[G.R. No. 124715.

January 24, 2000]

RUFINA LUY LIM petitioner, vs. COURT OF APPEALS, AUTO TRUCK TBA CORPORATION, SPEED
DISTRIBUTING, INC., ACTIVE DISTRIBUTORS, ALLIANCE MARKETING CORPORATION, ACTION COMPANY,
INC. respondents.
DECISION
BUENA, J.:
May a corporation, in its universality, be the proper subject of and be included in the inventory of the estate of a
deceased person?
Petitioner disputes before us through the instant petition for review on certiorari, the decision[1] of the Court of Appeals
promulgated on 18 April 1996, in CA-GR SP No. 38617, which nullified and set aside the orders dated 04 July 1995 [2],
12 September 1995[3] and 15 September 1995[4] of the Regional Trial Court of Quezon City, Branch 93, sitting as a
probate court.
Petitioner Rufina Luy Lim is the surviving spouse of the late Pastor Y. Lim whose estate is the subject of probate
proceedings in Special Proceedings Q-95-23334, entitled, "In Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim,
represented by George Luy, Petitioner".
Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active
Distributing, Inc. and Action Company are corporations formed, organized and existing under Philippine laws and
which owned real properties covered under the Torrens system.
On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented by her
nephew George Luy, filed on 17 March 1995, a joint petition [5] for the administration of the estate of Pastor Y. Lim
before the Regional Trial Court of Quezon City.
Private respondent corporations, whose properties were included in the inventory of the estate of Pastor Y. Lim, then
filed a motion[6] for the lifting of lis pendens and motion[7] for exclusion of certain properties from the estate of the
decedent.
In an order[8] dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court,
granted the private respondents twin motions, in this wise:
"Wherefore, the Register of Deeds of Quezon City is hereby ordered to lift, expunge or delete the
annotation of lis pendens on Transfer Certificates of Title Nos. 116716, 116717, 116718, 116719 and
5182 and it is hereby further ordered that the properties covered by the same titles as well as those
properties by (sic) Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236 are
excluded from these proceedings.
SO ORDERED."
Subsequently, Rufina Luy Lim filed a verified amended petition[9] which contained the following averments:
"3. The late Pastor Y. Lim personally owned during his lifetime the following business entities, to wit:
Business Entity Address:
XXXX
Alliance Marketing ,Inc. Block 3, Lot 6, Dacca
BF Homes,
Paraaque,
Metro Manila.
XXXX
Speed Distributing Inc. 910 Barrio Niog,
Aguinaldo Highway,
Bacoor, Cavite.
XXXX
Auto Truck TBA Corp. 2251 Roosevelt Avenue,
Quezon City.
XXXX
Active Distributors, Inc. Block 3, Lot 6, Dacca BF
Homes, Paraaque,
Metro Manila.
XXXX
Action Company 100 20th Avenue
Murphy, Quezon City
or
92-D Mc-Arthur Highway
Valenzuela Bulacan.
"3.1 Although the above business entities dealt and engaged in business with the public as
corporations, all their capital, assets and equity were however, personally owned by the late Pastor Y
Lim. Hence the alleged stockholders and officers appearing in the respective articles of incorporation
of the above business entities were mere dummies of Pastor Y. Lim, and they were listed therein only
for purposes of registration with the Securities and Exchange Commission.
"4. Pastor Lim, likewise, had Time, Savings and Current Deposits with the following banks: (a)
Metrobank, Grace Park, Caloocan City and Quezon Avenue, Quezon City Branches and (b) First
Intestate Bank (formerly Producers Bank), Rizal Commercial Banking Corporation and in other banks
whose identities are yet to be determined.
 "5. That the following real properties, although registered in the name of the above entities, were
actually acquired by Pastor Y. Lim during his marriage with petitioner, to wit:
Corporation Title Location
XXXX
k. Auto Truck TCT No. 617726 Sto. Domingo
TBA Corporation Cainta, Rizal
q. Alliance Marketing TCT No. 27896 Prance,
Metro Manila
Copies of the above-mentioned Transfer Certificate of Title and/or Tax Declarations are hereto
attached as Annexes "C" to "W".
XXXX
"7. The aforementioned properties and/or real interests left by the late Pastor Y. Lim, are all conjugal
in nature, having been acquired by him during the existence of his marriage with petitioner.
"8. There are other real and personal properties owned by Pastor Y. Lim which petitioner could not as
yet identify. Petitioner, however will submit to this Honorable Court the identities thereof and the
necessary documents covering the same as soon as possible."
On 04 July 1995, the Regional Trial Court acting on petitioners motion issued an order [10], thus:
"Wherefore, the order dated 08 June 1995 is hereby set aside and the Registry of Deeds of Quezon
City is hereby directed to reinstate the annotation of lis pendens in case said annotation had already
been deleted and/or cancelled said TCT Nos. 116716, 116717, 116718, 116719 and 51282.
Further more (sic), said properties covered by TCT Nos. 613494, 365123, 236256 and 236237 by
virtue of the petitioner are included in the instant petition.
SO ORDERED."
On 04 September 1995, the probate court appointed Rufina Lim as special administrator [11] and Miguel Lim and
Lawyer Donald Lee, as co-special administrators of the estate of Pastor Y. Lim, after which letters of administration
were accordingly issued.
In an order[12] dated 12 September 1995, the probate court denied anew private respondents motion for exclusion, in
this wise:
"The issue precisely raised by the petitioner in her petition is whether the corporations are the mere
alter egos or instrumentalities of Pastor Lim, Otherwise (sic) stated, the issue involves the piercing of
the corporate veil, a matter that is clearly within the jurisdiction of this Honorable Court and not the
Securities and Exchange Commission. Thus, in the case of Cease vs. Court of Appeals, 93 SCRA
483, the crucial issue decided by the regular court was whether the corporation involved therein was
the mere extension of the decedent. After finding in the affirmative, the Court ruled that the assets of
the corporation are also assets of the estate.
A reading of P.D. 902, the law relied upon by oppositors, shows that the SECs exclusive (sic) applies
only to intra-corporate controversy. It is simply a suit to settle the intestate estate of a deceased
person who, during his lifetime, acquired several properties and put up corporations as his
instrumentalities.
SO ORDERED."
On 15 September 1995, the probate court acting on an ex parte motion filed by petitioner, issued an order[13] the
dispositive portion of which reads:
"Wherefore, the parties and the following banks concerned herein under enumerated are hereby
ordered to comply strictly with this order and to produce and submit to the special administrators ,
through this Honorable Court within (5) five days from receipt of this order their respective records of
the savings/current accounts/time deposits and other deposits in the names of Pastor Lim and/or
corporations above-mentioned, showing all the transactions made or done concerning savings
/current accounts from January 1994 up to their receipt of this court order.
XXX XXX XXX
SO ORDERED."
Private respondent filed a special civil action for certiorari[14], with an urgent prayer for a restraining order or writ of
preliminary injunction, before the Court of Appeals questioning the orders of the Regional Trial Court, sitting as a
probate court.
On 18 April 1996, the Court of Appeals, finding in favor of herein private respondents, rendered the assailed
decision[15], the decretal portion of which declares:
"Wherefore, premises considered, the instant special civil action for certiorari is hereby granted, The
impugned orders issued by respondent court on July 4,1995 and September 12, 1995 are hereby
nullified and set aside. The impugned order issued by respondent on September 15, 1995 is nullified
insofar as petitioner corporations" bank accounts and records are concerned.
SO ORDERED."
Through the expediency of Rule 45 of the Rules of Court, herein petitioner Rufina Luy Lim now comes before us with
a lone assignment of error[16]:
"The respondent Court of Appeals erred in reversing the orders of the lower court which merely
allowed the preliminary or provisional inclusion of the private respondents as part of the estate of the
late deceased (sic) Pastor Y. Lim with the respondent Court of Appeals arrogating unto itself the
power to repeal, to disobey or to ignore the clear and explicit provisions of Rules 81,83,84 and 87 of
 the Rules of Court and thereby preventing the petitioner, from performing her duty as special
administrator of the estate as expressly provided in the said Rules."
Petitioners contentions tread on perilous grounds.
In the instant petition for review, petitioner prays that we affirm the orders issued by the probate court which were
subsequently set aside by the Court of Appeals.
Yet, before we delve into the merits of the case, a review of the rules on jurisdiction over probate proceedings is
indeed in order.
The provisions of Republic Act 7691[17], which introduced amendments to Batas Pambansa Blg. 129, are pertinent:
"Section 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary
Reorganization Act of 1980", is hereby amended to read as follows:
Section 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive jurisdiction:
xxx xxx xxx
(4) In all matters of probate, both testate and intestate, where the gross value of the estate exceeds
One Hundred Thousand Pesos (P100,000) or, in probate matters in Metro Manila, where such gross
value exceeds Two Hundred Thousand Pesos (P200,000);
xxx xxx xxx
Section 3. Section 33 of the same law is hereby amended to read as follows:
Section 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in Civil Cases.-Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts shall exercise:
1. Exclusive original jurisdiction over civil actions and probate proceedings, testate
and intestate, including the grant of provisional remedies in proper cases, where the
value of the personal property, estate or amount of the demand does not exceed One
Hundred Thousand Pesos(P100,000) or, in Metro Manila where such personal
property, estate or amount of the demand does not exceed Two Hundred Thousand
Pesos (P200,000), exclusive of interest, damages of whatever kind, attorneys fees,
litigation expenses and costs, the amount of which must be specifically alleged,
Provided, that interest, damages of whatever kind, attorneys, litigation expenses and
costs shall be included in the determination of the filing fees, Provided further, that
where there are several claims or causes of actions between the same or different
parties, embodied in the same complaint, the amount of the demand shall be the
totality of the claims in all the causes of action, irrespective of whether the causes of
action arose out of the same or different transactions;
xxx xxx xxx"
Simply put, the determination of which court exercises jurisdiction over matters of probate depends upon the gross
value of the estate of the decedent.
As to the power and authority of the probate court, petitioner relies heavily on the principle that a probate court may
pass upon title to certain properties, albeit provisionally, for the purpose of determining whether a certain property
should or should not be included in the inventory.
In a litany of cases, We defined the parameters by which the court may extend its probing arms in the determination of
the question of title in probate proceedings.
This Court, in PASTOR, JR. vs. COURT OF APPEALS,[18] held:
"X X X As a rule, the question of ownership is an extraneous matter which the probate court cannot
resolve with finality. Thus, for the purpose of determining whether a certain property should or should
not be included in the inventory of estate properties, the Probate Court may pass upon the title
thereto, but such determination is provisional, not conclusive, and is subject to the final decision in a
separate action to resolve title."
We reiterated the rule in PEREIRA vs. COURT OF APPEALS[19]:
"X X X The function of resolving whether or not a certain property should be included in the inventory
or list of properties to be administered by the administrator is one clearly within the competence of the
probate court. However, the courts determination is only provisional in character, not conclusive, and
is subject to the final decision in a separate action which may be instituted by the parties."
Further, in MORALES vs. CFI OF CAVITE[20] citing CUIZON vs. RAMOLETE[21], We made an exposition on the
probate courts limited jurisdiction:
"It is a well-settled rule that a probate court or one in charge of proceedings whether testate or
intestate cannot adjudicate or determine title to properties claimed to be a part of the estate and which
are equally claimed to belong to outside parties. All that the said court could do as regards said
properties is to determine whether they should or should not be included in the inventory or list of
properties to be administered by the administrator. If there is no dispute, well and good; but if there is,
then the parties, the administrator and the opposing parties have to resort to an ordinary action for a
final determination of the conflicting claims of title because the probate court cannot do so."
Again, in VALERA vs. INSERTO[22], We had occasion to elucidate, through Mr. Justice Andres Narvasa [23]:
"Settled is the rule that a Court of First Instance (now Regional Trial Court), acting as a probate court,
exercises but limited jurisdiction, and thus has no power to take cognizance of and determine the
issue of title to property claimed by a third person adversely to the decedent, unless the claimant and
all other parties having legal interest in the property consent, expressly or impliedly, to the submission
 of the question to the probate court for adjudgment, or the interests of third persons are not thereby
prejudiced, the reason for the exception being that the question of whether or not a particular matter
should be resolved by the court in the exercise of its general jurisdiction or of its limited jurisdiction as
a special court (e.g. probate, land registration, etc.), is in reality not a jurisdictional but in essence of
procedural one, involving a mode of practice which may be waived. x x x
x x x. These considerations assume greater cogency where, as here, the Torrens title is not in
the decedents name but in others, a situation on which this Court has already had occasion to
rule x x x."(emphasis Ours)
Petitioner, in the present case, argues that the parcels of land covered under the Torrens system and registered in the
name of private respondent corporations should be included in the inventory of the estate of the decedent Pastor Y.
Lim, alleging that after all the determination by the probate court of whether these properties should be included or
not is merely provisional in nature, thus, not conclusive and subject to a final determination in a separate action
brought for the purpose of adjudging once and for all the issue of title.
Yet, under the peculiar circumstances, where the parcels of land are registered in the name of private respondent
corporations, the jurisprudence pronounced in BOLISAY vs., ALCID[24] is of great essence and finds applicability, thus:
"It does not matter that respondent-administratrix has evidence purporting to support her claim of
ownership, for, on the other hand, petitioners have a Torrens title in their favor, which under the law is
endowed with incontestability until after it has been set aside in the manner indicated in the law itself,
which, of course, does not include, bringing up the matter as a mere incident in special proceedings
for the settlement of the estate of deceased persons. x x x"
"x x x. In regard to such incident of inclusion or exclusion, We hold that if a property covered by
Torrens title is involved, the presumptive conclusiveness of such title should be given due weight, and
in the absence of strong compelling evidence to the contrary, the holder thereof should be considered
as the owner of the property in controversy until his title is nullified or modified in an appropriate
ordinary action, particularly, when as in the case at bar, possession of the property itself is in the
persons named in the title. x x x"
A perusal of the records would reveal that no strong compelling evidence was ever presented by petitioner to bolster
her bare assertions as to the title of the deceased Pastor Y. Lim over the properties. Even so, P.D. 1529, otherwise
known as, " The Property Registration Decree", proscribes collateral attack on Torrens Title, hence:
"xxx xxx xxx
Section 48. Certificate not subject to collateral attack.
- A certificate of title shall not be subject to collateral attack. It cannot be altered, modified or cancelled
except in a direct proceeding in accordance with law."
In CUIZON vs. RAMOLETE, where similarly as in the case at bar, the property subject of the controversy was duly
registered under the Torrens system, We categorically stated:
"x x x Having been apprised of the fact that the property in question was in the possession of third
parties and more important, covered by a transfer certificate of title issued in the name of such third
parties, the respondent court should have denied the motion of the respondent administrator and
excluded the property in question from the inventory of the property of the estate. It had no authority
to deprive such third persons of their possession and ownership of the property. x x x"
Inasmuch as the real properties included in the inventory of the estate of the late Pastor Y. Lim are in the possession
of and are registered in the name of private respondent corporations, which under the law possess a personality
separate and distinct from their stockholders, and in the absence of any cogency to shred the veil of corporate fiction,
the presumption of conclusiveness of said titles in favor of private respondents should stand undisturbed.
Accordingly, the probate court was remiss in denying private respondents motion for exclusion. While it may be true
that the Regional Trial Court, acting in a restricted capacity and exercising limited jurisdiction as a probate court, is
competent to issue orders involving inclusion or exclusion of certain properties in the inventory of the estate of the
decedent, and to adjudge, albeit, provisionally the question of title over properties, it is no less true that such authority
conferred upon by law and reinforced by jurisprudence, should be exercised judiciously, with due regard and caution
to the peculiar circumstances of each individual case.
Notwithstanding that the real properties were duly registered under the Torrens system in the name of private
respondents, and as such were to be afforded the presumptive conclusiveness of title, the probate court obviously
opted to shut its eyes to this gleamy fact and still proceeded to issue the impugned orders.
By its denial of the motion for exclusion, the probate court in effect acted in utter disregard of the presumption of
conclusiveness of title in favor of private respondents. Certainly, the probate court through such brazen act
transgressed the clear provisions of law and infringed settled jurisprudence on this matter.
Moreover, petitioner urges that not only the properties of private respondent corporations are properly part of the
decedents estate but also the private respondent corporations themselves. To rivet such flimsy contention, petitioner
cited that the late Pastor Y. Lim during his lifetime, organized and wholly-owned the five corporations, which are the
private respondents in the instant case.[25] Petitioner thus attached as Annexes "F"[26] and "G"[27] of the petition for
review affidavits executed by Teresa Lim and Lani Wenceslao which among others, contained averments that the
incorporators of Uniwide Distributing, Inc. included on the list had no actual participation in the organization and
incorporation of the said corporation. The affiants added that the persons whose names appeared on the articles of
incorporation of Uniwide Distributing, Inc., as incorporators thereof, are mere dummies since they have not actually
contributed any amount to the capital stock of the corporation and have been merely asked by the late Pastor Y. Lim to
affix their respective signatures thereon.
It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing it. It
may not generally be held liable for that of the persons composing it. It may not be held liable for the personal
indebtedness of its stockholders or those of the entities connected with it. [28]
Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its
stockholders or members. In the same vein, a corporation by legal fiction and convenience is an entity shielded by a
protective mantle and imbued by law with a character alien to the persons comprising it.
Nonetheless, the shield is not at all times invincible. Thus, in FIRST PHILIPPINE INTERNATIONAL BANK vs.
COURT OF APPEALS[29], We enunciated:
"x x x When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals. x x x"
Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly
separate one, were it not for the existing corporate fiction. [30]
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of
a person or of another corporation. Where badges of fraud exist, where public convenience is defeated; where a
wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught. [31]
Further, the test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1)
Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal right; and (3) The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of. The absence of any of these elements prevent "piercing the corporate veil". [32]
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities. [33]
Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and
convincingly established. It cannot be presumed.[34]
Granting arguendo that the Regional Trial Court in this case was not merely acting in a limited capacity as a probate
court, petitioner nonetheless failed to adduce competent evidence that would have justified the court to impale the veil
of corporate fiction. Truly, the reliance reposed by petitioner on the affidavits executed by Teresa Lim and Lani
Wenceslao is unavailing considering that the aforementioned documents possess no weighty probative value pursuant
to the hearsay rule. Besides it is imperative for us to stress that such affidavits are inadmissible in evidence inasmuch
as the affiants were not at all presented during the course of the proceedings in the lower court. To put it differently, for
this Court to uphold the admissibility of said documents would be to relegate from Our duty to apply such basic rule of
evidence in a manner consistent with the law and jurisprudence.
Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs. LEONIDAS[35] finds pertinence:
"Affidavits are classified as hearsay evidence since they are not generally prepared by the affiant but
by another who uses his own language in writing the affiants statements, which may thus be either
omitted or misunderstood by the one writing them. Moreover, the adverse party is deprived of the
opportunity to cross-examine the affiants. For this reason, affidavits are generally rejected for being
hearsay, unless the affiant themselves are placed on the witness stand to testify thereon."
As to the order[36] of the lower court, dated 15 September 1995, the Court of Appeals correctly observed that the
Regional Trial Court, Branch 93 acted without jurisdiction in issuing said order; The probate court had no authority to
demand the production of bank accounts in the name of the private respondent corporations.
WHEREFORE, in view of the foregoing disquisitions, the instant petition is hereby DISMISSED for lack of merit and
the decision of the Court of Appeals which nullified and set aside the orders issued by the Regional Trial Court, Branch
93, acting as a probate court, dated 04 July 1995 and 12 September 1995 is AFFIRMED.
SO ORDERED.

G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and set
aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing
a writ of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order
dated October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law. Meanwhile,
respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic
corporations, likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing
business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of US$300,000.00
secured by real estate mortgages constituted over four (4) parcels of land in Makati City. This credit facility was later
increased successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996; to
US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made
repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the
real estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the
real estate mortgages and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at
the Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order before the Regional Trial Court of Makati. The Executive Judge of the
Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the case was raffled to
Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on June 8, 1999. At the hearing of
the application for preliminary injunction, petitioner was given a period of seven days to file its written opposition to the
application. On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction to
which the respondents filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between the petitioner and respondents. On June 30, 1999, the
trial court judge issued an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly
issued on July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of
merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of preliminary injunction
before the Court of Appeals. In the impugned decision, 1 the appellate court dismissed the petition. Petitioner thus
seeks recourse to this Court and raises the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO, CONSIDERING
THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER,
WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO ENFORCE
AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS OR LACK
OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN
THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101 SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's Orders dated
June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the instant case. 3
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two separate
entities, petitioner is still the party-in-interest in the application for preliminary injunction because it is tasked to commit
acts of foreclosing respondents' properties.4 Respondents maintain that the entire credit facility is void as it contains
stipulations in violation of the principle of mutuality of contracts. 5 In addition, respondents justified the act of the court a
quo in applying the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter
ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE
DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED UPON MAY
BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST
SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY
LAW OR BY THE MONETARY BOARD.7
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure and
eventual sale of the property in order to protect their rights to said property by reason of void credit facilities as bases
for the real estate mortgage over the said property.8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint,
respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia,
foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, herein petitioner
is an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate
mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the party to
the loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents
in their complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid
by them in accordance with the terms and conditions in the documents evidencing the credit facilities, and crediting
the amount previously paid to PNB by herein respondents. 9
Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the
contract. Respondents, therefore, do not have any cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned subsidiary of
defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL. 10In justifying its
ruling, the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may be
disregarded where a corporation is the mere alter ego, or business conduit of a person or where the corporation is so
organized and controlled and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. 13The
mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their
being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their
respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate
entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court disregarded
the separate existence of the parent and the subsidiary on the ground that the latter was formed merely for the
purpose of evading the payment of higher taxes. In the case at bar, respondents fail to show any cogent reason why
the separate entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have been identified that will justify the application of the
treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway Co.14is
enlightening. The case involved a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car
Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern
Railway Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the
latter corporation was but a mere instrumentality of the former. The Tennessee Supreme Court stated that as a
general rule the stock ownership alone by one corporation of the stock of another does not thereby render the
dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a
mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant
corporation. Said Court then outlined the circumstances which may be useful in the determination of whether the
subsidiary is but a mere instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite
variations of fact that can arise but there are certain common circumstances which are important and which, if present
in the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets except those
conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its business or financial responsibility is referred to as the parent
corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their
orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock of
Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation
is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of piercing the
veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and, unjust act in contravention of plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or
"alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the
individual defendant's relationship to the operation. 17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative
factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration
that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore,
the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the
case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit
against an agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of
Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no
final determination can be had, an action shall be joined either as plaintiffs or defendants." 19 In the case at bar, the
injunction suit is directed only against the agent, not the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct
to the main suit.20 A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a
litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal
action. The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ. Further,
there is no showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of
Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted when it is
established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the
commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either
for a limited period or perpetually,
(b) That the commission, continuance or non-performance of the acts or acts complained of during the litigation would
probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to
be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or
proceeding, and tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation. 21 Respondents do not deny their
indebtedness. Their properties are by their own choice encumbered by real estate mortgages. Upon the non-payment
of the loans, which were secured by the mortgages sought to be foreclosed, the mortgaged properties are properly
subject to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the contract only when
petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to prove that they have a right
protected and that the acts against which the writ is to be directed are violative of said right. 22The Court is not
unmindful of the findings of both the trial court and the appellate court that there may be serious grounds to nullify the
provisions of the loan agreement. However, as earlier discussed, respondents committed the mistake of filing the case
against the wrong party, thus, they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract the
provisions of which respondents seek to declare void. Accordingly, the case before the Regional Trial Court must be
dismissed and the preliminary injunction issued in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is
hereby REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of the Regional Trial Court of Makati,
Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said case
DISMISSED.
SO ORDERED.

