures of Ong and David were falsified. Thereupon, to recover
immediately its deposit, FMIC, on September 12, 1989, issued BPI FB check no.
129077 for P86,057,646.72 payable to itself and drawn on its deposit with BPI FB
55
SFDM branch. But upon presentation for payment on September 13, 1989, BPI FB
dishonored the check as it was drawn against insufficient funds (DAIF).
Consequently, FMIC filed with the Regional Trial Court, Branch 146, Makati City
Civil Case No. 89-5280 against BPI FB. FMIC likewise caused the filing by the Office
of the State Prosecutors of an Information for estafa against Ong, de Asis, Sebastian
and four others. However, the Information was dismissed on the basis of a demurrer
to evidence filed by the accused.
On October 1, 1993, the trial court rendered its Decision in Civil Case No. 89-
5280, the dispositive portion of which reads:
Premises considered, judgment is rendered in favor of plaintiff, ordering defendant to
pay:
a. the amount of P80 million with interest at the legal rate from the time this
complaint was filed less P14,667,678.01;
b. the amount of P100,000.00 as reasonable attorneys fees; and
c. the cost.
SO ORDERED.
On appeal by both parties, the Court of Appeals rendered a Decision affirming
the assailed Decision with modification, thus:
WHEREFORE, considering all the foregoing, this Court hereby modifies the decision
of the trial court and adjudges BPI Family Bank liable to First Metro Investment
Corporation for the amount of P65,332,321.99 plus interest at 17% per annum
from August 29, 1989 until fully restored. Further, this 17% interest shall itself earn
interest at 12% from October 4, 1989 until fully paid.
SO ORDERED.
BPI FB then filed a motion for reconsideration but was denied by the Court of
Appeals.
In the instant petition, BPI FB ascribes to the Appellate Court the following
assignments of error:
A. IN VALIDATING A CLEARLY ILLEGAL AND VOID AGREEMENT
BETWEEN FMIC AND AN OVERSTEPPING BRANCH MANAGER OF
BPI FB, THE COURT OF APPEALS DECIDED THE APPEALED CASE
IN A MANNER NOT IN ACCORDANCE WITH LAW OR THE
APPLICAPLE DECISIONS OF THE HONORABLE COURT.
B. THE COURT OF APPEALS TOTALLY IGNORED THE JUDICIAL
ADMISSIONS MADE BY FMIC WHEN IT CHARACTERIZED THE
TRANSACTION BETWEEN FMIC AND BPI FB AS A TIME DEPOSIT
WHEN IN FACT IT WAS AN INTEREST-BEARING CURRENT
ACCOUNT WHICH, UNDER THE EXISTING BANK REGULATIONS,
WAS AN ILLEGAL TRANSACTION.
C. THE COURT OF APPEALS COMMITTED AN EGREGIOUS ERROR IN
RULING THAT BPI FB CLOTHED ITS BRANCH MANAGER WITH
APPARENT AUTHORITY TO ENTER INTO SUCH A PATENTLY
ILLEGAL ARRANGEMENT.
D. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR
WHEN IT REFUSED TO CONSIDER THE NEGLIGENT ACTS
COMMITTED BY FMIC ITSELF WHICH LED TO THE TRANSFER OF
THE P80 MILLION FROM THE FMIC ACCOUNT TO THE
TEVESTECO ACCOUNT.
E. THE COURT OF APPEALS DID NOT ADHERE TO SETTLED
JURISPRUDENCE WHEN IT ADJUDGED BPI FB LIABLE TO FMIC
FOR AN AMOUNT WHICH WAS MORE THAN WHAT WAS
CONTEMPLATED OR PRAYED FOR IN FMICS COMPLAINT,
MOTION FOR RECONSIDERATION OF THE TRIAL COURTS
DECISION AND APPEAL BRIEF.
F. IN SUPPORT OF ITS ALTERNATIVE PRAYER, PETITIONER SUBMITS
THAT THE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR IN NOT ORDERING THE CONSOLIDATION OF THE
INSTANT CASE WITH THE TEVESTECO CASE WHICH IS STILL
PENDING BEFORE THE MAKATI REGIONAL TRIAL COURT.