Ryuichi Yamamoto vs. Nishino Leather Industries, Inc. and Ikuo Nishino
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under Philippine laws
Wako Enterprises Manila, Incorporated (WAKO), a corporation engaged principally in leather tanning, now known as
Nishino Leather Industries, Inc. (NLII), one of herein respondents.

In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a Japanese national, forged a
Memorandum of Agreement under which they agreed to enter into a joint venture wherein Nishino would acquire such
number of shares of stock equivalent to 70% of the authorized capital stock of WAKO.
 Eventually, Nishino and his brother[1] Yoshinobu Nishino (Yoshinobu) acquired more than 70% of the
authorized capital stock of WAKO, reducing Yamamotos investment therein to, by his claim, 10%, [2] less than 10%
according to Nishino.[3]

The corporate name of WAKO was later changed to, as reflected earlier, its current name NLII.

Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino who would buy-out the
shares of stock of Yamamoto. In the course of the negotiations, Yoshinobu and Nishinos counsel Atty. Emmanuel G.
Doce (Atty. Doce) advised Yamamoto by letter dated October 30, 1991, the pertinent portions of which follow:

Hereunder is a simple memorandum of the subject matters discussed with me by Mr.

Yoshinobu Nishino yesterday, October 29th, based on the letter of Mr. Ikuo Nishino from Japan, and
which I am now transmitting to you.[4]

xxxx

12. Machinery and Equipment:

The following machinery/equipment have been contributed by you to the company:

Splitting machine - 1 unit

Samming machine - 1 unit
Forklift - 1 unit
Drums - 4 units
Toggling machine - 2 units

Regarding the above machines, you may take them out with you (for your own use and sale) if you
want, provided, the value of such machines is deducted from your and Wakos capital
contributions, which will be paid to you.

Kindly let me know of your comments on all the above, soonest.

x x x x[5] (Emphasis and underscoring supplied)

On the basis of such letter, Yamamoto attempted to recover the machineries and equipment which were, by
Yamamotos admission, part of his investment in the corporation, [6] but he was frustrated by respondents, drawing
Yamamoto to file on January 15, 1992 before the Regional Trial Court (RTC) of Makati a complaint[7] against them for
replevin.

Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a bond. [8]

In their Answer with Counterclaim,[9] respondents claimed that the machineries and equipment subject
of replevin form part of Yamamotos capital contributions in consideration of his equity in NLII and should thus be
treated as corporate property; and that the above-said letter of Atty. Doce to Yamamoto was merely a
proposal, conditioned on [Yamamotos] sell-out to . . . Nishino of his entire equity,[10] which proposal was yet to be
authorized by the stockholders and Board of Directors of NLII.

By way of Counterclaim, respondents, alleging that they suffered damage due to the seizure via the
implementation of the writ of replevin over the machineries and equipment, prayed for the award to them of moral and
exemplary damages, attorneys fees and litigation expenses, and costs of suit.

The trial court, by Decision of June 9, 1995, decided the case in favor of Yamamoto, [11] disposing thus:

WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the rightful owner and
possessor of the machineries in question, and making the writ of seizure permanent; (2) ordering
defendants to pay plaintiff attorneys fees and expenses of litigation in the amount of Fifty Thousand
Pesos (P50,000.00), Philippine Currency; (3) dismissing defendants counterclaims for lack of merit;
and (4) ordering defendants to pay the costs of suit.

SO ORDERED.[12] (Underscoring supplied)

On appeal,[13] the Court of Appeals held in favor of herein respondents and accordingly reversed the RTC
decision and dismissed the complaint.[14] In so holding, the appellate court found that the machineries and equipment
claimed by Yamamoto are corporate property of NLII and may not thus be retrieved without the authority of the NLII
Board of Directors;[15] and that petitioners argument that Nishino and Yamamoto cannot hide behind the shield of
corporate fiction does not lie,[16] nor does petitioners invocation of the doctrine of promissory estoppel. [17] At the same
time, the Court of Appeals found no ground to support respondents Counterclaim. [18]

The Court of Appeals having denied[19] his Motion for Reconsideration,[20] Yamamoto filed the present petition,
[21]
faulting the Court of Appeals

A.

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE PIERCED IN THE
CASE AT BAR.

B.

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES NOT APPLY TO

THE CASE AT BAR.

C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEYS FEES.[22]

The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty. Doce that
Yamamoto may retrieve the machineries and equipment, which admittedly were part of his investment, bound the
corporation. The Court holds in the negative.

Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the corporation,
he cannot bind the latter. Under the Corporation Law, unless otherwise provided, corporate powers are exercised by
the Board of Directors.[23]

Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:

During the negotiations, the issue as to the ownership of the Machiner[ies] never came
up. Neither did the issue on the proper procedure to be taken to execute the complete take-over of the
Company come up since Ikuo, Yoshinobu, and Yamamoto were the owners thereof, the presence of
other stockholders being only for the purpose of complying with the minimum requirements of the law.

What course of action the Company decides to do or not to do depends not on the other
members of the Board of Directors. It depends on what Ikuo and Yoshinobu decide. The
Company is but a mere instrumentality of Ikuo [and] Yoshinobu.[24]

xxxx
x x x The Company hardly holds board meetings. It has an inactive board, the directors are
directors in name only and are there to do the bidding of the Nish[i]nos, nothing more. Its minutes are
paper minutes. x x x [25]

xxxx

The fact that the parties started at a 70-30 ratio and Yamamotos percentage declined to 10%
does not mean the 20% went to others. x x x The 20% went to no one else but Ikuo himself.x x
x Yoshinobu is the younger brother of Ikuo and has no say at all in the business. Only Ikuo
makes the decisions. There were, therefore, no other members of the Board who have not
given their approval.[26] (Emphasis and underscoring supplied)

While the veil of separate corporate personality may be pierced when the corporation is merely an adjunct, a
business conduit, or alter ego of a person,[27] the mere ownership by a single stockholder of even all or nearly all of the
capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. [28]

The elements determinative of the applicability of the doctrine of piercing the veil of corporate fiction follow:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
 2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of the plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents piercing the corporate veil. In
applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form,
with how the corporation operated and the individual defendants relationship to that operation.
[29]
(Italics in the original; emphasis and underscoring supplied)

In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or
unjust act in contravention of a plaintiffs legal rights must be clearly and convincingly established; it cannot be
presumed.[30] Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does
not apply.[31]

In the case at bar, there is no showing that Nishino used the separate personality of NLII to unjustly act or do
wrong to Yamamoto in contravention of his legal rights.

Yamamoto argues, in another vein, that promissory estoppel lies against respondents, thus:

Under the doctrine of promissory estoppel, x x x estoppel may arise from the making of a
promise, even though without consideration, if it was intended that the promise should be relied upon
and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice.

x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this purpose
negotiations were had between the parties. Having expressly given Yamamoto, through the Letter and
through a subsequent meeting at the Manila Peninsula where Ikuo himself confirmed that Yamamoto
may take out the Machinery from the Company anytime, respondents should not be allowed to turn
around and do the exact opposite of what they have represented they will do.

In paragraph twelve (12) of the Letter, Yamamoto was expressly advised that he could take
out the Machinery if he wanted to so, provided that the value of said machines would be deducted
from his capital contribution x x x.

xxxx

Respondents cannot now argue that they did not intend for Yamamoto to rely upon the
Letter. That was the purpose of the Letter to begin with. Petitioner[s] in fact, relied upon said Letter
and such reliance was further strengthened during their meeting at the Manila Peninsula.

To sanction respondents attempt to evade their obligation would be to sanction the

perpetration of fraud and injustice against petitioner.[32] (Underscoring supplied)

It bears noting, however, that the aforementioned paragraph 12 of the letter is followed by a request for
Yamamoto to give his comments on all the above, soonest.[33]

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his acceptance. Without
acceptance, a mere offer produces no obligation. [34]
Thus, under Article 1181 of the Civil Code, [i]n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition. In the case at bar, there is no showing of compliance with the condition for allowing Yamamoto to take the
machineries and equipment, namely, his agreement to the deduction of their value from his capital contribution due
him in the buy-out of his interests in NLII. Yamamotos allegation that he agreed to the condition [35] remained just that,
no proof thereof having been presented.

The machineries and equipment, which comprised Yamamotos investment in NLII, [36] thus remained part of the
capital property of the corporation.[37]

It is settled that the property of a corporation is not the property of its stockholders or members. [38] Under
the trust fund doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors which are preferred over the stockholders in the distribution of corporate assets.
[39]
The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation unless the indispensable conditions and procedures for the
protection of corporate creditors are followed.[40]

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.
G.R. No. 153886 January 14, 2004
MEL V. VELARDE, petitioner,
vs.
LOPEZ, INC., respondent.
DECISION
CARPIO-MORALES, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court, which seeks to review the decision 1 and
resolution2 of the Court of Appeals, raises the issue of whether the defendant in a complaint for collection of sum of
money can raise a counterclaim for retirement benefits, unpaid salaries and incentives, and other benefits arising from
services rendered by him in a subsidiary of the plaintiff corporation.
On January 6, 1997, Eugenio Lopez Jr., then President of respondent Lopez, Inc., as LENDER, and petitioner Mel
Velarde, then General Manager of Sky Vision Corporation (Sky Vision), a subsidiary of respondent, as BORROWER,
forged a notarized loan agreement covering the amount of ten million (P10,000,000.00) pesos. The agreement
expressly provided for, among other things, the manner of payment and the circumstances constituting default which
would give the lender the right to declare the loan together with accrued interest immediately due and payable. 3
Sec. 6 of the agreement detailed what constituted an "event of default" as follows:
Section 6
Each of the following events and occurrences shall constitute an Event of Default ("Event of Default") under this
Agreement:
a) the BORROWER fails to make payment when due and payable of any amount he is obligated to pay under this
Agreement;
b) the BORROWER fails to mortgage in favor of the LENDER real property sufficient to cover the amount of the
LOAN.4
As petitioner failed to pay the installments as they became due, respondent, apparently in answer to a proposal of
petitioner respecting the settlement of the loan, advised him by letter dated July 15, 1998 that he may use his
retirement benefits in Sky Vision in partial settlement of his loan after he settles his accountabilities to the latter and
gives his written instructions to it (Sky Vision).5
Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting that the imputed unliquidated
advances from Sky Vision had already been properly liquidated. 6
On August 18, 1998, respondent filed a complaint for collection of sum of money with damages at the Regional Trial
Court (RTC) of Pasig City against petitioner, alleging that petitioner violated the above-quoted Section 6 of the loan
agreement as he failed to put up the needed collateral for the loan and pay the installments as they became due, and
that despite his receipt of letters of demand dated December 1, 1997 7 and January 13, 1998,8he refused to pay.
In his answer, petitioner alleged that the loan agreement did not reflect his true agreement with respondent, it being
merely a "cover document" to evidence the reward to him of ten million pesos (P10,000,000.00) for his loyalty and
excellent performance as General Manager of Sky Vision and that the payment, if any was expected, was in the form
of continued service; and that it was when he was compelled by respondent to retire that the form of payment agreed
upon was rendered impossible, prompting the late Eugenio Lopez, Jr. to agree that his retirement benefits from Sky
Vision would instead be applied to the loan.9
By way of compulsory counterclaim, petitioner claimed that he was entitled to retirement benefits from Sky Vision in
the amount of P98,280,000.00, unpaid salaries in the amount of P2,740,000.00, unpaid incentives in the amount of
P500,000, unpaid share from the "net income of Plaintiff corporation," equity in his service vehicle in the amount of
P1,500,000, reasonable return on the stock ownership plan for services rendered as General Manager, and moral
damages and attorneys fees.10
Petitioner thus prayed for the dismissal of the complaint and the award of the following sums of money in the form of
compulsory counterclaims:
1. P103,020,000.00, PLUS the value of Defendants stock options and unpaid share from the net income with Plaintiff
corporation (to be computed) as actual damages;
2. P15,000,000.00, as moral damages; and
3. P1,500,000.00, as attorneys fees plus appearance fees and the costs of suit. 11
Respondent filed a manifestation and a motion to dismiss the counterclaim for want of jurisdiction, which drew
petitioner to assert in his comment and opposition thereto that the veil of corporate fiction must be pierced to hold
respondent liable for his counterclaims.
By Order of January 3, 2000, Branch 155 of the RTC of Pasig denied respondents motion to dismiss the counterclaim
on the following premises: A counterclaim being essentially a complaint, the principle that a motion to dismiss
hypothetically admits the allegations of the complaint is applicable; the counterclaim is compulsory, hence, within its
jurisdiction; and there is identity of interest between respondent and Sky Vision to merit the piercing of the veil of
corporate fiction.12
Respondents motion for reconsideration of the trial courts Order of January 3, 2000 having been denied, it filed a
Petition for Certiorari at the Court of Appeals which held that respondent is not the real party-in-interest on the
counterclaim and that there was failure to show the presence of any of the circumstances to justify the application of
the principle of "piercing the veil of corporate fiction." The Orders of the trial court were thus set aside and the
counterclaims of petitioner were accordingly dismissed.13
The Court of Appeals having denied petitioners motion for reconsideration, the instant Petition for Review was filed
which assigns the following errors:
I.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE RTC BRANCH 155
ALLEGEDLY ACTED WITH GRAVE ABUSE OF DISCRETION IN ISSUING THE ORDERS DATED
JANUARY 3, 2000 AND OCTOBER 9, 2000 CONSIDERING THAT THE GROUNDS RAISED BY
RESPONDENT LOPEZ, INC. IN ITS PETITION FOR CERTIORARI INVOLVED MERE ERRORS OF
JUDGMENT AND NOT ERRORS OF JURISDICTION.
II.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENT LOPEZ, INC. IS
NOT THE REAL PARTY-IN-INTEREST AS PARTY-DEFENDANT ON THE COUNTERCLAIMS OF
PETITIONER VELARDE CONSIDERING THAT THE FILING OF RESPONDENT LOPEZ, INC.S
MANIFESTATION AND MOTION TO DISMISS COUNTERCLAIM HAD THE EFFECT OF
HYPOTHETICALLY ADMITTING THE TRUTH OF THE MATERIAL AVERMENTS OF THE ANSWER,
WHICH MATERIAL AVERMENTS SUFFICIENTLY ALLEGED THAT RESPONDENT LOPEZ, INC.
COMMITTED ACTS WHICH SHOW THAT ITS SUBSIDIARY, SKY VISION, WAS A MERE BUSINESS
CONDUIT OR ALTER EGO OF THE FORMER, THUS, JUSTIFYING THE PIERCING OF THE VEIL
OF CORPORATE FICTION.
III.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE COUNTERCLAIMS OF
PETITIONER VELARDE ARE NOT COMPULSORY.14
While petitioner correctly invokes the ruling in Atienza v. Court of Appeals15 to postulate that not every denial of a
motion to dismiss can be corrected by certiorari under Rule 65 and that, as a general rule, the remedy from such
denial is to appeal in due course after a decision has been rendered on the merits, there are exceptions thereto, as
when the court in denying the motion to dismiss acted without or in excess of jurisdiction or with patent grave abuse of
discretion,16 or when the assailed interlocutory order is patently erroneous and the remedy of appeal would not afford
adequate and expeditious relief,17 or when the ground for the motion to dismiss is improper venue, 18 res judicata,19 or
lack of jurisdiction20 as in the case at bar.
Early on, it bears noting, when the case was still with the trial court, respondent filed a motion to dismiss the
counterclaims to assail its jurisdiction, respondent asserting that the counterclaims, being money claims arising from
a labor relationship, are within the exclusive competence of the National Labor Relations Commission. 21 On the other
hand, petitioner alleged that due to the tortuous manner he was coerced into retirement, it is the Regional Trial Courts
(RTCs) and not the National Labor Relations Commission which has exclusive jurisdiction over his counterclaims.
In determining which has jurisdiction over a case, the averments of the complaint/counterclaim, taken as a whole, are
considered.22 In his counterclaim, petitioner alleged that:
xxx
29. It was only on July 15, 1998 that Lopez, Inc. submitted a computation of the retirement benefit due to the
Defendant. (Copy attached as ANNEX 4). Immediately after receiving this computation, Defendant immediately
informed Plaintiff of the erroneous figure used as salary in the computation of benefits. This was done in a telephone
conversation with a certain Atty. Amina Amado of Lopez, Inc.
29.1 The Defendant also informed her that the so called "unliquidated advances amounting to P422,922.87 since
1995" had all been properly liquidated as reflected in all the reports of the company. The Defendant reminded Atty.
Amado of unpaid incentives and salaries for 1997.
29.2 Defendant likewise informed Plaintiff that the one month for every year of service as a basis for the
computation of the Defendants retirement benefit is erroneous. This computation is even less than what the rank and
file employees get. That CEOs, COOs and senior executives of the level of ABS-CBN, Sky Vision, Benpres, Meralco
and other Lopez companies had and have received a lot more than the regular rank and file employees. All these
retired executives and records can be summoned for verification.
29.3 The circumstances of the retirement of the Defendant are not those for a simple and ordinary rank and file
employee. Mr. Lopez, III admitted that he and the Defendant have had problems which accumulated through time and
that they chose to part ways in a manner that was dignified for both of them. Treating the Defendant as a rank and file
employee is hardly dignified not just to the Defendant but also to the Lopezes whose existing executives serving them
will draw lessons from the Defendants experience.
29.4 These circumstances hardly reflect a simple retirement. The Defendant, who is known in the local and
international media community, is hardly considered a rank and file employee. Defendant was a stockholder of the
Corporation and a duly-elected member of the Board of Directors. Certain government officials can attest to the
sensitivity of issues and matters the Defendant had represented for the Lopezes that are hardly issues handled by a
simple rank and file employee. Respectable individuals in government and industry are willing to testify to this regard.x
x x23 (Underscoring and italics supplied).
At the heart of petitioners counterclaim is his alleged forced retirement which is also the basis of his claim for, among
other things, unpaid salaries, unpaid incentives, reasonable return on the stock ownership plan, and other benefits
from a subsidiary company of the respondent.
Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) applies to a corporate officers
dismissal. For a corporate officers dismissal is always a corporate act and/or an intra-corporate controversy and that
its nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action. 24
With regard to petitioners claim for unpaid salaries, unpaid share in net income, reasonable return on the stock
ownership plan and other benefits for services rendered to Sky Vision, jurisdiction thereon pertains to the Securities
Exchange Commission even if the complaint by a corporate officer includes money claims since such claims are
actually part of the prerequisite of his position and, therefore, interlinked with his relations with the corporation. 25 The
question of remuneration involving a person who is not a mere employee but a stockholder and officer of the
corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and
management, and is in fact a corporate controversy in contemplation of the Corporation Code. 26
While petitioners counterclaims were filed on December 1, 1998, the second challenged order of the trial court
denying respondents motion for reconsideration of the denial of its motion to dismiss was issued on October 9, 2000
at which time P.D. 902-A had been amended by R.A. 8799 (approved on July 19, 2000) which mandated the transfer
of jurisdiction over intra-corporate controversies, subject of the counterclaims, to RTCs.
But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing thereof against respondent is
improper, it not being the real party-in-interest, for it is petitioners employer Sky Vision, respondents subsidiary.
It cannot be gainsaid that a subsidiary has an independent and separate juridical personality, distinct from that of its
parent company, hence, any claim or suit against the latter does not bind the former and vice versa.
Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing the veil of corporate fiction.
Piercing the veil of corporate fiction is warranted, however, only in cases when the separate legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the
law will regard the corporations as merged into one.27 The rationale behind piercing a corporations identity is to
remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. 28
In applying the doctrine of piercing the veil of corporate fiction, the following requisites must be established: (1)
control, not merely majority or complete stock control; (2) such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in
contravention of plaintiffs legal rights; and (3) the aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.29
Nowhere, however, in the pleadings and other records of the case can it be gathered that respondent has complete
control over Sky Vision, not only of finances but of policy and business practice in respect to the transaction attacked,
so that Sky Vision had at the time of the transaction no separate mind, will or existence of its own. The existence of
interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate
fiction in the absence of fraud or other public policy considerations.
This Court is thus not convinced that the real party-in-interest with regard to the counterclaim for damages arising from
the alleged tortuous manner by which petitioner was forced to retire as General Manager of Sky Vision is respondent.
Petitioner muddles the issues by arguing that respondent fraudulently took advantage of the control over the matter of
compensation and benefits of an employee of Sky Vision to deceive petitioner into signing the loan agreement on the
misleading assurance that it was merely for the purpose of documenting the reward to him of ten million pesos. This
argument does not persuade. Petitioner, being a lawyer, is presumed to know the legal and binding effects of loan
agreements.
It bears emphasis that Sky Visions involvement in the transaction subject of the case sprang only after a proposal was
apparently proffered by petitioner that his retirement benefits from Sky Vision be used in partial payment of his loan
from respondent as gathered from the July 15, 1998 letter 30 of Rommel Duran, Vice-President and General Manager
of respondent, to petitioner reading:
Dear Mr. Velarde:
As requested, we have made computations on the outstanding amount of your loan with Lopez, Inc. should your
retirement benefits from Sky Vision Corporation/Central CATV, Inc. ""Sky/Central") be applied to the partial payment of
your loan. Please note that in order to effect the application of your retirement benefits to the partial payment of your
loan, you will need to give Sky/Central written instructions on the same in the soonest possible time.
As you will see in the attached computation, the amount of P4,077,077.13 will be applied to the payment of your loan
to retroact on January 1, 1998. The amount of P422,922.87, representing unliquidated advances made by Sky/Central
to you (see attached listing), has been deducted from your retirement pay of P4.5 million. Should you be able
to liquidate the advances as requested by Sky/Central, the said amount will be applied to the partial payment of your
loan and we shall adjust the amount of principal and interest due from you accordingly. After the application of the
amount of P4,077,077.13 to the partial payment of your loan, the amount of P7,585,912.86 will be immediately due
and demandable. The amount of P7,585,912.86 represents the outstanding principal and interest due as of July 15,
1998.
Without the application of your retirement benefits to the partial payment of your loan, the amount of P11,850,000.00 is
due as of July 15, 1998. We reiterate our demand for full payment of your outstanding obligation immediately.
(Underscoring supplied)
As for the trial courts ruling that the agreement to set-off is an amendment of the loan agreement resulting to an
identity of interest between respondent and Sky Vision and, therefore, sufficient to pierce the veil of corporate fiction, it
is untenable. The abovequoted letter is clear that, to effect a set-off, it is a condition sine qua non that the approval
thereof by "Sky/Central" must be obtained, and that petitioner liquidate his advances from Sky Vision. These
conditions hardly manifest that respondent possessed that degree of control over Sky Vision as to make the latter its
mere instrumentality, agency or adjunct.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED.
SO ORDERED.

G.R. No. 167530 March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
x-----------------------x
G.R. No. 167561
ASSET PRIVATIZATION TRUST, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
x-----------------------x
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision 2 dated November 30, 2004 and the Resolution3 dated
March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said Decision affirmed the Decision 4dated
November 6, 1995 of the Regional Trial Court (RTC) of Makati City, Branch 62, granting a judgment award
of P8,370,934.74, plus legal interest, in favor of respondent Hydro Resources Contractors Corporation (HRCC) with
the modification that the Privatization and Management Office (PMO), successor of petitioner Asset Privatization Trust
(APT),5 has been held solidarily liable with Nonoc Mining and Industrial Corporation (NMIC) 6and petitioners Philippine
National Bank (PNB) and Development Bank of the Philippines (DBP), while the Resolution denied reconsideration
separately prayed for by PNB, DBP, and APT.
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque
Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the
assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC. 7 DBP and PNB
owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares. 8 As of September 1984,
the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada, were either from DBP or PNB. 9
Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and Road Construction Program
in 1985 for a total contract price of P35,770,120. After computing the payments already made by NMIC under the
program and crediting the NMICs receivables from
Hercon, Inc., the latter found that NMIC still has an unpaid balance of P8,370,934.74.10 Hercon, Inc. made several
demands on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a
complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and
PNB solidarily liable for the amount owing Hercon, Inc. 11 The case was docketed as Civil Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the
amendment of the complaint to substitute HRCC for Hercon, Inc. 12
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for
the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to
the said Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the
National Government assigning, transferring and conveying certain assets and liabilities, including their respective
stakes in NMIC.13 In turn and on even date, the National Government transferred the said assets and liabilities to the
APT as trustee under a Trust Agreement.14 Thus, the complaint was amended for the second time to implead and
include the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was
entered into by its then President without any authority. Moreover, the said contract allegedly failed to comply with
laws, rules and regulations concerning government contracts. NMIC further claimed that the contract amount was
manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the amounts
already paid to Hercon, Inc. and attorneys fees, as well as payment for equipment rental for four trucks, replacement
of parts and other services, and damage to some of NMICs properties. 16
For its part, DBPs answer17 raised the defense that HRCC had no cause of action against it because DBP was not
privy to HRCCs contract with NMIC. Moreover, NMICs juridical personality is separate from that of DBP. DBP further
interposed a counterclaim for attorneys fees.18
PNBs answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCCs part and laches as
defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for payment was made on it
by HRCC. PNB also invoked the separate juridical personality of NMIC and made counterclaims for moral damages
and attorneys fees.20
APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon,
Inc. and APT, and the National Governments preferred lien over the assets of NMIC. 22
After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It pierced the corporate
veil of NMIC and held DBP and PNB solidarily liable with NMIC:
On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this Court likewise finds
for the plaintiff.
From the documentary evidence adduced by the plaintiff, some of which were even adopted by defendants and DBP
and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and
submarkings, inclusive), it had been established that except for five (5) qualifying shares, NMIC is owned by
defendants DBP and PNB, with the former owning 57% thereof, and the latter 43%. As of September 24, 1984, all the
members of NMICs Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando
M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons,
disregard legal fiction that two (2) corporations are distinct entities, and treat them as identical." (Phil. Veterans
Investment Development Corp. vs. CA, 181 SCRA 669).
From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB.
Thus, the DBP and PNB are jointly and severally liable with NMIC for the latters unpaid obligations to plaintiff. 23
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO RESOURCES
CONTRACTORS CORPORATION and against the defendants NONOC
MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE
NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and severally, the sum
of P8,370,934.74 plus legal interest thereon from date of demand, and attorneys fees equivalent to 25% of the
judgment award.
The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND INDUSTRIAL
CORPORATION is directed to ensure compliance with this Decision. 24
DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for the RTC to
pierce the veil of NMICs corporate personality and hold DBP and PNB solidarily liable with NMIC. 25
The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the veil of the
corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In particular, the Court of
Appeals made the following findings:
In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and
43% respectively; that said two (2) appellants are the only stockholders, with the qualifying stockholders of five (5)
consisting of its own officers and included in its charter merely to comply with the requirement of the law as to number
of incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.
xxxx
We find it therefore correct for the lower court to have ruled that:
"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB.
Thus, the DBP and PNB are jointly and severally liable with NMIC for the latters unpaid obligation to
plaintiff."26(Citation omitted.)
The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of
NMIC should be pierced, ratiocinating:
For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial contracts, and
then using such separate entity to evade the payment of a just debt, would be the height of injustice and iniquity.
Surely that could not have been the intendment of the law with respect to corporations. x x x. 27
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in favor of
appellee Hydro Resources Contractors Corporation in the amount of P8,370,934.74 with legal interest from date of
demand is hereby AFFIRMED, but the dismissal of the case as against Assets Privatization Trust is REVERSED, and
its successor the Privatization and Management Office is INCLUDED as one of those jointly and severally liable for
such indebtedness. The award of attorneys fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28
The respective motions for reconsideration of DBP, PNB, and APT were denied. 29
Hence, these consolidated petitions.30
All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from both
PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is not a sufficient ground for
disregarding the separate corporate personality of NMIC because NMIC was not a mere adjunct, business conduit or
alter ego of DBP and PNB. According to them, the application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the ownership and control of the shareholdings of NMIC by
DBP and PNB were used to commit fraud, illegality or injustice. In the absence of evidence that the stock control by
DBP and PNB over NMIC was used to commit some fraud or a wrong and that said control was the proximate cause
of the injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is misplaced. 31
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMICs exclusive and
separate corporate indebtedness to HRCC, such liability of the two banks was transferred to and assumed by the
National Government through the APT, now the PMO, under the respective deeds of transfer both dated February 27,
1997 executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative Order
No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an unqualified assumption by the National Government of all
liabilities incurred by NMIC, the National Government through the APT could not be held liable for NMICs contractual
liability. The APT asserts that HRCC had not sufficiently shown that the APT is the successor-in-interest of all the
liabilities of NMIC, or of DBP and PNB as transferors, and that the adjudged liability is included among the liabilities
assigned and transferred by DBP and PNB in favor of the National Government.33
HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of corporate fiction." It
claims that NMIC was the alter ego of DBP and PNB which owned, conducted and controlled the business of NMIC as
shown by the following circumstances: NMIC was owned by DBP and PNB, the officers of DBP and PNB were also
the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further argues that a parent
corporation may be held liable for the contracts or obligations of its subsidiary corporation where the latter is a mere
agency, instrumentality or adjunct of the parent corporation. 34
Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC because the APT
assumed the obligations of DBP and PNB as the successor-in-interest of the said banks with respect to the assets and
liabilities of NMIC.35 As trustee of the Republic of the Philippines, the APT also assumed the responsibility of the
Republic pursuant to the following provision of Section 2.02 of the respective deeds of transfer executed by DBP and
PNB in favor of the Republic:
SECTION 2. TRANSFER OF BANKS LIABILITIES
xxxx
2.02 With respect to the Banks liabilities which are contingent and those liabilities where the Banks creditors consent
to the transfer thereof is not obtained, said liabilities shall remain in the books of the BANK with the GOVERNMENT
funding the payment thereof.36
After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers,
attributes, and properties expressly authorized by law or incident to its existence. 37 It has a personality separate and
distinct from that of its stockholders and from that of other corporations to which it may be connected. 38 As a
consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital
formation,39 a corporation incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other
words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or
credit of the stockholder.41 This protection from liability for shareholders is the principle of limited liability.42
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.43
However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may
be applied. Otherwise an injustice, although unintended, may result from its erroneous application. 44 Thus, cutting
through the corporate cover requires an approach characterized by due care and caution:
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be
mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be presumed. x x x. 45 (Emphases supplied; citations omitted.)
Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine of piercing the
corporate veil:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases
or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation. (Citation omitted.)
Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP and
PNB) should be held solidarily liable for using NMIC as alter ego. 47 The RTC sustained the allegation of HRCC and
pierced the corporate veil of NMIC pursuant to the alter ego theory when it concluded that NMIC "is a mere adjunct,
business conduit or alter ego of both DBP and PNB." 48 The Court of Appeals upheld such conclusion of the trial
court.49 In other words, both the trial and appellate courts relied on the alter ego theory when they disregarded the
separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which
is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained
of.50 (Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the
control and domination of the parent.51 It examines the parent corporations relationship with the subsidiary.52It inquires
whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be
ignored.53 It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation,
though acting through the subsidiary in form and appearance, "is operating the business directly for itself." 54
The second prong is the "fraud" test. This test requires that the parent corporations conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful.55 It examines the relationship of the plaintiff to the corporation. 56 It
recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the
plaintiff creditor.57 As such, it requires a showing of "an element of injustice or fundamental unfairness." 58
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. 59 A causal connection between the
fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage
incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendants exercise of control and improper use of the corporate form and, thereby,
suffer damages.60
To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements:
control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the
plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of
any of these elements prevents piercing the corporate veil. 61
This Court finds that none of the tests has been satisfactorily met in this case.
In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation
operated and the individual defendants relationship to that operation. 62 With respect to the control element, it refers
not to paper or formal control by majority or even complete stock control but actual control which amounts to "such
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will
or existence of its own, and is but a conduit for its principal." 63 In addition, the control must be shown to have been
exercised at the time the acts complained of took place. 64
Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of NMIC
based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged
interlocking directorates of DBP, PNB and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that
the DBP and PNB fit the alter ego theory with respect to NMICs transaction with HRCC on the premise of complete
stock ownership and interlocking directorates involved a quantum leap in logic and law exposing a gap in reason and
fact.
While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking
directorates may serve as indicia of control, by themselves and without more, however, these circumstances are
insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on
the other hand, that will justify the puncturing of the latters corporate cover. This Court has declared that "mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate personality." 66 This Court has likewise ruled that
the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil
of corporate fiction in the absence of fraud or other public policy considerations." 67
True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to this Court,
provided they are borne out of the record or are based on substantial evidence. 68 It is equally true that the question of
whether one corporation is merely an alter ego of another is purely one of fact. So is the question of whether a
corporation is a paper company, a sham or subterfuge or whether the requisite quantum of evidence has been
adduced warranting the piercing of the veil of corporate personality.69 Nevertheless, it has been held in Sarona v.
National Labor Relations Commission70 that this Court has the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for fraudulent or
malevolent ends, if the findings in the assailed decision are either not supported by the evidence on record or based
on a misapprehension of facts.
In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated
by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or existence of its own
but a mere conduit for DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on the
knowledge that it was dealing with NMIC, not with NMICs stockholders. The letter proposal of Hercon, Inc., HRCCs
predecessor-in-interest, regarding the contract for NMICs mine stripping and road construction program was
addressed to and accepted by NMIC.71 The various billing reports, progress reports, statements of accounts and
communications of Hercon, Inc./HRCC regarding NMICs mine stripping and road construction program in 1985
concerned NMIC and NMICs officers, without any indication of or reference to the control exercised by DBP and/or
PNB over NMICs affairs, policies and practices.72
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged undue
disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services rendered by HRCC in
connection with NMICs mine stripping and road construction program in 1985. On the contrary, the overall picture
painted by the evidence offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person
acting through its own corporate officers.73
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no basis.
HRCCs Exhibit "I-5,"74 the initial General Information Sheet submitted by NMIC to the Securities and Exchange
Commission, relied upon by the trial court and the Court of Appeals may have proven that DBP and PNB owned the
stocks of NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a finding that NMIC, DBP,
and PNB had interlocking directors as it only indicates that, of the five members of NMICs board of directors, four
were nominees of either DBP or PNB and only one was a nominee of both DBP and PNB. 75 Only two members of the
board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of the board of
governors of DBP and none was proved to be a member of the board of directors of PNB. 76 No director of NMIC was
shown to be also sitting simultaneously in the board of governors/directors of both DBP and PNB.
In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and NMIC on the other
hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia, 77 which it described as "a case under a
similar factual milieu."78 However, in Sibagat Timber Corporation, this Court took care to enumerate the circumstances
which led to the piercing of the corporate veil of Sibagat Timber Corporation for being the alter ego of Del Rosario &
Sons Logging Enterprises, Inc. Those circumstances were as follows: holding office in the same building, practical
identity of the officers and directors of the two corporations and assumption of management and control of Sibagat
Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.
Here, DBP and PNB maintain an address different from that of NMIC. 79 As already discussed, there was insufficient
proof of interlocking directorates. There was not even an allegation of similarity of corporate officers. Instead of
evidence that DBP and PNB assumed and controlled the management of NMIC, HRCCs evidence shows that NMIC
operated as a distinct entity endowed with its own legal personality. Thus, what obtains in this case is a factual
backdrop different from, not similar to, Sibagat Timber Corporation.
In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or
unjust act in contravention of a plaintiffs legal rights must be clearly and convincingly established; it cannot be
presumed. Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does not
apply.80
In this case, the Court of Appeals declared:
We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that NMIC was used to
conceal fraud. x x x.81
Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which DBP and
PNB used "to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiffs legal rights." It is a recognition that, even assuming that DBP and PNB
exercised control over NMIC, there is no evidence that the juridical personality of NMIC was used by DBP and PNB to
commit a fraud or to do a wrong against HRCC.
There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP
and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP and PNB. As this
Court ruled in Ramoso v. Court of Appeals82:
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary
appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded
in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally,
involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.
As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental
unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm could be said to have been
proximately caused by DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable with
NMIC.1wphi1
Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee of the
rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB are held liable, the APT incurs no
liability for the judgment indebtedness of NMIC. Even HRCC recognizes that "as assignee of DBP and PNB 's loan
receivables," the APT simply "stepped into the shoes of DBP and PNB with respect to the latter's rights and
obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect to NMIC other than
whatever liabilities may be imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC invokes, the
APT cannot be held liable. The contingent liability for which the National Government, through the APT, may be held
liable under the said provision refers to contingent liabilities of DBP and PNB. Since DBP and PNB may not be held
solidarily liable with NMIC, no contingent liability may be imputed to the APT as well. Only NMIC as a distinct and
separate legal entity is liable to pay its corporate obligation to HRCC in the amount of P8,370,934.74, with legal
interest thereon from date of demand.
As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the judgment against it.
The APT itself acknowledges this.84
WHEREFORE, the petitions are hereby GRANTED.
The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the Asset
Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack of merit. The Asset
Privatization Trust, now the Privatization and Management Office, as trustee of Nonoc Mining and Industrial
Corporation, now the Philnico Processing Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and
Industrial Corporation, now the Philnico Processing Corporation, with this Decision.
SO ORDERED.
[G.R. No. 136456. October 24, 2000]
HEIRS OF RAMON DURANO, SR., RAMON DURANO III, AND ELIZABETHHOTCHKISS DURANO, petitioners,
vs. SPOUSES ANGELES SEPULVEDA UY AND EMIGDIO BING SING UY, SPOUSES FAUSTINO ALATAN
AND VALERIANA GARRO, AURELIA MATA, SILVESTRE RAMOS, HERMOGENES TITO, TEOTIMO
GONZALES, PRIMITIVA GARRO, JULIAN GARRO, ISMAEL GARRO, BIENVENIDO CASTRO, GLICERIO
BARRIGA, BEATRIZ CALZADA, ANDREA MATA DE BATULAN, TEOFISTA ALCALA, FILEMON
LAVADOR, CANDELARIO LUMANTAO, GAVINO QUIMBO, JUSTINO TITO, MARCELINO GONZALES,
SALVADOR DAYDAY, VENANCIA REPASO, LEODEGARIO GONZALES, and RESTITUTA
GONZALES, respondents.
DECISION
GONZAGA-REYES, J.:
Petitioners seek the reversal of the decision of the First Division of the Court of Appeals dated November 14,
1997 in CA-G.R. CV No. 27220, entitled Heirs of Ramon Durano, Sr., et. al. versus Spouses Angeles Supelveda Uy,
et. al., and the resolution of the Court of Appeals dated October 29, 1998 which denied petitioners motion for
reconsideration.
The antecedents of this case may be traced as far back as August 1970; it involves a 128-hectare parcel of land
located in the barrios of Dunga and Cahumayhumayan, Danao City. On December 27, 1973, the late Congressman
Ramon Durano, Sr., together with his son Ramon Durano III, and the latters wife, Elizabeth Hotchkiss Durano
(petitioners in the herein case), instituted an action for damages against spouses Angeles Supelveda Uy and Emigdio
Bing Sing Uy, spouses Faustino Alatan and Valeriana Garro, spouses Rufino Lavador and Aurelia Mata, Silvestre
Ramos, Hermogenes Tito, Teotimo Gonzales, Primitiva Garro, Julian Garro, Ismael Garro, Bienvenido Castro, Glicerio
Barriga, Beatriz Calzada, Andrea Mata de Batulan, Teofista Alcala, Filemon Lavador, Candelario Lumantao, Gavino
Quimbo, Justino Tito, Marcelino Gonzales, Salvador Dayday, Venancia Repaso, Leodegario Gonzales, Jose de la
Calzada, Restituta Gonzales, and Cosme Ramos (herein respondents [1]) before Branch XVII of the then Court of First
Instance of Cebu, Danao City.
In that case, docketed as Civil Case No. DC-56, petitioners accused respondents of officiating a hate campaign
against them by lodging complaints in the Police Department of Danao City in August 1970, over petitioners so-called
invasion of respondents alleged properties in Cahumayhumayan, Danao City. This was followed by another complaint
sent by respondents to the President of the Philippines in February 1971, which depicted petitioners as oppressors,
landgrabbers and usurpers of respondents alleged rights. Upon the direction of the President, the Department of
Justice through City Fiscal Jesus Navarro and the Philippine Constabulary of Cebu simultaneously conducted
investigations on the matter. Respondents complaints were dismissed as baseless, and they appealed the same to
the Secretary of Justice, who called for another investigation to be jointly conducted by the Special Prosecutor and the
Office of the City Fiscal of Danao City. During the course of said joint investigation, respondents Hermogenes Tito and
Salvador Dayday again lodged a complaint with the Office of the President, airing the same charges of
landgrabbing. The investigations on this new complaint, jointly conducted by the 3 rd Philippine Constabulary Zone and
the Citizens Legal Assistance Office resulted in the finding that (petitioners) should not be held answerable therefor. [2]
Petitioners further alleged in their complaint before the CFI that during the course of the above investigations,
respondents kept spreading false rumors and damaging tales which put petitioners into public contempt and ridicule. [3]
In their Answer, respondents lodged their affirmative defenses, demanded the return of their respective
properties, and made counterclaims for actual, moral and exemplary damages.Respondents stated that sometime in
the early part of August 1970 and months thereafter they received mimeographed notices dated August 2, 1970 and
signed by the late Ramon Durano, Sr., informing them that the lands which they are tilling and residing in, formerly
owned by the Cebu Portland Cement Company (hereafter, Cepoc), had been purchased by Durano & Co., Inc. The
notices also declared that the lands were needed by Durano & Co. for planting to sugar and for roads or residences,
and directed respondents to immediately turn over the said lands to the representatives of the
company. Simultaneously, tall bamboo poles with pennants at the tops thereof were planted in some areas of the
lands and metal sheets bearing the initials RMD were nailed to posts.
As early as the first week of August 1970, and even before many of the respondents received notices to vacate,
men who identified themselves as employees of Durano & Co. proceeded to bulldoze the lands occupied by various
respondents, destroying in their wake the plantings and improvements made by the respondents therein. On some
occasions, respondents alleged, these men fired shots in the air, purportedly acting upon the instructions of petitioner
Ramon Durano III and/or Ramon Durano, Jr. On at least one instance, petitioners Ramon Durano III and Elizabeth
Hotchkiss Durano were seen on the site of the bulldozing operations.
On September 15, 1970, Durano & Co. sold the disputed property to petitioner Ramon Durano III, who procured
the registration of these lands in his name under TCT No. T-103 and TCT No. T-104.
Respondents contended that the display of force and the known power and prestige of petitioners and their family
restrained them from directly resisting this wanton depredation upon their property. During that time, the mayor of
Danao City was Mrs. Beatriz Durano, wife of Ramon Durano, Sr. and mother of petitioner Ramon Durano III. Finding
no relief from the local police, who respondents said merely laughed at them for daring to complain against the
Duranos, they organized themselves and sent a letter to then President Ferdinand Marcos reporting dispossession of
their properties and seeking a determination of the ownership of the land. This notwithstanding, the bulldozing
operations continued until the City Fiscal was requested by the Department of Justice to conduct an investigation on
the matter. When, on July 27, 1971, the City Fiscal announced that he would be unable to conduct a preliminary
investigation, respondents urged the Department of Justice to conduct the preliminary investigation. This was granted,
and the investigations which spanned the period March 1972 to April 1973 led to the conclusion that respondents
complaint was untenable.[4]
In their counterclaim, respondents alleged that petitioners acts deprived most of them of their independent source
of income and have made destitutes of some of them. Also, petitioners have done serious violence to respondents
spirit, as citizens and human beings, to the extent that one of them had been widowed by the emotional shock that the
damage and dispossession has caused.[5] Thus, in addition to the dismissal of the complaint, respondents demanded
actual damages for the cost of the improvements they made on the land, together with the damage arising from the
dispossession itself; moral damages for the anguish they underwent as a result of the high-handed display of power
by petitioners in depriving them of their possession and property; as well as exemplary damages, attorneys fees and
expenses of litigation.
Respondents respective counterclaims --- referring to the improvements destroyed, their values, and the
approximate areas of the properties they owned and occupied --- are as follows:
a) TEOFISTA ALCALA - Tax Declaration No. 00223; .2400 ha.; bulldozed on August, 10,
1970. Improvements destroyed consist of 47 trees, 10 bundles beatilis firewood and 2 sacks of cassava,
all valued at P5,437.00. (Exh. B, including submarkings)
b) FAUSTINO ALATAN and VALERIANA GARRO - Tax Declaration No. 30758; .2480 ha.; Tax Declaration
No. 32974; .8944 ha.; Tax Declaration No. 38908; .8000 ha.; Bulldozed on September 9, 1970;
Improvements destroyed consist of 682 trees, a cornfield with one cavan per harvest 3 times a year,
valued at P71,770.00; Bulldozed on March 13, 1971; 753 trees, 1,000 bundles beatilis firewood every
year, valued at P29,100.00; Cut down in the later part of March, 1971 - 22 trees, 1,000 bundles beatilis
firewood every year, 6 cavans corn harvest per year, valued at P1,940.00 or a total value of
P102,810.00. (Exh. C, including submarkings)
c) ANDREA MATA DE BATULAN - Tax Declaration No. 33033; .4259 has.; bulldozed on September 11,
1970. Improvements destroyed consist of 512 trees and 15 sacks cassava all valued at
P79,425.00. (Exh. D, including submarkings)
d) GLICERIO BARRIGA - Tax Declaration No. 32290; .4000 ha.; bulldozed on September 10,
1990. Improvements destroyed consist of 354 trees, cassava field if planted with corn good for one liter,
30 cavans harvest a year of corn, and one resthouse, all valued at P35,500.00. (Exh. E, including
submarkings)
e) BEATRIZ CALZADA - Tax Declaration No. 03449; .900 ha.; Bulldozed on June 16, 1971. Improvements
destroyed consist of 2,864 trees, 1,600 bundles of beatilis firewood, 12 kerosene cans cassava every
year and 48 cavans harvest a year of corn all valued at P34,800.00. (Exh. F, including submarkings)
f) BIENVENIDO CASTRO - Tax Declaration No. 04883; .6000 ha.; bulldozed on September 10,
1970. Improvements destroyed consist of 170 trees, 10 sacks cassava every year, 500 bundles beatilis
firewood every year, 60 cavans corn harvest per year, all valued at (5,550.00. (Exh. G, including
submarkings)
g) ISMAEL GARRO - Tax Declaration No. 7185; 2 has. Bulldozed in August, 1970. Improvements destroyed
consist of 6 coconut trees valued at P1,800.00. Bulldozed on February 3, 1971 - improvements destroyed
consist of 607 trees, a corn field of 5 cavans produce per harvest thrice a year, all valued at
P67,890.00. (Exh. H, including submarkings)
h) JULIAN GARRO - Tax Declaration No. 28653; 1 ha.; Bulldozed in the latter week of August,
1970. Improvements destroyed consist of 365 trees, 1 bamboo grove, 1 tisa, 1,000 bundles of beatilis
firewood, 24 cavans harvest a year of corn, all valued at P46,060.00. (Exh. I, including submarkings)
i) PRIMITIVA GARRO - Tax Declaration No. 28651; .3000 ha.; Bulldozed on September 7,
1970. Improvements destroyed consist of 183 trees, 10 pineapples, a cassava field, area if planted with
corn good for liter, sweet potato, area if planted with corn good for liter all valued at P10,410.00. (Exh. J,
including submarkings)
j) TEOTIMO GONZALES - Tax Declaration No. 38159; .8644 ha.; Tax Declaration No. 38158; .8000 ha.;
Bulldozed on September 10, 1970 - improvements destroyed consist of 460 trees valued at P20,000.00.
Bulldozed on December 10, 1970 - Improvements destroyed consist of 254 trees valued at P65,600.00 -
or a total value of P85,600.00. (Exh. K, including submarkings)
k) LEODEGARIO GONZALES - Tax Declaration No. 36884; Bulldozed on February 24, 1971. Improvements
destroyed consist of 946 trees, 40 ubi, 15 cavans harvest a year of corn, all valued at P72,270.00. (Exh.
L, including submarkings)
l) FILEMON LAVADOR - Tax Declaration No. 14036; 1 ha.; Bulldozed on February 5, 1971. Improvements
destroyed consist of 675 trees and 9 cavans harvest a year of corn all valued at P63,935.00.(Exh. M,
including submarkings)
m) CANDELARIO LUMANTAO - Tax Declaration No. 18791; 1.660 ha. Bulldozed on the second week of
August, 1970 - Improvements destroyed consist of 1,377 trees, a cornfield with 3 cavans per harvest
thrice a year and a copra dryer all valued at P193,960.00. Bulldozed on February 26, 1971 -
Improvements destroyed consist of 44 trees, one pig pen and the fence thereof and the chicken roost all
valued at P12,650.00. Tax Declaration No. 33159; 3.500 has. Bulldozed in the last week of March, 1971 -
Improvements destroyed consist of 13 trees valued at P1,550.00. Bulldozed in the latter part consist of 6
 Bamboo groves and Ipil-Ipil trees valued at P700.00 with total value of P208,860.00. (Exh. N, including
submarkings)
n) AURELIA MATA - Tax Declaration No. 38071; .3333 ha.; Bulldozed sometime in the first week of March,
1971 - Improvements destroyed consist of 344 trees and 45 cavans corn harvest per year valued at
P30,965.00. (Exh. Q, including submarkings)
o) GAVINO QUIMBO - Tax Declaration No. 33231; 2.0978 has.; Tax Declaration No. 24377; .4960 ha. (.2480
ha. Belonging to your defendant) Bulldozed on September 12, 1970 - Improvements destroyed consist of
200 coconut trees and 500 banana fruit trees valued at P68,500.00. Bulldozed on consist of 59 trees, 20
sacks cassava and 60 cavans harvest a year of corn valued at P9,660.00 or a total value of
P78,160.00. (Exh. R, including submarkings)
p) SILVESTRE RAMOS - Tax Declaration No. 24288; 1.5568 has.; Bulldozed on February 23, 1971.
- Improvements destroyed consist of 737 trees, a cornfield with 3 cavans per harvest 3 times a year and
50 bundles of beatilis firewood, all valued at P118,170.00. (Exh. S, including submarkings)
q) MARCELINO GONZALES - Tax Declaration No. 34057; .4049 ha. Bulldozed on March 20, 1972 -
Improvements destroyed consist of 5 coconut trees and 9 cavans harvest a year of corn valued at
P1,860.00. Bulldozed on July 4, 1972 - destroying 19 coconut trees valued at P5,700.00 or a total value
of P7,560.00. (Exh. U, including submarkings)
r) JUSTINO TITO -Tax Declaration No. 38072; .2000 has.; Bulldozed on February 25, 1971 - Improvements
destroyed consist of 338 trees and 5 kamongay all valued at P29,650.00. (Exh. T, including submarkings)
s) EMIGDIO BING SING UY and ANGELES SEPULVEDA UY - Transfer Certificate of Title No. T-35
(Register of Deeds of Danao City); 140.4395 has.; Area bulldozed- 20.000 has. Bulldozed on August 5, 6
and 7, 1970 - destroying 565 coconut trees, 2-1/2 yrs. old, 65,422 banana groves with 3,600 mango
trees, 3 years old, grafted and about to bear fruit valued at P212,260.00. Bulldozed on November 24,
1970 and on February 16, 1971 - destroying 8,520 madri-cacao trees and 24 cylindrical cement posts
boundaries valued at P18,540.00. Bulldozed on November 24, 1970 - destroying 90 coconut trees, 3
years old cornfield at 40 cavans per harvest and at 3 harvests a year (120 cavans) valued at
P31,800.00. Bulldozed on February 16, 1971 - destroying 25,727 trees and sugarcane field value
P856,725.00 or a total value of P1,123,825.00. (Exh. V, including submarkings)
t) SALVADOR DAYDAY - Tax Declaration No. (unnumbered) dated September 14, 1967; 4.000
has. Bulldozed on May 6, 1971 - destroying 576 trees, 9 cavans yearly of corn, 30 kerosene cans of
cassava yearly valued at P4,795.00. Bulldozed from March 26, 1973 to the first week of April, 1973 -
destroying 108 trees and cornland, 6 cavans harvest per year valued at P53,900.00 or a total value of
P58,695.00. (Exh. A, including submarkings)
u) VENANCIA REPASO - Tax Declaration No. 18867; 1.1667 has. Bulldozed on April 15, 1971 -
Improvements destroyed were 775 trees, 500 abaca, about to be reaped, and being reaped 3 times a
year 2 bamboo groves all valued at P47,700.00. (Exh. O, including submarkings)
v) HERMOGENES TITO - Tax Declaration No. 38009; over one (1) ha. Bulldozed in the latter part of
September, 1970 - destroying 1 coconut tree, 18 sacks of corn per year valued at P1,020.00.Bulldozed
on March 15, 1973 - destroying 2 coconut trees, 5 buri trees, 1 bamboo grove valued at
P1,400.00. Bulldozed on March 26, 1974 - destroying 3 coconut trees valued at P1,500.00 with a total
value of P3,920.00. (Exh. P, including submarkings).[6]
On April 22, 1975, petitioners moved to dismiss their complaint with the trial court. The trial court granted the
motion to dismiss, without prejudice to respondents right to proceed with their counterclaim.
Hence, the trial proceeded only on the counterclaim.
On September 23, 1980, this Court issued a resolution in Administrative Matter No. 6290 changing the venue of
trial in Civil Case No. DC-56 to the Regional Trial Court of Cebu City.The change was mainly in line with the transfer of
Judge Bernardo Ll. Salas, who presided over the case in Danao City, to Cebu City.
The parties agreed to dispense with pre-trial, and for the evidence-in-chief to be submitted by way of affidavits
together with a schedule of documentary exhibits, subject to additional direct examination, cross examination and
presentation of rebuttal evidence by the parties.
The trial court and later, the Court of Appeals, took note of the following portions of affidavits submitted by
petitioners:
xxx City Fiscal Jesus Navarro said that in August, 1967, he issued subpoenas to several tenants in Cahumayhumayan
upon representation by Cepoc, the latter protesting failure by the tenants to continue giving Cepoc its share of the
corn produce. He learned from the tenants that the reason why they were reluctant and as a matter of fact some
defaulted in giving Cepoc its share, was that Uy Bing Sepulveda made similar demands to them for his share in the
produce, and that they did not know to whom the shares should be given.
xxx xxx xxx
Jesus Capitan said that he is familiar with the place Cahumayhumayan and that the properties in said locality were
acquired by Durano and Company and Ramon Durano III, but formerly owned by Cepoc.
When the properties of Ramonito Durano were cultivated, the owners of the plants requested him that they be given
something for their effort even if the properties do not belong to them but to Cepoc, and that he was directed by
Ramonito Durano to do a listing of the improvements as well as the owners. After he made a listing, this was given to
Ramonito who directed Benedicto Ramos to do payment.
When he was preparing the list, they did not object to the removal of the plants because the counterclaimants
understood that the lands did not belong to them, but later and because of politics a complaint was filed, and finally
that when he was doing the listing, the improvements were even pointed to him by the counterclaimants
themselves. (Exh. 48, Records, p. 385-386).
xxx xxx xxx
Ruperto Rom said that he had an occasion to work at Cepoc from 1947 to 1950 together with Benedicto and Tomas
Ramos, the latter a capataz of the Durano Sugar Mills. Owner of the properties, subject of the complaint, was Cepoc.
The persons who eventually tilled the Cepoc properties were merely allowed to do cultivation if planted to corn, and for
Cepoc to be given a share, which condition was complied with by all including the counterclaimants. He even
possessed one parcel which he planted to coconuts, jackfruit trees and other plants. (Exh. 51, Records, pp. 383-384)
xxx xxx xxx
Co-defendant Ramon Durano III said that he agreed with the dismissal of the complaint because his fathers wish was
reconciliation with the defendants following the death of Pedro Sepulveda, father of Angeles Sepulveda Uy, but inspite
of the dismissal of the complaint, the defendants still prosecuted their counterclaim.
The disputed properties were owned formerly by Cepoc, and then of the latter selling the properties to Durano and
Company and then by the latter to him as of September 15, 1970. As a matter of fact, TCT T-103 and T-104 were
issued to him and that from that time on, he paid the taxes.
At the time he purchased the properties, they were not occupied by the defendants. The first time he learned about
the alleged bulldozing of the improvements was when the defendants filed the complaint of land grabbing against their
family with the Office of the President and the attendant publicity. Precisely his family filed the complaint against
them. (Exh. 57, Records, pp. 723-730)
xxx xxx xxx
Congressman Ramon Durano said he is familiar with the properties, being owned originally by Cepoc. Thereafter they
were purchased by Durano and Company and then sold to Ramon Durano III, the latter now the owner. He filed a
motion to dismiss the case against Angeles Sepulveda et al. as a gesture of respect to the deceased Pedro
Sepulveda, father of Angeles Sepulveda, and as a Christian, said Pedro Sepulveda being the former Mayor of Danao,
if only to stop all misunderstanding between their families.
xxx xxx xxx
He was the one who did the discovery of the properties that belonged to Cepoc, which happened when he was doing
mining work near Cahumayhumayan and without his knowledge extended his operation within the area belonging to
Cepoc. After Cepoc learned of the substantial coal deposits, the property was claimed by Cepoc and then a survey
was made to relocate the muniments. Eventually he desisted doing mining work and limited himself within the confines
of his property that was adjacent to Cepocs property. All the claimants except Sepulveda Uy were occupants of the
Cepoc properties. Durano and Company purchased the property adjacent to Cepoc, developed the area, mined the
coal and had the surveyed area planted with sugar cane, and finally the notices to the occupants because of their
intention to plant sugar cane and other crops (T.S. N. December 4, 1985, pp. 31-32, 44-54, RTC Decision, pp. 16-19,
Records, pp. 842-845).[7]
Petitioners also presented Court Commissioner, Engineer Leonidas Gicain, who was directed by the trial court to
conduct a field survey of the disputed property. Gicain conducted surveys on the areas subjected to bulldozing,
including those outside the Cepoc properties. The survey --- which was based on TCT No. T-103 and TCT No. T-104,
titled in the name of Ramon Durano III, and TCT No. 35, in the name of respondent Emigdio Bing Sing Uy --- was paid
for by petitioners.[8]
Respondents, for their part, also presented their affidavits and supporting documentary evidence, including tax
declarations covering such portions of the property as they formerly inhabited and cultivated.
On March 8, 1990, the RTC issued a decision upholding respondents counterclaim. The dispositive portion of
said decision reads:
THE FOREGOING CONSIDERED, judgment is hereby rendered in favor of the counter claimants and against the
plaintiffs directing the latter to pay the former:
a) With respect to Salvador Dayday P 14,400.00
b) With respect to Teofista Alcala 4,400.00
c) With respect to Faustino Alatan 118,400.00
d) With respect to Andrea Mata de Batulan 115,050.00
e) With respect to Glicerio Barriga 35,500.00
f) With respect to Beatriz Galzada 70,300.00
g) With respect to Bienvenido Castro 5,000.00
h) With respect to Ismael Garro 66,060.00
i) With respect to Julian Garro 48,600.00
j) With respect to Primitiva Garro 13,000.00
k) With respect to Teotimo Gonzales 63,200.00
l) With respect to Leodegario Gonzales 85,300.00
m) With respect to Filemon Lavador 70,860.00
n) With respect to Venancia Repaso 101,700.00
o) With respect to Candelario Lumantao 192,550.00
p) With respect to Hermogenes Tito 1,200.00
q) With respect to Aurelia Mata 28,560.00
r) With respect to Gavino Quimbo 81,500.00
s) With respect to Silvestre Ramos 101,700.00
t) With respect to Justino Tito 27,800.00
 u) With respect to Marcelino Gonzales 2,360.00
v) With respect to Angeles Supelveda 902,840.00
P120,000.00 should be the figure in terms of litigation expenses and a separate amount of P100,000.00 as
attorneys fees.
Return of the properties to Venancia Repaso, Hermogenes Tito and Marcelino Gonzales is hereby directed.
With respect to counter claimant Angeles Sepulveda Uy, return of the property to her should be with respect to the
areas outside of the Cepoc property, as mentioned in the sketch, Exhibit 56-A.
Finally with costs against the plaintiffs.
SO ORDERED. [9]
The RTC found that the case preponderated in favor of respondents, who all possessed their respective portions
of the property covered by TCT Nos. T-103 and T-104 thinking that they were the absolute owners thereof. A number
of these respondents alleged that they inherited these properties from their parents, who in turn inherited them from
their own parents.Some others came into the properties by purchase from the former occupants thereof. They and
their predecessors were responsible for the plantings and improvements on the property.They were the ones who
sought for the properties to be tax-declared in their respective names, and they continually paid the taxes
thereto. Respondents maintained that they were unaware of anyone claiming adverse possession or ownership of
these lands until the bulldozing operations in 1970.
As for Venancia Repaso, Hermogenes Tito and Marcelino Gonzales, the Court found that the properties they laid
claim to were not part of the land that was purchased by Durano & Co. from Cepoc. Thus, it found the bulldozing of
these lands by petitioners totally unjustified and ordered not only the total reimbursement of useful and necessary
expenses on the properties but also the return of these properties to Repaso, Tito and Gonzales, respectively. As for
all the other respondents, the RTC found their possession of the properties to be in the concept of owner and
adjudged them to be builders in good faith. Considering that petitioners in the instant case appropriated the
improvements on the areas overran by the bulldozers, the RTC ruled that (t)he right of retention to the improvements
necessarily should be secured (in favor of respondents) until reimbursed not only of the necessary but also useful
expenses.[10]
On the matter of litigation expenses and attorneys fees, the RTC observed that the trial period alone consisted of
forty (40) trial dates spread over a period of sixteen (16) years. At the time, respondents were represented by counsel
based in Manila, and the trial court took into consideration the travel, accommodation and miscellaneous expenses of
their lawyer that respondents must have shouldered during the trial of the case.
Dissatisfied, petitioners appealed the RTC decision to the Court of Appeals, which, in turn, affirmed the said
decision and ordered the return of the property to all the respondents-claimants, in effect modifying the RTC decision
which allowed return only in favor of respondents Repaso, Tito and Gonzales.
In its decision, the Court of Appeals upheld the factual findings and conclusions of the RTC, including the awards
for actual damages, attorneys fees and litigation expenses, and found additionally that the issuance of TCT Nos. T-
103 and T-104 in the name of Ramon Durano III was attended by fraud. Evaluating the evidence before it, the Court of
Appeals observed that the alleged reconstituted titles of Cepoc over the property, namely, TCT No. (RT-38) (T-14457)
-4 and TCT No. (RT-39) (T-14456) -3 (Exhibits 19 and 20 of this case), which were claimed to be the derivative titles of
TCT Nos. T-103 and T-104, were not submitted in evidence before the RTC. Thus, in an Order dated June 15, 1988,
the RTC ordered Exhibits 19 and 20 deleted from petitioners Offer of Exhibits. The Court of Appeals further noted that
even among the exhibits subsequently produced by petitioners before the RTC, said Exhibits 19 and 20 were still not
submitted.[11] Moreover, Cepoc had no registered title over the disputed property as indicated in TCT Nos. T-103 and T-
104. Thus:
TRANSFER CERTIFICATE OF TITLE
NO. - 103 -
xxx xxx
IT IS FURTHER CERTIFIED that said land was originally registered on the N.A. day of N.A., in the year nineteen
hundred and N.A. in Registration Book No. N.A. page N.A. of the Office of the Register of Deeds of N.A., as Original
Certificate of Title No. N.A., pursuant to a N.A. patent granted by the President of the Philippines, on the N.A. day
of N.A., in the year nineteen hundred and N.A., under Act No. N.A.
This certificate is a transfer from Transfer Certificate of Title No. (RT-39) (T-14456) -3 which is cancelled by virtue
hereof in so far as the above described land is concerned.
xxx xxx
TRANSFER CERTIFICATE OF TITLE
NO. T - 104 -
xxx xxx
IT IS FURTHER CERTIFIED that said land was originally registered on the N.A. day of N.A., in the year nineteen
hundred and N.A. in Registration Book No. N.A. page N.A. of the Office of the Register of Deeds of N.A., as Original
Certificate of Title No. N.A., pursuant to a N.A. patent granted by the President of the Philippines, on the N.A. day
of N.A., in the year nineteen hundred and N.A., under Act No. N.A.
This certificate is a transfer from Transfer Certificate of Title No. (RT-38) (T-14457) -4 which is cancelled by virtue
hereof in so far as the above described land is concerned. [12]
From the foregoing, the Court of Appeals concluded that the issuance of the TCT Nos. T-103 and T-104 in favor
of petitioner Ramon Durano III was attended by fraud; hence, petitioners could not invoke the principle of
indefeasibility of title. Additionally, the Court of Appeals found that the alleged Deed of Absolute Sale, undated,
between Cepoc Industries, Inc. and Durano & Co. was not notarized and thus, unregistrable.
 The Court of Appeals went on to state that while, on the one hand, no valid issuance of title may be imputed in
favor of petitioners from the private Deed of Sale and the alleged reconstituted titles of Cepoc that were not presented
in evidence, respondents, in contrast --- who although admittedly had no registered titles in their names --- were able
to demonstrate possession that was public, continuous and adverse --- or possession in the concept of owner, and
which was much prior (one or two generations back for many of respondents) to the claim of ownership of petitioners.
Thus, the Court of Appeals ordered the return of the properties covered by TCT Nos. T-103 and T-104 to all
respondents who made respective claims thereto. Corollarily, it declared that petitioners were possessors in bad faith,
and were not entitled to reimbursement for useful expenses incurred in the conversion of the property into sugarcane
lands. It also gave no merit to petitioners allegation that the actual damages awarded by the trial court were
excessive, or to petitioners argument that they should not have been held personally liable for any damages imputable
to Durano & Co.
Following is the dispositive portion of the decision of the Court of Appeals:
WHEREFORE, the appealed decision of the lower court in Civil Case No. DC-56 is hereby AFFIRMED with
MODIFICATION ordering the return of the respective subject properties to all the defendants-appellees, without
indemnity to the plaintiffs-appellants as regards whatever improvements made therein by the latter. In all other
respects, said decision in affirmed.
Costs against plaintiffs-appellants.
SO ORDERED.[13]
On October 29, 1998, the Court of Appeals denied petitioners motion for reconsideration for lack of merit. Hence,
this petition.
Petitioners assign the following errors from the CA decision:
1. The Court of Appeals erred in granting relief to the respondents who did not appeal the decision of the
lower court.
2. The Court of Appeals erred in collaterally attacking the validity of the title of petitioner Ramon Durano III.
3. The respondents should not have been adjudged builders in good faith.
4. The petitioners should not be held personally liable for damages because of the doctrine of separate
corporate personality.
5. It was an error to hold that the respondents had proved the existence of improvements on the land by
preponderance of evidence, and in awarding excessive damages therefor.
6. It was error to direct the return of the properties to respondents Venancia Repaso, Hermogenes Tito and
Marcelino Gonzales.
7. The award of litigation expenses and attorneys fees was erroneous.
8. The petitioners are not possessors in bad faith.
On their first assignment of error, petitioners contend that before the Court of Appeals, they only questioned that
portion of the RTC decision which directed the return of the properties to respondents Repaso, Tito and
Gonzales. They argued that the return of the properties to all the other respondents by the Court of Appeals was
erroneous because it was not among the errors assigned or argued by petitioners on appeal. Besides, since
respondents themselves did not appeal from the RTC decision on the issue of return of the physical possession of the
property, it is understood that judgment as to them has already become final by operation of law. To support its
argument, petitioners cited the cases of Madrideo vs. Court of Appeals[14]and Medida vs. Court of Appeals[15], which
held that whenever an appeal is taken in a civil case an appellee who has not himself appealed cannot obtain from the
appellate court any affirmative relief other than the ones granted in the decision of the court below.
Rule 51 of the New Rules of Civil Procedure provides:
Sec. 8. Questions that may be decided. --- No error which does not affect the jurisdiction over the subject matter
or the validity of the judgment appealed from or the proceedings therein will be considered unless stated in the
assignment of errors, or closely related to or dependent on an assigned error and properly argued in the brief,
save as the court may pass upon plain errors and clerical errors.
We find untenable petitioners argument that since no party (whether petitioners or respondents) appealed for the
return of the properties to respondents other than Repaso, Tito and Gonzales, that portion of the RTC decision that
awards damages to such other respondents is final and may no longer be altered by the Court of Appeals. A reading
of the provisions of Section 8, Rule 51, aforecited, indicates that the Court of Appeals is not limited to reviewing only
those errors assigned by appellant, but also those that are closely related to or dependent on an assigned error. [16] In
other words, the Court of Appeals is imbued with sufficient discretion to review matters, not otherwise assigned as
errors on appeal, if it finds that their consideration is necessary in arriving at a complete and just resolution of the
case. In this case, the Court of Appeals ordered the return of the properties to respondents merely as a legal
consequence of the finding that respondents had a better right of possession than petitioners over the disputed
properties, the former being possessors in the concept of owner. Thus, it held ---
Plaintiffs-appellants have to return possession of the subject property, not only to defendants-appellees Venancia
Repaso, Hermogenes Tito and Marcelino Gonzales but to all other defendants-appellees herein, by virtue of the latters
priority in time of declaring the corresponding portions of the subject properties in their name and/or their
predecessors-in-interest coupled with actual possession of the same property through their predecessors-in-interest in
the concept of an owner. Plaintiffs-appellants who had never produced in court a valid basis by which they are
claiming possession or ownership over the said property cannot have a better right over the subject properties than
defendants-appellees.[17]
Moreover, petitioners reliance on the Madrideo and Medida cases is misplaced. In the Madrideo case, the
predecessors-in-interest of the Llorente Group sold the disputed property to the Alcala Group, who in turn sold the
same to the spouses Maturgo. The RTC adjudged the spouses Maturgo purchasers in good faith, such that they could
retain their title to the property, but held that the Lllorente Group was unlawfully divested of its ownership of the
property by the Alcala Group. The Alcala Group appealed this decision to the Court of Appeals, who denied the appeal
and ordered the reinstatement in the records of the Registry of Deeds of the Original Certificates of Title of the
predecessors-in-interest of the Llorente Group. In setting aside the decision of the Court of Appeals, this Court held
that no relief may be afforded in favor of the Llorente Group to the prejudice of the spouses Maturgo, who --- the Court
carefully emphasized --- were third parties to the appeal, being neither appellants nor appellees before the Court of
Appeals, and whose title to the disputed property was confirmed by the RTC. The application of the ruling
in Madrideo to the instant case bears no justification because it is clear that petitioners, in appealing the RTC decision,
impleaded all the herein respondents.
Meanwhile, in the Medida case, petitioners (who were the appellees before the Court of Appeals) sought the
reversal of a finding of the RTC before the Supreme Court. The Court explained that since petitioners failed to appeal
from the RTC decision, they --- as appellees before the Court of Appeals --- could only argue for the purpose of
sustaining the judgment in their favor, and could not ask for any affirmative relief other than that granted by the court
below. The factual milieu in Medida is different from that of the instant case, where the return of the properties to
respondents was not an affirmative relief sought by respondents but an independent determination of the Court of
Appeals proceeding from its findings that respondents were long-standing possessors in the concept of owner while
petitioners were builders in bad faith. Certainly, under such circumstances, the Court of Appeals is not precluded from
modifying the decision of the RTC in order to accord complete relief to respondents.
Moving now to the other errors assigned in the petition, the return of the properties to respondents Repaso, Tito
and Gonzales was premised upon the factual finding that these lands were outside the properties claimed by
petitioners under TCT Nos. T-103 and T-104. Such factual finding of the RTC, sustained by the Court of Appeals, is
now final and binding upon this Court.
In respect of the properties supposedly covered by TCT Nos. T-103 and T-104, the Court of Appeals basically
affirmed the findings of the RTC that respondents have shown prior and actual possession thereof in the concept of
owner, whereas petitioners failed to substantiate a valid and legitimate acquisition of the property --- considering that
the alleged titles of Cepoc from which TCT Nos. T-103 and T-104 were supposed to have derived title were not
produced, and the deed of sale between Cepoc and Durano & Co. was unregistrable.
The records clearly bear out respondents prior and actual possession; more exactly, the records indicate that
respondents possession has ripened into ownership by acquisitive prescription.
Ordinary acquisitive prescription, in the case of immovable property, requires possession of the thing in good
faith and with just title,[18] for a period of ten years.[19] A possessor is deemed to be in good faith when he is not aware
of any flaw in his title or mode of acquisition of the property.[20] On the other hand, there is just title when the adverse
claimant came into possession of the property through one of the modes for acquiring ownership recognized by law,
but the grantor was not the owner or could not transmit any right. [21] The claimant by prescription may compute the ten-
year period by tacking his possession to that of his grantor or predecessor-in-interest. [22]
The evidence shows that respondents successfully complied with all the requirements for acquisitive prescription
to set in. The properties were conveyed to respondents by purchase or inheritance, and in each case the respondents
were in actual, continuous, open and adverse possession of the properties. They exercised rights of ownership over
the lands, including the regular payment of taxes and introduction of plantings and improvements. They were unaware
of anyone claiming to be the owner of these lands other than themselves until the notices of demolition in 1970 --- and
at the time each of them had already completed the ten-year prescriptive period either by their own possession or by
obtaining from the possession of their predecessors-in-interest. Contrary to the allegation of petitioners that the claims
of all twenty-two (22) respondents were lumped together and indiscriminately sustained, the lower courts (especially
the RTC) took careful consideration of the claims individually, taking note of the respective modes and dates of
acquisition. Whether respondents predecessors-in-interest in fact had title to convey is irrelevant under the concept of
just title and for purposes of prescription.
Thus, respondents counterclaim for reconveyance and damages before the RTC was premised upon a claim of
ownership as indicated by the following allegations:
(Y)our defendants are owners and occupants of different parcels of land located in Barrio Cahumayhumayan,
your defendants having occupied these parcels of land for various periods by themselves or through their
predecessors-in-interest, some for over fifty years, and some with titles issued under the Land Registration
Act; xxxxx [23]
Respondents claim of ownership by acquisitive prescription (in respect of the properties covered by TCT Nos. T-
103 and T-104) having been duly alleged and proven, the Court deems it only proper that such claim be categorically
upheld. Thus, the decision of the Court of Appeals insofar as it merely declares those respondents possessors in the
concept of owner is modified to reflect the evidence on record which indicates that such possession had been
converted to ownership by ordinary prescription.
Turning now to petitioners claim to ownership and title, it is uncontested that their claim hinges largely on TCT
Nos. T-103 and T-104, issued in the name of petitioner Ramon Durano III.However, the validity of these certificates of
title was put to serious doubt by the following: (1) the certificates reveal the lack of registered title of Cepoc to the
properties;[24] (2) the alleged reconstituted titles of Cepoc were not produced in evidence; and (3) the deed of sale
between Cepoc and Durano & Co. was unnotarized and thus, unregistrable.
It is true that fraud in the issuance of a certificate of title may be raised only in an action expressly instituted for
that purpose,[25] and not collaterally as in the instant case which is an action for reconveyance and damages. While we
cannot sustain the Court of Appeals finding of fraud because of this jurisdictional impediment, we observe that the
above-enumerated circumstances indicate none too clearly the weakness of petitioners evidence on their claim of
ownership. For instance, the non-production of the alleged reconstituted titles of Cepoc despite demand therefor gives
rise to a presumption (unrebutted by petitioners) that such evidence, if produced, would be adverse to petitioners.
[26]
Also, the unregistrability of the deed of sale is a serious defect that should affect the validity of the certificates of
title. Notarization of the deed of sale is essential to its registrability,[27] and the action of the Register of Deeds in
allowing the registration of the unacknowledged deed of sale was unauthorized and did not render validity to the
registration of the document.[28]
Furthermore, a purchaser of a parcel of land cannot close his eyes to facts which should put a reasonable man
upon his guard, such as when the property subject of the purchase is in the possession of persons other than the
seller.[29] A buyer who could not have failed to know or discover that the land sold to him was in the adverse
possession of another is a buyer in bad faith.[30] In the herein case, respondents were in open possession and
occupancy of the properties when Durano & Co. supposedly purchased the same from Cepoc. Petitioners made no
attempt to investigate the nature of respondents possession before they ordered demolition in August 1970.
In the same manner, the purchase of the property by petitioner Ramon Durano III from Durano & Co. could not be
said to have been in good faith. It is not disputed that Durano III acquired the property with full knowledge of
respondents occupancy thereon. There even appears to be undue haste in the conveyance of the property to Durano
III, as the bulldozing operations by Durano & Co. were still underway when the deed of sale to Durano III was
executed on September 15, 1970. There is not even an indication that Durano & Co. attempted to transfer registration
of the property in its name before it conveyed the same to Durano III.
In the light of these circumstances, petitioners could not justifiably invoke the defense of indefeasibility of title to
defeat respondents claim of ownership by prescription. The rule on indefeasibility of title, i.e., that Torrens titles can be
attacked for fraud only within one year from the date of issuance of the decree of registration, does not altogether
deprive an aggrieved party of a remedy at law. As clarified by the Court in Javier vs. Court of Appeals[31] ---
The decree (of registration) becomes incontrovertible and can no longer be reviewed after one (1) year from the
date of the decree so that the only remedy of the landowner whose property has been wrongfully or erroneously
registered in anothers name is to bring an ordinary action in court for reconveyance, which is an action in
personam and is always available as long as the property has not passed to an innocent third party for value. If
the property has passed into the hands of an innocent purchaser for value, the remedy is an action for damages.
In the instant case, respondents action for reconveyance will prosper, it being clear that the property, wrongfully
registered in the name of petitioner Durano III, has not passed to an innocent purchaser for value.
Since petitioners knew fully well the defect in their titles, they were correctly held by the Court of Appeals to be
builders in bad faith.
The Civil Code provides:
Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown
without right of indemnity.
Art. 450. The owner of the land on which anything has been built, planted or sown in bad faith may demand the
demolition of the work, or that the planting or sowing be removed, in order to replace things in their former
condition at the expense of the person who built, planted or sowed; or he may compel the builder or planter to
pay the price of the land, and the sower the proper rent.
Art. 451. In the cases of the two preceding articles, the landowner is entitled to damages from the builder, planter
or sower.
Based on these provisions, the owner of the land has three alternative rights: (1) to appropriate what has been
built without any obligation to pay indemnity therefor, or (2) to demand that the builder remove what he had built, or (3)
to compel the builder to pay the value of the land. [32] In any case, the landowner is entitled to damages under Article
451, abovecited.
We sustain the return of the properties to respondents and the payment of indemnity as being in accord with the
reliefs under the Civil Code.
On petitioners fifth assignment of error that respondents had not proved the existence of improvements on the
property by preponderance of evidence, and that the damages awarded by the lower courts were excessive and not
actually proved, the Court notes that the issue is essentially factual. Petitioners, however, invoke Article 2199 of the
Civil Code which requires actual damages to be duly proved. Passing upon this matter, the Court of Appeals cited with
approval the decision of the RTC which stated:
The counter claimants made a detail of the improvements that were damaged. Then the query, how accurate were the
listings, supposedly representing damaged improvements. The Court notes, some of the counter claimants
improvements in the tax declarations did not tally with the listings as mentioned in their individual affidavits. Also,
others did not submit tax declarations supporting identity of the properties they possessed. The disparity with respect
to the former and absence of tax declarations with respect to the latter, should not be a justification for defeating right
of reimbursement. As a matter of fact, no controverting evidence was presented by the plaintiffs that the improvements
being mentioned individually in the affidavits did not reflect the actual improvements that were overran by the
bulldozing operation. Aside from that, the City Assessor, or any member of his staff, were not presented as
witnesses. Had they been presented by the plaintiffs, the least that can be expected is that they would have
enlightened the Court the extent of their individual holdings being developed in terms of existing improvements. This,
the plaintiffs defaulted. It might be true that there were tax declarations, then presented as supporting documents by
the counter claimants, but then mentioning improvements but in variance with the listings in the individual
affidavits. This disparity similarly cannot be accepted as a basis for the setting aside of the listing of improvements
being adverted to by the counter claimants in their affidavits. This Court is not foreclosing the possibility that the tax
declarations on record were either table computations by the Assessor or his deputy, or tax declarations whose entries
were merely copied from the old tax declarations during the period of revision. (RTC Decision, p. 36, Records, p. 862)
[33]