Petitioner BPI FB contends that the Court of Appeals erred in awarding the 17%
per annum interest corresponding to the amount deposited by respondent
FMIC. Petitioner insists that respondents deposit is not a special savings account
similar to a time deposit, but actually a demand deposit, withdrawable upon
demand, proscribed from earning interest under Central Bank Circular
56
777. Petitioner further contends that the transaction is not valid as its Branch
Manager, Jaime Sebastian, clearly overstepped his authority in entering into such an
agreement with respondents Executive Vice President.
We hold that the parties did not intend the deposit to be treated as a demand
deposit but rather as an interest-earning time deposit not withdrawable any time. This
is quite obvious from the communications between Jaime Sebastian, petitioners
Branch Manager, and Antonio Ong, respondents Executive Vice President. Both
agreed that the deposit of P100 million was non-withdrawable for one year upon
payment in advance of the 17% per annum interest. Respondents time deposit
of P100 million was accepted by petitioner as shown by a deposit slip prepared and
signed by Ong himself who indicated therein the account number to which the deposit
is to be credited, the name of FMIC as depositor or account holder, the date of
deposit, and the amount of P100 million as deposit in check. Clearly, when
respondent FMIC invested its money with petitioner BPI FB, they intended the P100
million as a time deposit, to earn 17% per annum interest and to remain intact until its
maturity date one year thereafter.
Ordinarily, a time deposit is defined as one the payment of which cannot legally
be required within such a specified number of days.[3]
In contrast, demand deposits are all those liabilities of the Bangko Sentral and
of other banks which are denominated in Philippine currency and are subject to
payment in legal tender upon demand by the presentation of (depositors)
checks.[4]
While it may be true that barely one month and seven days from the date of
deposit, respondent FMIC demanded the withdrawal ofP86,057,646.72 through the
issuance of a check payable to itself, the same was made as a result of the fraudulent
and unauthorized transfer by petitioner BPI FB of its P80 million deposit to
Tevestecos savings account. Certainly, such was a normal reaction of respondent as
a depositor to petitioners failure in its fiduciary duty to treat its account with the
highest degree of care.
Under this circumstance, the withdrawal of deposit by respondent FMIC before
the one-year maturity date did not change the nature of its time deposit to one of
demand deposit.
On another tack, petitioners argument that Central Bank regulations prohibit
demand deposit from earning interest is bereft of merit.
Under Central Bank Circular No. 22, Series of 1994, demand deposits shall
not be subject to any interest rate ceiling. This, in effect, is an open authority to
pay interest on demand deposits, such interest not being subject to any rate ceiling.
Likewise, time deposits are not subject to interest rate ceiling. In fact, the rate
ceiling was abolished and even allowed to float depending on the market
conditions. Sections 1244 and 1244.1 of the Manual of Regulations of the Central
Bank of the Philippines provide:
Sec. 1244. Interest on time deposit. Time deposits shall not be subject to any interest
rate ceiling.
Sec. 1244.1. Time of payment. Interest on time deposit may be paid at maturity or
upon withdrawal or in advance. Provided, however, That interest paid in advance
shall not exceed the interest for one year.
Thus, even assuming that respondents account with petitioner is a demand
deposit, still it would earn interest.
Going back to the unauthorized transfer of respondents funds to Tevesteco, in
its attempt to evade any liability therefor, petitioner now impugns the validity of the
subject agreement on the ground that its Branch Manager, Jaime Sebastian,
overstepped the limits of his authority in accepting respondents deposit with 17%
interest per annum. We have held that if a corporation knowingly permits its officer, or
any other agent, to perform acts within the scope of an apparent authority, holding
him out to the public as possessing power to do those acts, the corporation will, as
against any person who has dealt in good faith with the corporation through such
agent, be estopped from denying such authority.[5] We reiterated this doctrine
in Prudential Bank vs. Court of Appeals,[6] thus:
A bank holding out its officers and agent as worthy of confidence will not be permitted
to profit by the frauds they may thus be enabled to perpetrate in the apparent scope
of their employment; nor will it be permitted to shirk its responsibility for such frauds,
even though no benefit may accrue to the bank therefrom. Accordingly, a banking
corporation is liable to innocent third persons where the representation is made in the
course of its business by an agent acting within the general scope of his authority
even though the agent is secretly abusing his authority and attempting to perpetrate a
fraud upon his principal or some other person for his own ultimate benefit.