The right of the owner of the land to recover damages from a builder in bad faith is clearly provided for in Article
451 of the Civil Code. Although said Article 451 does not elaborate on the basis for damages, the Court perceives that
it should reasonably correspond with the value of the properties lost or destroyed as a result of the occupation in bad
faith, as well as the fruits (natural, industrial or civil) from those properties that the owner of the land reasonably
expected to obtain. We sustain the view of the lower courts that the disparity between respondents affidavits and their
tax declarations on the amount of damages claimed should not preclude or defeat respondents right to damages,
which is guaranteed by Article 451.Moreover, under Article 2224 of the Civil Code:
Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of
the case, be proved with certainty.
We also uphold the award of litigation expenses and attorneys fees, it being clear that petitioners acts compelled
respondents to litigate and incur expenses to regain rightful possession and ownership over the disputed property. [34]
The last issue presented for our resolution is whether petitioners could justifiably invoke the doctrine of separate
corporate personality to evade liability for damages. The Court of Appeals applied the well-recognized principle of
piercing the corporate veil, i.e., the law will regard the act of the corporation as the act of its individual stockholders
when it is shown that the corporation was used merely as an alter ego by those persons in the commission of fraud or
other illegal acts.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiffs legal
rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate veil. In applying the instrumentality or alter
ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual
defendants relationship to that operation.[35]
The question of whether a corporation is a mere alter ego is purely one of fact. [36] The Court sees no reason to
reverse the finding of the Court of Appeals. The facts show that shortly after the purported sale by Cepco to Durano &
Co., the latter sold the property to petitioner Ramon Durano III, who immediately procured the registration of the
property in his name.Obviously, Durano & Co. was used by petitioners merely as an instrumentality to appropriate the
disputed property for themselves.
WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals is MODIFIED to declare
respondents with claims to the properties covered by Transfer Certificate of Title Nos. T-103 and T-104 owners by
acquisitive prescription to the extent of their respective claims. In all other respects, the decision of the Court of
Appeals is AFFIRMED. Costs against petitioners.
SO ORDERED.

General Credit Corp. vs. Alsons Development and Investment Corp.

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner General Credit Corporation, now
known as Penta Capital Finance Corporation, seeks to annul and set aside the Decision [1] and Resolution[2] dated April
11, 2002 and August 20, 2002, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 31801, affirming the
November 8, 1990 decision of the Regional Trial Court (RTC) of Makati City in its Civil Case No. 12707, an action for a
sum of money thereat instituted by the herein respondent Alsons Development and Investment Corporation against
the petitioner and respondent CCC Equity Corporation.

The facts:

Shortly after its incorporation in 1957 as a finance and investment company, petitioner General Credit Corporation
(GCC, for short), then known as Commercial Credit Corporation (CCC), established CCC franchise companies in
different urban centers of the country.[3] In furtherance of its business, GCC had, as early as 1974, applied for and was
able to secure license from the then Central Bank (CB) of the Philippines and the Securities and Exchange
Commission (SEC) to engage also in quasi-banking activities. [4]On the other hand, respondent CCC Equity
Corporation (EQUITY, for brevity) was organized in November 1994 by GCC for the purpose of, among other things,
taking over the operations and management of the various franchise companies. At a time material hereto, respondent
Alsons Development and Investment Corporation (ALSONS, hereinafter) and Conrado, Nicasio, Editha and
Ladislawa, all surnamed Alcantara, and Alfredo de Borja (hereinafter the Alcantara family, for convenience), each
owned, just like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.