In Francisco vs. Government Service Insurance System,[7] we ruled:
57
Corporate transactions would speedily come to a standstill were every person dealing
with a corporation held duty-bound to disbelieve every act of its responsible officers,
no matter how regular they should appear on their face. This Court has observed
in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this kind it is always well to
keep in mind the situation as it presents itself to the third party with whom the contract
is made. Naturally he can have little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding
the corporation strictly to the liability fixed upon it by its agents in accordance with
law; and we would be sorry to announce a doctrine which would permit the property
of a man in the city of Paris to be whisked out of his hands and carried into a remote
quarter of the earth without recourse against the corporation whose name and
authority had been used in the manner disclosed in this case.As already observed, it
is familiar doctrine that if a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority, and thus holds him
out to the public as possessing power to do those acts, the corporation will, as
against any one who has in good faith dealt with the corporation through such agent,
be estopped from denying his authority; and where it is said if the corporation permits,
this means the same as if the thing is permitted by the directing power of the
corporation.
Petitioner maintains that respondent should have first inquired whether the
deposit of P100 Million and the fixing of the interest rate were pursuant to its
(petitioners) internal procedures. Petitioners stance is a futile attempt to evade an
obligation clearly established by the intent of the parties. What transpires in the
corporate board room is entirely an internal matter. Hence, petitioner may not impute
negligence on the part of respondents representative in failing to find out the scope of
authority of petitioners Branch Manager. Indeed, the public has the right to rely on the
trustworthiness of bank managers and their acts. Obviously, confidence in the
banking system, which necessarily includes reliance on bank managers, is vital in the
economic life of our society.
Significantly, the transaction was actually acknowledged and ratified by
petitioner when it paid respondent in advance the interest for one year. Thus,
petitioner is estopped from denying that it authorized its Branch Manager to enter into
an agreement with respondents Executive Vice President concerning the deposit with
the corresponding 17% interest per annum.
Anent the award of interest, petitioner contends that such award is not in order
as it had not been prayed for by respondent in its complaint nor was it an issue
agreed upon by the parties during the pre-trial of the case. Nonetheless, the rule is
well settled that when the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing, as in this case. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded.
[8]
Besides, the matter of how much interest respondent is entitled to falls squarely
within the issues framed by the parties in their respective pleadings filed with the
court a quo. At any rate, courts may indeed grant the relief warranted by the
allegations and proof even if no such specific relief is prayed for if only to
conclude a complete and thorough resolution of the issues involved.[9]
Finally, petitioner faults the Court of Appeals in not ordering the consolidation of
Civil Case No. 89-4996 (filed by petitioner against Tevesteco) with Civil Case No. 89-
5280 (the instant case). According to petitioner, had there been consolidation of these
two cases, it would have been shown that the P80 Million transferred to Tevestecos
account were proceeds of a loan extended by respondent FMIC to Tevesteco.Suffice
it to state that as found by both the trial court and the Appellate Court, petitioners
transfer of respondents P80M to Tevesteco was unauthorized and tainted with fraud.
At this point, we must emphasize that this Court is not a trier of facts. Thus, we
uphold the finding of both lower courts that petitioner failed to exercise that degree of
diligence required by the nature of its obligations to its depositors. A bank is under
obligation to treat the accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of million of pesos.[10] Here, petitioner
cannot claim it exercised such a degree of care required of it and must, therefore,
bear the consequence.
WHEREFORE, the petition is DENIED. The assailed Decision dated July 4,
1997 and the Resolution dated January 28, 1998 of the Court of Appeals in CA-G.R.
CV No. 44986 are hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. 109491. February 28, 2001]
58
ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS,
E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE
LEON, JR., AND HI-CEMENT CORPORATION,respondents.
[G.R. No. 121794. February 28, 2001]
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM
MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.
DECISION
PARDO, J.:
What is before the Court are separate appeals from the decision of the Court of Appeals,
[1]
ruling that Hi-Cement Corporation is not liable for four checks amounting to P2 million
issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional Trial
Court, Manila an action for collection of the proceeds of four postdated checks in the total
amount of P2 million. Hi-Cement Corporation through its corporate signatories, petitioner
Lourdes M. de Leon,[2] treasurer, and the late Antonio de las Alas, Chairman, issued checks in
favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four
checks to petitioner Atrium Management Corporation for valuable consideration. Upon
presentment for payment, the drawee bank dishonored all four checks for the common reason
payment stopped. Atrium, thus, instituted this action after its demand for payment of the value
of the checks was denied.[3]
After due proceedings, on July 20, 1989, the trial court rendered a decision ordering
Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement
Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million
corresponding to the value of the four checks, plus interest and attorneys fees. [4]
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals
promulgated its decision modifying the decision of the trial court, absolving Hi-Cement
Corporation from liability and dismissing the complaint as against it. The appellate court ruled
that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T.
Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late
Antonio de las Alas constituted ultra viresacts; and (3) The subject checks were not issued for
valuable consideration.[5]
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in
February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance,
offering to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement
in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to
confirm with Hi-Cement the fact that the checks represented payment for petroleum products
which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated
February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as
treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for
petroleum products.[6]
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was
once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was
familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T.
Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-
Cement a loan which the subject checks would secure as collateral. [7]
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause
of action by preponderance of evidence, judgment is hereby rendered ordering all the
defendants except defendant Antonio de las Alas to pay plaintiff jointly and severally the
amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the
filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00)
PESOS as and for attorneys fees and the cost of suit.
All other claims are, for lack of merit dismissed.
SO ORDERED.[8]
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.
[9]
Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly
liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that
Atrium was an ordinary holder, not a holder in due course of the rediscounted checks. [10]
Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-
Cement did not authorize the issuance of the checks, it could still be held liable for the
checks. And assuming that the checks were issued with its authorization, the same was without
59
any consideration, which is a defense against a holder in due course and that the liability shall
be borne alone by E.T. Henry.[11]
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling
of the trial court, the dispositive portion of which reads:
Judgement is hereby rendered:
(1) dismissing the plaintiffs complaint as against defendants Hi-Cement
Corporation and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS
(P2,000,000.00) with interest at the legal rate from the filling of the complaint
until fully paid, plus P20,000.00 for attorneys fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M.
de Leon, jointly and severally to pay defendant Hi-Cement Corporation, the
sum of P20,000.00 as and for attorneys fees.
With cost in this instance against the appellee Atrium Management Corporation
and appellant Lourdes Victoria M. de Leon.
So ordered. [12]
Hence, the recourse to this Court.[13]
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement
and ordering it to pay P20,000.00 as attorneys fees.[14]
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable for
the Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due
course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de
Leon as signatory of the checks was personally liable for the value of the
checks, which were declared to be issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement
attorneys fees and costs.[15]
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra
vires act. The record reveals that Hi-Cement Corporation issued the four (4) checks to extend
financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost
of hydro oil delivered by E.T. Henry to Hi-Cement.Why else would petitioner de Leon ask for
counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by
E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration and
that Lourdes and E.T. Henry engaged in a kiting operation to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation
and is authorized to sign checks for the corporation. At the time of the issuance of the checks,
there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks was
well within the ambit of a valid corporate act, for it was for securing a loan to finance the
activities of the corporation, hence, not an ultra vires act.
An ultra vires act is one committed outside the object for which a corporation is created
as defined by the law of its organization and therefore beyond the power conferred upon it by
law[16] The term ultra vires is distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is
void and cannot be validated.[17]
60
 The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas
were personally liable for the checks issued as corporate officers and authorized signatories of
the check.
"Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith
or gross negligence in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
or
4. He is made, by a specific provision of law, to personally answer for his
corporate action.[18]
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and
Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was
negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr.
Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T.
Henry. She was aware that the checks were strictly endorsed for deposit only to the payees
account and not to be further negotiated.What is more, the confirmation letter contained a
clause that was not true, that is, that the checks issued to E.T. Henry were in payment of Hydro
oil bought by Hi-Cement from E.T. Henry. Her negligence resulted in damage to the
corporation. Hence, Ms. de Leon may be held personally liable therefor.
The next issue is whether or not petitioner Atrium was a holder of the checks in due
course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that
it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it.
In the instant case, the checks were crossed checks and specifically indorsed for deposit
to payees account only. From the beginning, Atrium was aware of the fact that the checks were
all for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner Atrium
was not a holder in due course for having taken the instruments in question with notice that the
same was for deposit only to the account of payee E.T. Henry that it was altogether precluded
from recovering on the instrument. The Negotiable Instruments Law does not provide that a
holder not in due course can not recover on the instrument. [19]
The disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable. [20] One such defense is absence
or failure of consideration. [21] We need not rule on the other issues raised, as they merely
follow as a consequence of the foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the
Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMEDin toto.
No costs.
SO ORDERED.
61