In December 1980, ALSONS and the Alcantara family, for a consideration of Two Million (P2,000,000.00) Pesos,
sold their shareholdings a total of 101,953 shares, more or less in the CCC franchise companies to EQUITY.
[5]
On January 2, 1981, EQUITY issued ALSONS et al., a bearer promissory note for P2,000,000.00 with a one-year
maturity date, at 18% interest per annum, with provisions for damages and litigation costs in case of default. [6]

Some four years later, the Alcantara family assigned its rights and interests over the bearer note to ALSONS which
thenceforth became the holder thereof.[7] But even before the execution of the assignment deal aforestated, letters of
demand for interest payment were already sent to EQUITY, through its President, Wilfredo Labayen, who pleaded
inability to pay the stipulated interest, EQUITY no longer then having assets or property to settle its obligation nor
being extended financial support by GCC.

What happened next, as narrated in the assailed Decision of the CA, may be summarized, as follows:

1. On January 14, 1986, before the RTC of Makati, ALSONS, having failed to collect on the bearer
note aforementioned, filed a complaint for a sum of money [8] against EQUITY and GCC. The case,
docketed as Civil Case No. 12707, was eventually raffled to Branch 58 of the court. As stated in par. 4
of the complaint, GCC is being impleaded as party-defendant for any judgment ALSONS might secure
against EQUITY and, under the doctrine of piercing the veil of corporate fiction, against
GCC, EQUITY having been organized as a tool and mere conduit of GCC.

2. Answering with a cross-claim against GCC, EQUITY stated by way of special and
affirmative defenses that it (EQUITY):

a) was purposely organized by GCC for the latter to avoid CB Rules and Regulations
on DOSRI (Directors, Officers, Stockholders and Related Interest) limitations, and
that it acted merely as intermediary or bridge for loan transactions and other dealings
of GCC to its franchises and the investing public; and

b) is solely dependent upon GCC for its funding requirements, to settle, among
others, equity purchases made by investors on the franchises; hence, GCC is solely
and directly liable to ALSONS, the former having failed to provide EQUITY the
necessary funds to meet its obligations to ALSONS.

3. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from
EQUITY and alleging, in essence that the business relationships with each other were always at arms
length. And following the denial of its motion to dismiss ALSONS complaint, on the ground of lack of
jurisdiction and want of cause of action, GCC filed its Answer thereto and set up affirmative defenses
with counterclaim for exemplary damages and attorneys fees.

Issues having been joined, trial ensued. Presented by ALSONS, but testifying as adverse witnesses, were CB and
GCC officers. Among other things, ALSONS evidence, which included the EQUITY-issued bearer promissory note
marked as Exhibit K and over sixty (60) other marked and subsequently admitted documents, [9] were to the effect that
five (5) incorporators, each contributing P100,000.00 as the initial paid up capital of the company, organized EQUITY
to manage, as it did manage, various GCC franchises through management contracts. Before EQUITYs incorporation,
however, GCC was already into the financing business as it was in fact managing and operating various CCC
franchises. Presented in evidence, too, was the September 29, 1982 letter-reply of one G. Villanueva, then GCC
President, to EQUITY President Wilfredo Labayen, bearing on the sale of EQUITY shares to third parties, part of the
proceeds of which the Alcantaras wanted applied to liquidate the promissory note in question. In said letter, Mr.
Villanueva explained that the GCC Board denied the Alcantaras request to be paid out of such proceeds, but
nonetheless authorized EQUITY to pay them interest out of EQUITYs operation income, in preference over what was
due GCC.[10]

Albeit EQUITY presented its president, it opted to adopt the testimony of some of ALSONS witnesses,
inclusive of the documentary exhibits testified to by each of them, as its evidence.

For its part, GCC called only Wilfredo Labayen to testify. It stuck to its underlying defense of separateness and
presented documentary evidence detailing the organizational structures of both GCC and EQUITY. And in a bid to
negate the notion that it was conducting its business illegally, GCC presented CB and SEC-issued licenses authoring
it to engage in financing and quasi-banking activities. It also adduced evidence to prove that it was never a party to
any of the actionable documents ALSONS and its predecessors-in-interest had in their possession and that
the November 27, 1985 deed of assignment of rights over the promissory note was unenforceable.

Eventually, the trial court, on its finding that EQUITY was but an instrumentality or adjunct of GCC and
considering the legal consequences and implications of such relationship, came out with its decision on November 8,
1990, rendering judgment for ALSONS, to wit:
 WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of plaintiff
[ALSONS] and against the defendants [EQUITY and GCC] who are hereby ordered, jointly and
severally, to pay plaintiff:

1. the principal sum of Two Million Pesos (P2,000,000.00) together with the interest due thereon at the
rate of eighteen percent (18%) annually computed from Jan. 2, 1981 until the obligation is fully paid;

2. liquidated damages due thereon equivalent to three percent (3%) monthly computed from January
2, 1982 until the obligation is fully paid;

3. attorneys fees in an amount equivalent to twenty four percent (24%) of the total obligation due; and

4. the costs of suit.

IT IS SO ORDERED. (Words in brackets added.)

Therefrom, GCC went on appeal to the CA where its appellate recourse was docketed as CA-G.R. CV No.
31801, ascribing to the trial court the commission of the following errors:

1. In holding that there is a Parent-Subsidiary corporate relationship between EQUITY and

GCC;

2. In not holding that EQUITY and GCC are distinct and separate corporate entities;

3. In applying the doctrine of Piercing the Veil of Corporate Fiction in the case at bar; and

4. In not holding ALSONS in estoppel to question the corporate personality of EQUITY.

On April 11, 2002, the appellate court rendered the herein assailed Decision, [11] affirming that of the trial court, thus:
WHEREFORE, premises considered, the Decision of the Regional Trial Court, Branch 58, Makati in
Civil Case No. 12707 is hereby AFFIRMED.

SO ORDERED.

In time, GCC moved for reconsideration followed by a motion for oral argument, but both motions were denied by the
CA in its equally assailed Resolution of August 20, 2002.[12]

Hence, GCCs present recourse anchored on the following arguments, issues and/or submissions:

1. The motion for oral argument with motion for reconsideration and its supplement were perfunctorily
denied by the CA without justifiable basis;

2. There is absolutely no basis for piercing the veil of corporate fiction;

3. Respondent Alsons is not a real party-in-interest as the promissory note payable to bearer subject
of the collection suit is but a simulated document and/or refers to another party. Moreover, the subject
promissory note is not admissible in evidence because it has not been duly authenticated and it is an
altered document;

4. The fact of full payment stated in the ten (10) deeds of sale of the shares of stock is
conclusive on the sellers, and by the patrol evidence rule, the alleged fact of its non-payment cannot
be introduced in evidenced; and

5. The counter-claim filed by GCC against Alsons should be granted in the interest of justice.

The petition and the arguments and/or issues holding it together are without merit. The desired reversal of the
assailed decision and resolution of the appellate court is accordingly DENIED.
Instead of raising distinctly formulated questions of law, as is expected of one seeking a review under Rule 45
of the Rules of Court of a final CA judgment,[13] petitioner GCC starts off by voicing disappointment over the
perfunctory denial by the CA of its twin motions for reconsideration and oral argument. Petitioner, to be sure, cannot
plausibly expect a reversal action premised on the cursory way its motions were denied, if such indeed were the
case. Such manner of denial, while perhaps far from ideal, is not even a recognized ground for appeal by certiorari,
unless a denial of due process ensues, which is not the case here. And lest it be overlooked, the CA prefaced its
assailed denial resolution with the clause: [F]inding no reversible error committed to warrant the modification and/or
reversal of the April 11, 2002 Decision, suggesting that the appellate court gave the petitioners motion for
reconsideration the attention it deserved. At the very least, the petitioner was duly apprised of the reasons why
reconsideration could not be favorably considered. An extended resolution was not really necessary to dispose of the
motion for reconsideration in question.

Petitioners lament about being deprived of procedural due process owing to the denial of its motion for oral
argument is simply specious. Under the CA Internal Rules, the appellate court may tap any of the three (3) alternatives
therein provided to aid the court in resolving appealed cases before it. It may rely on available records alone, require
the submission of memoranda or set the case for oral argument. The option the Internal Rules thus gives the CA
necessarily suggests that the appellate court may, at its sound discretion, dispense with a tedious oral argument
exercise. Rule VI, Section 6 of the 2002 Internal Rules of the CA, provides:

SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for review, after the receipt of
the respondents comment on the petition, the Court [of Appeals] may dismiss the petition if it finds the
same to be patently without merit , otherwise, it shall give due course to it.

xxx xxx xxx

If the petition is given due course, the Court may consider the case submitted for decision or
require the parties to submit their memorandum or set the case for oral argument. xxx. After the oral
argument or upon submission of the memoranda the case shall be deemed submitted for decision.

In the case at bench, records reveal that the appellate court, in line with the prescription of its own rules,
required the parties to just submit, as they did, their respective memoranda to properly ventilate their separate causes.
Under this scenario, the petitioner cannot be validly heard, having been deprived of due process.

Just like the first, the last three (3) arguments set forth in the petition will not carry the day for the petitioner. In
relation therewith, the Court notes that these arguments and the issues behind them were not raised before the trial
court. This appellate maneuver cannot be allowed. For, well-settled is the rule that issues or grounds not raised below
cannot be resolved on review in higher courts.[14] Springing surprises on the opposing party is antithetical to the
sporting idea of fair play, justice and due process; hence, the proscription against a party shifting from one theory at
the trial court to a new and different theory in the appellate level. On the same rationale, points of law, theories, issues
not brought to the attention of the lower court or, in fine, not interposed during the trial cannot be raised for the first
time on appeal.[15]

There are, to be sure, exceptions to the rule respecting what may be raised for the first time on appeal. Lack
of jurisdiction over when the issues raised present a matter of public policy [16] comes immediately to mind. None of the
well-recognized exceptions obtain in this case, however.

Lest it be overlooked vis--vis the same last three arguments thus pressed, both the trial court and the CA,
based on the evidence adduced, adjudged the petitioner and respondent EQUITY jointly and severally liable to pay
what respondent ALSONS is entitled to under the bearer promissory note. The judgment argues against the notion of
the note being simulated or altered or that respondent ALSONS has no standing to sue on the note, not being the
payee of the bearer note. For, the declaration of liability not only presupposes the duly established authenticity and
due execution of the promissory note over which ALSONS, as the holder in due course thereof, has interest, but also
the untenability of the petitioners counterclaim for attorneys fees and exemplary damages against ALSONS. At
bottom, the petitioner predicated such counter-claim on the postulate that respondent ALSONS had no cause of
action, the supposed promissory note being, according to the petitioner, either a simulated or an altered document.

In net effect, the definitive conclusion of the appellate court affirmatory of that of the trial court was that the
bearer promissory note (Exh. K) was a genuine and authentic instrument payable to the holder thereof. This factual
determination, as a matter of long and sound appellate practice, deserves great weight and shall not be disturbed on
appeal, save for the most compelling reasons,[17] such as when that determination is clearly without evidentiary
support or when grave abuse of discretion has been committed. [18] This is as it should be since the Court, in petitions
for review of CA decisions under Rule 45 of the Rules of Court, usually limits its inquiry only to questions of law. Stated
otherwise, it is not the function of the Court to analyze and weigh all over again the evidence or premises supportive of
the factual holdings of lower courts.[19]

As nothing in the record indicates any of the exceptions adverted to above, the factual conclusion of the CA
that the P2 Million promissory note in question was authentic and was issued at the first instance to respondent
ALSONS and the Alcantara family for the amount stated on its face, must be affirmed. It should be stressed in this
regard that even the issuing entity, i.e., respondent EQUITY, never challenged the genuineness and due execution of
the note.

This brings us to the remaining but core issue tendered in this case and aptly raised by the petitioner, to wit: whether
there is absolutely no basis for piercing GCCs veil of corporate identity.
A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons
composing it[20] as well as from that of any other entity to which it may be related. [21] The first consequence of the
doctrine of legal entity of the separate personality of the corporation is that a corporation may not be made to answer
for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. [22]

The notion of separate personality, however, may be disregarded under the doctrine piercing the veil of
corporate fiction as in fact the court will often look at the corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is that when two (2) business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and
the same.[23]

Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately
pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not
hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. [24] After all, the
concept of corporate entity was not meant to promote unfair objectives.

Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and
isolates the corporation from any other legal entity to which it may be related, is allowed. [25] These are: 1) defeat of
public convenience,[26] as when the corporate fiction is used as vehicle for the evasion of an existing obligation; [27] 2)
fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; [28] or 3) alter
ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.[29]

The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being justifiable basis for such action.
When the appellate court spoke of a justifying factor, the reference was to what the trial court said in its decision,
namely: the existence of certain circumstances [which], taken together, gave rise to the ineluctable conclusion that
[respondent] EQUITY is but an instrumentality or adjunct of [petitioner] GCC.

The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the
transaction subject of this case. Per the Courts count, the trial court enumerated no less than 20 documented
circumstances and transactions, which, taken as a package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit of petitioner GCC. This relation, in turn, provides a
justifying ground to pierce petitioners corporate existence as to ALSONS claim in question. Foremost of what the trial
court referred to as certain circumstances are the commonality of directors, officers and stockholders and even
sharing of office between petitioner GCC and respondent EQUITY; certain financing and management arrangements
between the two, allowing the petitioner to handle the funds of the latter; the virtual domination if not control wielded
by the petitioner over the finances, business policies and practices of respondent EQUITY; and the establishment of
respondent EQUITY by the petitioner to circumvent CB rules. For a perspective, the following are some relevant
excerpts from the trial courts decision setting forth in some detail the tipping circumstances adverted to therein:
It must be noted that as characterized by their business relationship, [respondent] EQUITY and
[petitioner] GCC had common directors and/or officers as well as stockholders. This is revealed
by the proceedings recorded in SEC Case No. 25-81 entitled Avelina Ramoso, et al., vs. GCC, et al.,
where it was established, thru the testimony of EQUITYs own President that more than 90% of the
stockholders of EQUITY were also stockholders of GCC .. Disclosed likewise is the fact that when
[EQUITYs President] Labayen sold the shareholdings of EQUITY in said franchise companies,
practically the entire proceeds thereof were surrendered to GCC, and not received by EQUITY
(EXHIBIT RR) xxx.

It was likewise shown by a preponderance of evidence that not only had GCC financed EQUITY and
that the latter was heavily indebted to the former but EQUITY was, in fact, a wholly owned
subsidiary of GCC. Thus, as affirmed by EQUITYs President, the funds invested by EQUITY in the
CCC franchise companies actually came from CCC Phils. or GCC (Exhibit Y-5). that, as disclosed
by the Auditors report for 1982, past due receivables alone of GCC exceeded P101,000,000.00
mostly to GCC affiliates especially CCC EQUITY. ; that [CBs] Report of Examination dated July 14,
1977 shows that EQUITY which has a paid-up capital of only P500,000.00 was the biggest borrower
of GCC with a total loan of P6.70 Million .

xxx xxx xxx

It has likewise been amply substantiated by [respondent ALSONS] evidence that not only did GCC
cause the incorporation of EQUITY, but, the latter had grossly inadequate capital for the pursuit of its
line of business to the extent that its business affairs were considered as GCCs own business
endeavors. xxx.
 xxx xxx xxx

ALSONS has likewise shown that the bonuses of the officers and directors of EQUITY was based on
its total financial performance together with all its affiliates both firms were sharing one and the same
office when both were still operational and that the directors and executives of EQUITY never acted
independently but took their orders from GCC.

The evidence has also indubitably established that EQUITY was organized by GCC for the
purpose of circumventing [CB] rules and regulations and the Anti-Usury Law. Thus, as
disclosed by the Advance Report on the result of Central Banks Operations Examination conducted
on GCC as of March 31, 1977 (EXHIBITS FFF etc.), the latter violated [CB] rules and
regulations by : (a) using as a conduit its non-quasi bank affiliates . (b) issuing without recourse
facilities to enable GCC to extend credit to affiliates like EQUITY which go beyond the single
borrowers limit without the need of showing outstanding balance in the book of accounts. (Emphasis
over words in brackets added.)

It bears to stress at this point that the facts and the inferences drawn therefrom, upon which the two (2) courts
below applied the piercing doctrine, stand, for the most part, undisputed. Among these is, to reiterate, the matter of
EQUITY having been incorporated to serve, as it did serve, as an instrumentality or adjunct of GCC. With the view we
take of this case, GCC did not adduce any evidence, let alone rebut the testimonies and documents presented by
ALSONS, to establish the prevailing circumstances adverted to that provided the justifying occasion to pierce the veil
of corporate fiction between GCC and EQUITY. We quote the trial court:

Verily, indeed, as the relationships binding herein [respondent EQUITY and petitioner GCC] have
been that of parent-subsidiary corporations the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily and indubitably shown that the said
relationships had been used to perform certain functions not characterized with legitimacy, this Court
feels amply justified to pierce the veil of corporate entity and disregard the separate existence of
the percent (sic) and subsidiary the latter having been so controlled by the parent that its
separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of the
former. Consequently, as the parent corporation, [petitioner] GCC maybe (sic) held responsible for
the acts and contracts of its subsidiary [respondent] EQUITY - most especially if the latter (who had
anyhow acknowledged its liability to ALSONS) maybe (sic) without sufficient property with which to
settle its obligations. For, after all, GCC was the entity which initiated and benefited immensely from
the fraudulent scheme perpetrated in violation of the law. (Words in parenthesis in the original;
emphasis and bracketed words added).

Given the foregoing considerations, it behooves the petitioner, as a matter of law and equity, to assume the legitimate
financial obligation of a cash-strapped subsidiary corporation which it virtually controlled to such a degree that the
latter became its instrument or agent. The facts, as found by the courts a quo, and the applicable law call for this kind
of disposition. Or else, the Court would be allowing the wrong use of the fiction of corporate veil.

WHEREFORE, the instant petition is DENIED and the appealed Decision and Resolution of the Court of Appeals are
accordingly AFFIRMED.

Costs against the petitioner.

SO ORDERED.
G.R. No. L-12719 May 31, 1962
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal
Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed
and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation
organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was
subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de golf,
tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no
prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion
cualquiera para el recreo y entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de
Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends
and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying
debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its
members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its
golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits
it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital
surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered
that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-
9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and
demanded from the Club, the following sums:
As percentage tax on its gross
receipts
during the tax years 1946 to P9,599.
1951 07
2,399.7
Surcharge therein
7
As fixed tax for the years 1946
70.00
to 1952
Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the
Club filed the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and
surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made, in
connection with the operation of its bar and restaurant, during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which
the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or
fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the
percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due
on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage
tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and
keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has been
held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach
by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must
be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is
restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when
used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profitor
livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R.
No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al.
[International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar;
Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its
dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in
Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution
to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its
overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the
Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not
necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the
Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object
of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and
members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club
should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R.
No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23,
1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation.
This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does not
detract from the finding of the trial court that it is not engaged in the business of operator of bar and
restaurant. What is determinative of whether or not the Club is engaged in such business is its object or
purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by
the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic
evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court
concluded that the Club is not engaged in the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock
divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of
the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its
articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus
profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the
corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock
organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra),
which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and
restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much
less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed without costs.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.

[G.R. No. 143377. February 20, 2001]

SHIPSIDE INCORPORATED, petitioner, vs. THE HON. COURT OF APPEALS [Special Former Twelfth Division],
HON. REGIONAL TRIAL COURT, BRANCH 26 (San Fernando City, La Union) & The REPUBLIC OF THE
PHILIPPINES, respondents.

The antecedent facts are undisputed:

On October 29, 1958, Original Certificate of Title No. 0-381 was issued in favor of Rafael Galvez, over four
parcels of land Lot 1 with 6,571 square meters; Lot 2, with 16,777 square meters; Lot 3 with 1,583 square meters; and
Lot 4, with 508 square meters.
On April 11, 1960, Lots No. 1 and 4 were conveyed by Rafael Galvez in favor of Filipina Mamaril, Cleopatra
Llana, Regina Bustos, and Erlinda Balatbat in a deed of sale which was inscribed as Entry No. 9115 OCT No. 0-381
on August 10, 1960. Consequently, Transfer Certificate No. T-4304 was issued in favor of the buyers covering Lots No.
1 and 4.
On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4 to Lepanto Consolidated Mining Company. The deed of
sale covering the aforesaid property was inscribed as Entry No. 9173 on TCT No. T-4304. Subsequently, Transfer
Certificate No. T-4314 was issued in the name of Lepanto Consolidated Mining Company as owner of Lots No. 1 and
4.
On February 1, 1963, unknown to Lepanto Consolidated Mining Company, the Court of First Instance of La
Union, Second Judicial District, issued an Order in Land Registration Case No. N-361 (LRC Record No. N-14012)
entitled Rafael Galvez, Applicant, Eliza Bustos, et al., Parties-In-Interest; Republic of the Philippines, Movant declaring
OCT No. 0-381 of the Registry of Deeds for the Province of La Union issued in the name of Rafael Galvez, null and
void, and ordered the cancellation thereof.
The Order pertinently provided:
Accordingly, with the foregoing, and without prejudice on the rights of incidental parties concerned herein to institute
their respective appropriate actions compatible with whatever cause they may have, it is hereby declared and this
court so holds that both proceedings in Land Registration Case No. N-361 and Original Certificate No. 0-381 of the
Registry of Deeds for the province of La Union issued in virtue thereof and registered in the name of Rafael Galvez,
are null and void; the Register of Deeds for the Province of La Union is hereby ordered to cancel the said original
certificate and / or such other certificates of title issued subsequent thereto having reference to the same parcels of
land; without pronouncement as to costs.
On October 28, 1963, Lepanto Consolidated Mining Company sold to herein petitioner Lots No. 1 and 4, with the
deed being entered in TCT NO. 4314 as entry No. 12381. Transfer Certificate of Title No. T-5710 was thus issued in
favor of the petitioner which starting since then exercised proprietary rights over Lots No. 1 and 4.
In the meantime, Rafael Galvez filed his motion for reconsideration against the order issued by the trial court
declaring OCT No. 0-381 null and void. The motion was denied on January 25, 1965. On appeal, the Court of Appeals
ruled in favor of the Republic of the Philippines in a Resolution promulgated on August 14, 1973 in CA-G. R. No.
36061-R.
Thereafter, the Court of Appeals issued an Entry of Judgment, certifying that its decision dated August 14, 1973
became final and executory on October 23, 1973.
On April 22, 1974, the trial court in L. R. C. Case No. N-361 issued a writ of execution of the judgment which was
served on the Register of Deeds, San Fernando, La Union on April 29, 1974.
Twenty four long years thereafter, on January 14, 1999, the Office of the Solicitor General received a letter
dated January 11, 1999 from Mr. Victor G. Floresca, Vice-President, John Hay Poro Point Development
Corporation, stating that the aforementioned orders and decision of the trial court in L. R. C. No. N-361 have
not been executed by the Register of Deeds, San Fernando, La Union despite receipt of the writ of execution.
On April 21, 1999, the Office of the Solicitor General filed a complaint for revival of judgment and cancellation of
titles before the Regional Trial Court of the First Judicial Region (Branch 26, San Fernando, La Union) docketed
therein as Civil Case No. 6346 entitled, Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez,
represented by Teresita Tan, Reynaldo Mamaril, Elisa Bustos, Erlinda Balatbat, Regina Bustos, Shipside Incorporated
and the Register of Deeds of La Union, Defendants.
The evidence shows that the impleaded defendants (except the Register of Deeds of the province of La Union)
are the successors-in-interest of Rafael Galvez (not Reynaldo Galvez as alleged by the Solicitor General) over the
property covered by OCT No. 0-381, namely: (a) Shipside Inc. which is presently the registered owner in fee simple of
Lots No. 1 and 4 covered by TCT No. T-5710, with a total area of 7,079 square meters; (b) Elisa Bustos, Jesusito
Galvez, and Teresita Tan who are the registered owners of Lot No. 2 of OCT No. 0-381;and (c) Elisa Bustos, Filipina
Mamaril, Regina Bustos and Erlinda Balatbat who are the registered owners of Lot No. 3 of OCT No. 0-381, now
covered by TCT No. T-4916, with an area of 1,583 square meters.
In its complaint in Civil Case No. 6346, the Solicitor General argued that since the trial court in LRC Case No.
361 had ruled and declared OCT No. 0-381 to be null and void, which ruling was subsequently affirmed by the Court
of Appeals, the defendants-successors-in-interest of Rafael Galvez have no valid title over the property covered by
OCT No. 0-381, and the subsequent Torrens titles issued in their names should be consequently cancelled.
On July 22, 1999, petitioner Shipside, Inc. filed its Motion to Dismiss, based on the following grounds: (1) the
complaint stated no cause of action because only final and executory judgments may be subject of an action for
revival of judgment; (2) the plaintiff is not the real party-in-interest because the real property covered by the Torrens
titles sought to be cancelled, allegedly part of Camp Wallace (Wallace Air Station), were under the ownership and
administration of the Bases Conversion Development Authority (BCDA) under Republic Act No. 7227; (3) plaintiffs
cause of action is barred by prescription; (4) twenty-five years having lapsed since the issuance of the writ of
execution, no action for revival of judgment may be instituted because under Paragraph 3 of Article 1144 of the Civil
Code, such action may be brought only within ten (10) years from the time the judgment had been rendered.
An opposition to the motion to dismiss was filed by the Solicitor General on August 23, 1999, alleging among
others, that: (1) the real party-in-interest is the Republic of the Philippines;and (2) prescription does not run against the
State.
On August 31, 1999, the trial court denied petitioners motion to dismiss and on October 14, 1999, its motion for
reconsideration was likewise turned down.
On October 21, 1999, petitioner instituted a petition for certiorari and prohibition with the Court of Appeals,
docketed therein as CA-G.R. SP No. 55535, on the ground that the orders of the trial court denying its motion to
dismiss and its subsequent motion for reconsideration were issued in excess of jurisdiction.
On November 4, 1999, the Court of Appeals dismissed the petition in CA-G.R. SP No. 55535 on the ground that
the verification and certification in the petition, under the signature of Lorenzo Balbin, Jr., was made without authority,
there being no proof therein that Balbin was authorized to institute the petition for and in behalf and of petitioner.
On May 23, 2000, the Court of Appeals denied petitioners motion for reconsideration on the grounds that: (1) a
complaint filed on behalf of a corporation can be made only if authorized by its Board of Directors, and in the absence
thereof, the petition cannot prosper and be granted due course;and (2) petitioner was unable to show that it had
substantially complied with the rule requiring proof of authority to institute an action or proceeding.
Hence, the instant petition.
In support of its petition, Shipside, Inc. asseverates that:
 1. The Honorable Court of Appeals gravely abused its discretion in dismissing the petition when it made a
conclusive legal presumption that Mr. Balbin had no authority to sign the petition despite the clarity of
laws, jurisprudence and Secretarys certificate to the contrary;
2. The Honorable Court of Appeals abused its discretion when it dismissed the petition, in effect affirming the
grave abuse of discretion committed by the lower court when it refused to dismiss the 1999 Complaint for
Revival of a 1973 judgment, in violation of clear laws and jurisprudence.
Petitioner likewise adopted the arguments it raised in the petition and comment/reply it filed with the Court of
Appeals, attached to its petition as Exhibit L and N, respectively.
In his Comment, the Solicitor General moved for the dismissal of the instant petition based on the following
considerations: (1) Lorenzo Balbin, who signed for and in behalf of petitioner in the verification and certification of non-
forum shopping portion of the petition, failed to show proof of his authorization to institute the petition for certiorari and
prohibition with the Court of Appeals, thus the latter court acted correctly in dismissing the same; (2) the real party-in-
interest in the case at bar being the Republic of the Philippines, its claims are imprescriptible.
In order to preserve the rights of herein parties, the Court issued a temporary restraining order on June 26, 2000
enjoining the trial court from conducting further proceedings in Civil Case No. 6346.
The issues posited in this case are: (1) whether or not an authorization from petitioners Board of Directors is still
required in order for its resident manager to institute or commence a legal action for and in behalf of the corporation;
and (2) whether or not the Republic of the Philippines can maintain the action for revival of judgment herein.
We find for petitioner.
Anent the first issue:
The Court of Appeals dismissed the petition for certiorari on the ground that Lorenzo Balbin, the resident
manager for petitioner, who was the signatory in the verification and certification on non-forum shopping, failed to
show proof that he was authorized by petitioners board of directors to file such a petition.
A corporation, such as petitioner, has no power except those expressly conferred on it by the Corporation Code
and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board
of directors and / or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation
to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers (Premium
Marble Resources, Inc. v. CA, 264 SCRA 11 [1996]). In turn, physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a
specific act of the board of directors.
It is undisputed that on October 21, 1999, the time petitioners Resident Manager Balbin filed the petition, there
was no proof attached thereto that Balbin was authorized to sign the verification and non-forum shopping certification
therein, as a consequence of which the petition was dismissed by the Court of Appeals. However, subsequent to such
dismissal, petitioner filed a motion for reconsideration, attaching to said motion a certificate issued by its board
secretary stating that on October 11, 1999, or ten days prior to the filing of the petition, Balbin had been authorized by
petitioners board of directors to file said petition.
The Court has consistently held that the requirement regarding verification of a pleading is formal, not
jurisdictional (Uy v. LandBank, G.R. No. 136100, July 24, 2000). Such requirement is simply a condition affecting the
form of the pleading, non-compliance with which does not necessarily render the pleading fatally defective. Verification
is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product
of the imagination or a matter of speculation, and that the pleading is filed in good faith. The court may order the
correction of the pleading if verification is lacking or act on the pleading although it is not verified, if the attending
circumstances are such that strict compliance with the rules may be dispensed with in order that the ends of justice
may thereby be served.
On the other hand, the lack of certification against forum shopping is generally not curable by the submission
thereof after the filing of the petition. Section 5, Rule 45 of the 1997 Rules of Civil Procedure provides that the failure
of the petitioner to submit the required documents that should accompany the petition, including the certification
against forum shopping, shall be sufficient ground for the dismissal thereof. The same rule applies to certifications
against forum shopping signed by a person on behalf of a corporation which are unaccompanied by proof that said
signatory is authorized to file a petition on behalf of the corporation.
In certain exceptional circumstances, however, the Court has allowed the belated filing of the
certification. In Loyola v. Court of Appeals, et. al. (245 SCRA 477 [1995]), the Court considered the filing of the
certification one day after the filing of an election protest as substantial compliance with the requirement. In Roadway
Express, Inc. v. Court of Appeals, et. al. (264 SCRA 696 [1996]), the Court allowed the filing of the certification 14 days
before the dismissal of the petition. In Uy v. LandBank, supra, the Court had dismissed Uys petition for lack of
verification and certification against non-forum shopping.However, it subsequently reinstated the petition after Uy
submitted a motion to admit certification and non-forum shopping certification. In all these cases, there were special
circumstances or compelling reasons that justified the relaxation of the rule requiring verification and certification on
non-forum shopping.
In the instant case, the merits of petitioners case should be considered special circumstances or compelling
reasons that justify tempering the requirement in regard to the certificate of non-forum shopping. Moreover,
in Loyola, Roadway, and Uy, the Court excused non-compliance with the requirement as to the certificate of non-
forum shopping. With more reason should we allow the instant petition since petitioner herein did submit a certification
on non-forum shopping, failing only to show proof that the signatory was authorized to do so. That petitioner
subsequently submitted a secretarys certificate attesting that Balbin was authorized to file an action on behalf of
petitioner likewise mitigates this oversight.
 It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory,
nonetheless the requirements must not be interpreted too literally and thus defeat the objective of preventing the
undesirable practice of forum-shopping (Bernardo v. NLRC, 255 SCRA 108 [1996]). Lastly, technical rules of
procedure should be used to promote, not frustrate justice. While the swift unclogging of court dockets is a laudable
objective, the granting of substantial justice is an even more urgent ideal.
Now to the second issue:
The action instituted by the Solicitor General in the trial court is one for revival of judgment which is governed by
Article 1144(3) of the Civil Code and Section 6, Rule 39 of the 1997 Rules on Civil Procedure. Article 1144(3) provides
that an action upon a judgment must be brought within 10 years from the time the right of action accrues." On the
other hand, Section 6, Rule 39 provides that a final and executory judgment or order may be executed
on motion within five (5) years from the date of its entry, but that after the lapse of such time, and before it is barred by
the statute of limitations, a judgment may be enforced by action. Taking these two provisions into consideration, it is
plain that an action for revival of judgment must be brought within ten years from the time said judgment becomes
final.
From the records of this case, it is clear that the judgment sought to be revived became final on October 23,
1973. On the other hand, the action for revival of judgment was instituted only in 1999, or more than twenty-five (25)
years after the judgment had become final. Hence, the action is barred by extinctive prescription considering that such
an action can be instituted only within ten (10) years from the time the cause of action accrues.
The Solicitor General, nonetheless, argues that the States cause of action in the cancellation of the land title
issued to petitioners predecessor-in-interest is imprescriptible because it is included in Camp Wallace, which belongs
to the government.
The argument is misleading.
While it is true that prescription does not run against the State, the same may not be invoked by the government
in this case since it is no longer interested in the subject matter. While Camp Wallace may have belonged to the
government at the time Rafael Galvezs title was ordered cancelled in Land Registration Case No. N-361, the same no
longer holds true today.
Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, created the
Bases Conversion and Development Authority. Section 4 pertinently provides:
Section 4. Purposes of the Conversion Authority. The Conversion Authority shall have the following purposes:
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station,
ODonnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station
(Hermosa, Bataan) and those portions of Metro Manila military camps which may be transferred to it by
the President;
Section 2 of Proclamation No. 216, issued on July 27, 1993, also provides:
Section 2. Transfer of Wallace Air Station Areas to the Bases Conversion and Development Authority. All areas
covered by the Wallace Air Station as embraced and defined by the 1947 Military Bases Agreement between the
Philippines and the United States of America, as amended, excluding those covered by Presidential Proclamations
and some 25-hectare area for the radar and communication station of the Philippine Air Force, are hereby transferred
to the Bases Conversion Development Authority
With the transfer of Camp Wallace to the BCDA, the government no longer has a right or interest to
protect. Consequently, the Republic is not a real party in interest and it may not institute the instant action. Nor may it
raise the defense of imprescriptibility, the same being applicable only in cases where the government is a party in
interest. Under Section 2 of Rule 3 of the 1997 Rules of Civil Procedure, every action must be prosecuted or defended
in the name of the real party in interest. 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 enforced (Pioneer Insurance v. CA,
175 SCRA 668 [1989]). A real party in interest is the party who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit. And by real interest is meant a present substantial interest, as
distinguished from a mere expectancy, or a future, contingent, subordinate or consequential interest (Ibonilla v.
Province of Cebu, 210 SCRA 526 [1992]). Being the owner of the areas covered by Camp Wallace, it is the Bases
Conversion and Development Authority, not the Government, which stands to be benefited if the land covered by TCT
No. T-5710 issued in the name of petitioner is cancelled.
Nonetheless, it has been posited that the transfer of military reservations and their extensions to the BCDA is
basically for the purpose of accelerating the sound and balanced conversion of these military reservations into
alternative productive uses and to enhance the benefits to be derived from such property as a measure of promoting
the economic and social development, particularly of Central Luzon and, in general, the countrys goal for
enhancement (Section 2, Republic Act No. 7227). It is contended that the transfer of these military reservations to the
Conversion Authority does not amount to an abdication on the part of the Republic of its interests, but simply a
recognition of the need to create a body corporate which will act as its agent for the realization of its program. It is
consequently asserted that the Republic remains to be the real party in interest and the Conversion Authority merely
its agent.
We, however, must not lose sight of the fact that the BCDA is an entity invested with a personality separate and
distinct from the government. Section 3 of Republic Act No. 7227 reads:
Section 3. Creation of the Bases Conversion and Development Authority. There is hereby created a body corporate to
be known as the Conversion Authority which shall have the attribute of perpetual succession and shall be vested with
the powers of a corporation.
 It may not be amiss to state at this point that the functions of government have been classified into governmental
or constituent and proprietary or ministrant. While public benefit and public welfare, particularly, the promotion of the
economic and social development of Central Luzon, may be attributable to the operation of the BCDA, yet it is certain
that the functions performed by the BCDA are basically proprietary in nature. The promotion of economic and social
development of Central Luzon, in particular, and the countrys goal for enhancement, in general, do not make the
BCDA equivalent to the Government. Other corporations have been created by government to act as its agents for the
realization of its programs, the SSS, GSIS, NAWASA and the NIA, to count a few, and yet, the Court has ruled that
these entities, although performing functions aimed at promoting public interest and public welfare, are not
government-function corporations invested with governmental attributes. It may thus be said that the BCDA is not a
mere agency of the Government but a corporate body performing proprietary functions.
Moreover, Section 5 of Republic Act No. 7227 provides:
Section 5. Powers of the Conversion Authority. To carry out its objectives under this Act, the Conversion Authority is
hereby vested with the following powers:
(a) To succeed in its corporate name, to sue and be sued in such corporate name and to adopt, alter and
use a corporate seal which shall be judicially noticed;
Having the capacity to sue or be sued, it should thus be the BCDA which may file an action to cancel petitioners
title, not the Republic, the former being the real party in interest. One having no right or interest to protect cannot
invoke the jurisdiction of the court as a party plaintiff in an action (Ralla v. Ralla, 199 SCRA 495 [1991]). A suit may be
dismissed if the plaintiff or the defendant is not a real party in interest. If the suit is not brought in the name of the real
party in interest, a motion to dismiss may be filed, as was done by petitioner in this case, on the ground that the
complaint states no cause of action (Tanpingco v. IAC, 207 SCRA 652 [1992]).
However, E. B. Marcha Transport Co. , Inc. v. IAC (147 SCRA 276 [1987]) is cited as authority that the Republic is
the proper party to sue for the recovery of possession of property which at the time of the institution of the suit was no
longer held by the national government but by the Philippine Ports Authority. In E. B. Marcha, the Court ruled:
It can be said that in suing for the recovery of the rentals, the Republic of the Philippines, acted as principal of the
Philippine Ports Authority, directly exercising the commission it had earlier conferred on the latter as its agent. We may
presume that, by doing so, the Republic of the Philippines did not intend to retain the said rentals for its own use,
considering that by its voluntary act it had transferred the land in question to the Philippine Ports Authority effective
July 11, 1974. The Republic of the Philippines had simply sought to assist, not supplant, the Philippine Ports Authority,
whose title to the disputed property it continues to recognize. We may expect then that the said rentals, once collected
by the Republic of the Philippines, shall be turned over by it to the Philippine Ports Authority conformably to the
purposes of P. D. No. 857.
E. B. Marcha is, however, not on all fours with the case at bar. In the former, the Court considered the Republic a
proper party to sue since the claims of the Republic and the Philippine Ports Authority against the petitioner therein
were the same. To dismiss the complaint in E. B. Marcha would have brought needless delay in the settlement of the
matter since the PPA would have to refile the case on the same claim already litigated upon. Such is not the case here
since to allow the government to sue herein enables it to raise the issue of imprescriptibility, a claim which is not
available to the BCDA. The rule that prescription does not run against the State does not apply to corporations or
artificial bodies created by the State for special purposes, it being said that when the title of the Republic has been
divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons
(Kingston v. LeHigh Valley Coal Co., 241 Pa 469). By raising the claim of imprescriptibility, a claim which cannot be
raised by the BCDA, the Government not only assists the BCDA, as it did in E. B. Marcha, it even supplants the latter,
a course of action proscribed by said case.
Moreover, to recognize the Government as a proper party to sue in this case would set a bad precedent as it
would allow the Republic to prosecute, on behalf of government-owned or controlled corporations, causes of action
which have already prescribed, on the pretext that the Government is the real party in interest against whom
prescription does not run, said corporations having been created merely as agents for the realization of government
programs.
Parenthetically, petitioner was not a party to the original suit for cancellation of title commenced by the Republic
twenty-seven years for which it is now being made to answer, nay, being made to suffer financial losses.
It should also be noted that petitioner is unquestionably a buyer in good faith and for value, having acquired the
property in 1963, or 5 years after the issuance of the original certificate of title, as a third transferee. If only not to do
violence and to give some measure of respect to the Torrens System, petitioner must be afforded some measure of
protection.
One more point.
Since the portion in dispute now forms part of the property owned and administered by the Bases Conversion
and Development Authority, it is alienable and registerable real property.
We find it unnecessary to rule on the other matters raised by the herein parties.
WHEREFORE, the petition is hereby granted and the orders dated August 31, 1999 and October 4, 1999 of the
Regional Trial Court of the First National Judicial Region (Branch 26, San Fernando, La Union) in Civil Case No. 6346
entitled Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez, et. al., Defendants as well as the
resolutions promulgated on November 4, 1999 and May 23, 2000 by the Court of Appeals (Twelfth Division) in CA-G.
R. SP No. 55535 entitled Shipside, Inc., Petitioner versus Hon. Alfredo Cajigal, as Judge, RTC, San Fernando, La
Union, Branch 26, and the Republic of the Philippines, Respondents are hereby reversed and set aside. The
complaint in Civil Case No. 6346, Regional Trial Court, Branch 26, San Fernando City, La Union entitled Republic of
the Philippines, Plaintiff, versus Heirs of Rafael Galvez, et al." is ordered dismissed, without prejudice to the filing of an
appropriate action by the Bases Development and Conversion Authority.
SO ORDERED.
Panganiban, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ. , concur.
Vitug, J. , Please see separate opinion.

G.R. No. L-8451 December 20, 1957

THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, INC., petitioner,
vs.
THE LAND REGISTRATION COMMISSION and THE REGISTER OF DEEDS OF DAVAO CITY, respondents.
Teodoro Padilla, for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Jose G. Bautista and Troadio T. Quianzon,
Jr., for respondents.

FELIX, J.:
This is a petition for mandamus filed by the Roman Catholic Apostolic Administrator of Davao seeking the reversal of a
resolution by the Land Registration Commissioner in L.R.C. Consulta No. 14. The facts of the case are as follows:
On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed a deed of sale of a
parcel of land located in the same city covered by Transfer Certificate No. 2263, in favor of the Roman Catholic
Apostolic Administrator of Davao Inc., s corporation sole organized and existing in accordance with Philippine Laws,
with Msgr. Clovis Thibault, a Canadian citizen, as actual incumbent. When the deed of sale was presented to Register
of Deeds of Davao for registration, the latter.
having in mind a previous resolution of the Fourth Branch of the Court of First Instance of Manila wherein the
Carmelite Nuns of Davao were made to prepare an affidavit to the effect that 60 per cent of the members of their
corporation were Filipino citizens when they sought to register in favor of their congregation of deed of donation of a
parcel of land
required said corporation sole to submit a similar affidavit declaring that 60 per cent of the members thereof were
Filipino citizens.
The vendee in the letter dated June 28, 1954, expressed willingness to submit an affidavit, both not in the same tenor
as that made the Progress of the Carmelite Nuns because the two cases were not similar, for whereas the
congregation of the Carmelite Nuns had five incorporators, the corporation sole has only one; that according to their
articles of incorporation, the organization of the Carmelite Nuns became the owner of properties donated to it,
whereas the case at bar, the totality of the Catholic population of Davao would become the owner of the property
bought to be registered.
As the Register of Deeds entertained some doubts as to the registerability if the document, the matter was referred to
the Land Registration Commissioner en consulta for resolution in accordance with section 4 of Republic Act No. 1151.
Proper hearing on the matter was conducted by the Commissioner and after the petitioner corporation had filed its
memorandum, a resolution was rendered on September 21, 1954, holding that in view of the provisions of Section 1
and 5 of Article XIII of the Philippine Constitution, the vendee was not qualified to acquire private lands in the
Philippines in the absence of proof that at least 60 per centum of the capital, property, or assets of the Roman Catholic
Apostolic Administrator of Davao, Inc., was actually owned or controlled by Filipino citizens, there being no question
that the present incumbent of the corporation sole was a Canadian citizen. It was also the opinion of the Land
Registration Commissioner that section 159 of the corporation Law relied upon by the vendee was rendered operative
by the aforementioned provisions of the Constitution with respect to real estate, unless the precise condition set
therein that at least 60 per cent of its capital is owned by Filipino citizens be present, and, therefore, ordered the
Registered Deeds of Davao to deny registration of the deed of sale in the absence of proof of compliance with such
condition.
After the motion to reconsider said resolution was denied, an action for mandamus was instituted with this Court by
said corporation sole, alleging that under the Corporation Law as well as the settled jurisprudence on the matter, the
deed of sale executed by Mateo L. Rodis in favor of petitioner is actually a deed of sale in favor of the Catholic Church
which is qualified to acquire private agricultural lands for the establishment and maintenance of places of worship, and
prayed that judgment be rendered reserving and setting aside the resolution of the Land Registration Commissioner in
question. In its resolution of November 15, 1954, this Court gave due course to this petition providing that the
procedure prescribed for appeals from the Public Service Commission of the Securities and Exchange Commissions
(Rule 43), be followed.
Section 5 of Article XIII of the Philippine Constitution reads as follows:
SEC. 5. Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to
individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines.
Section 1 of the same Article also provides the following:
SECTION 1. All agricultural, timber, and mineral lands of the public domain, water, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, and other natural resources of the Philippines belong to the State, and
their disposition, exploitation, development, or utilization shall be limited to cititzens of the Philippines, or to
corporations or associations at least sixty per centum of the capital of which is owned by such citizens, SUBJECT TO
ANY EXISTING RIGHT, grant, lease, or concession AT THE TIME OF THE INAUGURATION OF THE GOVERNMENT
ESTABLISHED UNDER CONSTITUTION. Natural resources, with the exception of public agricultural land, shall not
be alienated, and no license, concession, or leases for the exploitation, development, or utilization of any of the
natural resources shall be granted for a period exceeding twenty-five years, renewable for another twenty-five years,
except as to water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water
power, in which cases other than the development and limit of the grant.
In virtue of the foregoing mandates of the Constitution, who are considered "qualified" to acquire and hold agricultural
lands in the Philippines? What is the effect of these constitutional prohibition of the right of a religious corporation
recognized by our Corporation Law and registered as a corporation sole, to possess, acquire and register real estates
in its name when the Head, Manager, Administrator or actual incumbent is an alien?
Petitioner consistently maintained that a corporation sole, irrespective of the citizenship of its incumbent, is not
prohibited or disqualified to acquire and hold real properties. The Corporation Law and the Canon Law are explicit in
their provisions that a corporation sole or "ordinary" is not the owner of the of the properties that he may acquire but
merely the administrator thereof. The Canon Law also specified that church temporalities are owned by the Catholic
Church as a "moral person" or by the diocess as minor "moral persons" with the ordinary or bishop as administrator.
And elaborating on the composition of the Catholic Church in the Philippines, petitioner explained that as a religious
society or organization, it is made up of 2 elements or divisions the clergy or religious members and the faithful or
lay members. The 1948 figures of the Bureau of Census showed that there were 277,551 Catholics in Davao and
aliens residing therein numbered 3,465. Ever granting that all these foreigners are Catholics, petitioner contends that
Filipino citizens form more than 80 per cent of the entire Catholics population of that area. As to its clergy and religious
composition, counsel for petitioner presented the Catholic Directory of the Philippines for 1954 (Annex A) which
revealed that as of that year, Filipino clergy and women novices comprise already 60.5 per cent of the group. It was,
therefore, allowed that the constitutional requirement was fully met and satisfied.
Respondents, on the other hand, averred that although it might be true that petitioner is not the owner of the land
purchased, yet he has control over the same, with full power to administer, take possession of, alienate, transfer,
encumber, sell or dispose of any or all lands and their improvements registered in the name of the corporation sole
and can collect, receive, demand or sue for all money or values of any kind that may be kind that may become due or
owing to said corporation, and vested with authority to enter into agreements with any persons, concerns or entities in
connection with said real properties, or in other words, actually exercising all rights of ownership over the properties. It
was their stand that the theory that properties registered in the name of the corporation sole are held in true for the
benefit of the Catholic population of a place, as of Davao in the case at bar should be sustained because a
conglomeration of persons cannot just be pointed out as the cestui que trust or recipient of the benefits from the
property allegedly administered in their behalf. Neither can it be said that the mass of people referred to as such
beneficiary exercise ant right of ownership over the same. This set-up, respondents argued, falls short of a trust. The
respondents instead tried to prove that in reality, the beneficiary of ecclesiastical properties are not members or faithful
of the church but someone else, by quoting a portion a portion of the ought of fidelity subscribed by a bishop upon his
elevation to the episcopacy wherein he promises to render to the Pontificial Father or his successors an account of
his pastoral office and of all things appertaining to the state of this church.
Respondents likewise advanced the opinion that in construing the constitutional provision calling for 60 per cent of
Filipino citizenship, the criterion of the properties or assets thereof.
In solving the problem thus submitted to our consideration, We can say the following: A corporation sole is a special
form of corporation usually associated with the clergy. Conceived and introduced into the common law by sheer
necessity, this legal creation which was referred to as "that unhappy freak of English law" was designed to facilitate
the exercise of the functions of ownership carried on by the clerics for and on behalf of the church which was regarded
as the property owner (See I Couvier's Law Dictionary, p. 682-683).
A corporation sole consists of one person only, and his successors (who will always be one at a time), in some
particular station, who are incorporated by law in order to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural persons they could not have had. In this sense, the king is a sole
corporation; so is a bishop, or dens, distinct from their several chapters (Reid vs. Barry, 93 Fla. 849, 112 So. 846).
The provisions of our Corporation law on religious corporations are illuminating and sustain the stand of petitioner.
Section 154 thereof provides:
SEC. 154. For the administration of the temporalities of any religious denomination, society or church and the
management of the estates and the properties thereof, it shall be lawful for the bishop, chief priest, or presiding either
of any such religious denomination, society or church to become a corporation sole, unless inconsistent wit the rules,
regulations or discipline of his religious denomination, society or church or forbidden by competent authority thereof.
See also the pertinent provisions of the succeeding sections of the same Corporation Law copied hereunder:
SEC. 155. In order to become a corporation sole the bishop, chief priest, or presiding elder of any religious
denomination, society or church must file with the Securities and Exchange Commissioner articles of incorporation
setting forth the following facts:
xxx xxx xxx.
(3) That as such bishop, chief priest, or presiding elder he is charged with the administration of the temporalities and
the management of the estates and properties of his religious denomination, society, or church within its territorial
jurisdiction, describing it;
xxx xxx xxx.
(As amended by Commonwealth Act No. 287).
SEC. 157. From and after the filing with the Securities and Exchange Commissioner of the said articles of
incorporation, which verified by affidavit or affirmation as aforesaid and accompanied by the copy of the commission,
certificate of election, or letters of appointment of the bishop, chief priest, or presiding elder, duly certified as
prescribed in the section immediately preceding such the bishop, chief priest, or presiding elder, as the case may be,
shall become a corporation sole and all temporalities, estates, and properties the religious denomination, society, or
church therefore administered or managed by him as such bishop, chief priest, or presiding elder, shall be held in trust
by him as a corporation sole, for the use, purpose, behalf, and sole benefit of his religious denomination, society, or
church, including hospitals, schools, colleges, orphan, asylums, parsonages, and cemeteries thereof. For the filing of
such articles of incorporation, the Securities and Exchange Commissioner shall collect twenty-five pesos. (As
amended by Commonwealth Act. No. 287); and.
SEC. 163. The right to administer all temporalities and all property held or owned by a religious order or society, or by
the diocese, synod, or district organization of any religious denomination or church shall, on its incorporation, pass to
the corporation and shall be held in trust for the use, purpose behalf, and benefit of the religious society, or order so
incorporated or of the church of which the diocese, or district organization is an organized and constituent part.
The Cannon Law contains similar provisions regarding the duties of the corporation sole or ordinary as administrator
of the church properties, as follows:
Al Ordinario local pertenence vigilar diligentemente sobre la administracion de todos los bienes eclesiasticos que se
hallan en su territorio y no estuvieren sustraidos de su jurisdiccion, salvs las prescriciones legitimas que le concedan
mas aamplios derechos.
Teniendo en cuenta los derechos y las legitimas costumbres y circunstancias, procuraran los Ordinarios regular todo
lo concerniente a la administracion de los bienes eclesciasticos, dando las oportunas instucciones particularles dentro
del narco del derecho comun. (Title XXVIII, Codigo de Derecho Canonico, Lib. III, Canon 1519).1
That leaves no room for doubt that the bishops or archbishops, as the case may be, as corporation's sole are
merely administrators of the church properties that come to their possession, in which they hold in trust for the church.
It can also be said that while it is true that church properties could be administered by a natural persons, problems
regarding succession to said properties can not be avoided to rise upon his death. Through this legal fiction, however,
church properties acquired by the incumbent of a corporation sole pass, by operation of law, upon his death not his
personal heirs but to his successor in office. It could be seen, therefore, that a corporation sole is created not only to
administer the temporalities of the church or religious society where he belongs but also to hold and transmit the same
to his successor in said office. If the ownership or title to the properties do not pass to the administrators, who are the
owners of church properties?.
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise comment:
In matters regarding property belonging to the Universal Church and to the Apostolic See, the Supreme Pontiff
exercises his office of supreme administrator through the Roman Curia; in matters regarding other church property,
through the administrators of the individual moral persons in the Church according to that norms, laid down in the
Code of Cannon Law. This does not mean, however, that the Roman Pontiff is the owner of all the church property;
but merely that he is the supreme guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).
and this Court, citing Campes y Pulido, Legislacion y Jurisprudencia Canonica, ruled in the case of Trinidad vs.
Roman Catholic Archbishop of Manila, 63 Phil. 881, that:
The second question to be decided is in whom the ownership of the properties constituting the endowment of the
ecclesiastical or collative chaplaincies is vested.
Canonists entertain different opinions as to the persons in whom the ownership of the ecclesiastical properties is
vested, with respect to which we shall, for our purpose, confine ourselves to stating with Donoso that, while many
doctors cited by Fagnano believe that it resides in the Roman Pontiff as Head of the Universal Church, it is more
probable that ownership, strictly speaking, does not reside in the latter, and, consequently, ecclesiastical properties
are owned by the churches, institutions and canonically established private corporations to which said properties have
been donated.
Considering that nowhere can We find any provision conferring ownership of church properties on the Pope although
he appears to be the supreme administrator or guardian of his flock, nor on the corporation sole or heads of dioceses
as they are admittedly mere administrators of said properties, ownership of these temporalities logically fall and
develop upon the church, diocese or congregation acquiring the same. Although this question of ownership of
ecclesiastical properties has off and on been mentioned in several decisions of the Court yet in no instance was the
subject of citizenship of this religious society been passed upon.
We are not unaware of the opinion expressed by the late Justice Perfecto in his dissent in the case of Agustines vs.
Court of First Instance of Bulacan, 80 Phil. 565, to the effect that "the Roman Catholic Archbishop of Manila is only a
branch of a universal church by the Pope, with permanent residence in Rome, Italy". There is no question that the
Roman Catholic Church existing in the Philippines is a tributary and part of the international religious organization, for
the word "Roman" clearly expresses its unity with and recognizes the authority of the Pope in Rome. However, lest We
become hasty in drawing conclusions, We have to analyze and take note of the nature of the government established
in the Vatican City, of which it was said:
GOVERNMENT. In the Roman Catholic Church supreme authority and jurisdiction over clergy and laity alike as held
by the pope who (since the Middle Ages) is elected by the cardinals assembled in conclave, and holds office until his
death or legitimate abdication. . . While the pope is obviously independent of the laws made, and the officials
appointed, by himself or his predecessors, he usually exercises his administrative authority according to the code of
canon law and through the congregations, tribunals and offices of the Curia Romana. In their respective territories
(called generally dioceses) and over their respective subjects, the patriarchs, metropolitans or archbishops and
bishops exercise a jurisdiction which is called ordinary (as attached by law to an office given to a person. . . (Collier's
Encyclopedia, Vol. 17, p. 93).
While it is true and We have to concede that in the profession of their faith, the Roman Pontiff is the supreme head;
that in the religious matters, in the exercise of their belief, the Catholic congregation of the faithful throughout the world
seeks the guidance and direction of their Spiritual Father in the Vatican, yet it cannot be said that there is a merger of
personalities resultant therein. Neither can it be said that the political and civil rights of the faithful, inherent or acquired
under the laws of their country, are affected by that relationship with the Pope. The fact that the Roman Catholic
Church in almost every country springs from that society that saw its beginning in Europe and the fact that the clergy
of this faith derive their authorities and receive orders from the Holy See do not give or bestow the citizenship of the
Pope upon these branches. Citizenship is a political right which cannot be acquired by a sort of "radiation". We have to
realize that although there is a fraternity among all the catholic countries and the dioceses therein all over the globe,
the universality that the word "catholic" implies, merely characterize their faith, a uniformity in the practice and the
interpretation of their dogma and in the exercise of their belief, but certainly they are separate and independent from
one another in jurisdiction, governed by different laws under which they are incorporated, and entirely independent on
the others in the management and ownership of their temporalities. To allow theory that the Roman Catholic Churches
all over the world follow the citizenship of their Supreme Head, the Pontifical Father, would lead to the absurdity of
finding the citizens of a country who embrace the Catholic faith and become members of that religious society,
likewise citizens of the Vatican or of Italy. And this is more so if We consider that the Pope himself may be an Italian or
national of any other country of the world. The same thing be said with regard to the nationality or citizenship of the
corporation sole created under the laws of the Philippines, which is not altered by the change of citizenship of the
incumbent bishops or head of said corporation sole.
We must therefore, declare that although a branch of the Universal Roman Catholic Apostolic Church, every Roman
Catholic Church in different countries, if it exercises its mission and is lawfully incorporated in accordance with the
laws of the country where it is located, is considered an entity or person with all the rights and privileges granted to
such artificial being under the laws of that country, separate and distinct from the personality of the Roman Pontiff or
the Holy See, without prejudice to its religious relations with the latter which are governed by the Canon Law or their
rules and regulations.
We certainly are conscious of the fact that whatever conclusion We may draw on this matter will have a far reaching
influence, nor can We overlook the pages of history that arouse indignation and criticisms against church
landholdings. This nurtured feeling that snowbailed into a strong nationalistic sentiment manifested itself when the
provisions on natural to be embodied in the Philippine Constitution were framed, but all that has been said on this
regard referred more particularly to landholdings of religious corporations known as "Friar Estates" which have already
bee acquired by our government, and not to properties held by corporations sole which, We repeat, are properties
held in trust for the benefit of the faithful residing within its territorial jurisdiction. Though that same feeling probably
precipitated and influenced to a large extent the doctrine laid down in the celebrated Krivenco decision, We have to
take this matter in the light of legal provisions and jurisprudence actually obtaining, irrespective of sentiments.
The question now left for our determination is whether the Universal Roman Catholic Apostolic Church in the
Philippines, or better still, the corporation sole named the Roman Catholic Apostolic Administrator of Davao, Inc., is
qualified to acquire private agricultural lands in the Philippines pursuant to the provisions of Article XIII of the
Constitution.
We see from sections 1 and 5 of said Article quoted before, that only persons or corporations qualified to acquire hold
lands of the public domain in the Philippines may acquire or be assigned and hold private agricultural lands.
Consequently, the decisive factor in the present controversy hinges on the proposition or whether or not the petitioner
in this case can acquire agricultural lands of the public domain.
From the data secured from the Securities and Exchange Commission, We find that the Roman Catholic Bishop of
Zamboanga was incorporated (as a corporation sole) in September, 1912, principally to administer its temporalities
and manage its properties. Probably due to the ravages of the last war, its articles of incorporation
were reconstructed in the Securities and Exchange Commission on April 8, 1948. At first, this corporation sole
administered all the temporalities of the church existing or located in the island of Mindanao. Later on, however, new
dioceses were formed and new corporations sole were created to correspond with the territorial jurisdiction of the new
dioceses, one of them being petitioner herein, the Roman Catholic Apostolic Administrator of Davao, Inc., which was
registered with the Securities and Exchange Commission on September 12, 1950, and succeeded in the
administrative for all the "temporalities" of the Roman Catholic Church existing in Davao.
According to our Corporation Law, Public Act No. 1549, approved April 1, 1906, a corporation sole.
is organized and composed of a single individual, the head of any religious society or church, for the
ADMINISTRATION of the temporalities of such society or church. By "temporalities" is meant estate and properties not
used exclusively for religious worship. The successor in office of such religious head or chief priest incorporated as a
corporation sole shall become the corporation sole on ascension to office, and shall be permitted to transact business
as such on filing with the Securities and Exchange Commission a copy of his commission, certificate of election or
letter of appointment duly certified by any notary public or clerk of court of record (Guevara's The Philippine
Corporation Law, p. 223).
The Corporation Law also contains the following provisions:
SECTION 159. Any corporation sole may purchase and hold real estate and personal; property for its church,
charitable, benevolent, or educational purposes, and may receive bequests or gifts of such purposes. Such
corporation may mortgage or sell real property held by it upon obtaining an order for that purpose from the Court of
First Instance of the province in which the property is situated; but before making the order proof must be made to the
satisfaction of the Court that notice of the application for leave to mortgage or sell has been given by publication or
otherwise in such manner and for such time as said Court or the Judge thereof may have directed, and that it is to the
interest of the corporation that leave to mortgage or sell must be made by petition, duly verified by the bishop, chief
priest, or presiding elder acting as corporation sole, and may be opposed by any member of the religious
denomination, society or church represented by the corporation sole: Provided, however, That in cases where the
rules, regulations, and discipline of the religious denomination, society or church concerned represented by such
corporation sole regulate the methods of acquiring, holding, selling and mortgaging real estate and personal property,
such rules, regulations, and discipline shall control and the intervention of the Courts shall not be necessary.
It can, therefore, be noticed that the power of a corporation sole to purchase real property, like the power exercised in
the case at bar, it is not restricted although the power to sell or mortgage sometimes is, depending upon the rules,
regulations, and discipline of the church concerned represented by said corporation sole. If corporations sole can
purchase and sell real estate for its church, charitable, benevolent, or educational purposes, can they register said
real properties? As provided by law, lands held in trust for specific purposes me be subject of registration (section 69,
Act 496), and the capacity of a corporation sole, like petitioner herein, to register lands belonging to it is
acknowledged, and title thereto may be issued in its name (Bishop of Nueva Segovia vs. Insular Government, 26 Phil.
300-1913). Indeed it is absurd that while the corporations sole that might be in need of acquiring lands for the erection
of temples where the faithful can pray, or schools and cemeteries which they are expressly authorized by law to
acquire in connection with the propagation of the Roman Catholic Apostolic faith or in furtherance of their freedom of
religion they could not register said properties in their name. As professor Javier J. Nepomuceno very well says "Man
in his search for the immortal and imponderable, has, even before the dawn of recorded history, erected temples to
the Unknown God, and there is no doubt that he will continue to do so for all time to come, as long as he continues
'imploring the aid of Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law Journal, No. 1, p. 41,
September, 1956). Under the circumstances of this case, We might safely state that even before the establishment of
the Philippine Commonwealth and of the Republic of the Philippines every corporation sole then organized and
registered had by express provision of law the necessary power and qualification to purchase in its name private lands
located in the territory in which it exercised its functions or ministry and for which it was created, independently of the
nationality of its incumbent unique and single member and head, the bishop of the dioceses. It can be also maintained
without fear of being gainsaid that the Roman Catholic Apostolic Church in the Philippines has no nationality and that
the framers of the Constitution, as will be hereunder explained, did not have in mind the religious corporations sole
when they provided that 60 per centum of the capital thereof be owned by Filipino citizens.
There could be no controversy as to the fact that a duly registered corporation sole is an artificial being having the
right of succession and the power, attributes, and properties expressly authorized by law or incident to its existence
(section 1, Corporation Law). In outlining the general powers of a corporation. Public Act. No. 1459 provides among
others:
SEC. 13. Every corporation has the power:
(5) To purchase, hold, convey, sell, lease, lot, mortgage, encumber, and otherwise deal with such real and personal
property as the purpose for which the corporation was formed may permit, and the transaction of the lawful business
of the corporation may reasonably and necessarily require, unless otherwise prescribed in this Act: . . .
In implementation of the same and specially made applicable to a form of corporation recognized by the same law,
Section 159 aforequoted expressly allowed the corporation sole to purchase and hold real as well as personal
properties necessary for the promotion of the objects for which said corporation sole is created. Respondent Land
Registration Commissioner, however, maintained that since the Philippine Constitution is a later enactment than public
Act No. 1459, the provisions of Section 159 in amplification of Section 13 thereof, as regard real properties, should be
considered repealed by the former.
There is a reason to believe that when the specific provision of the Constitution invoked by respondent Commissioner
was under consideration, the framers of the same did not have in mind or overlooked this particular form of
corporation. It is undeniable that the naturalization and conservation of our national resources was one of the
dominating objectives of the Convention and in drafting the present Article XII of the Constitution, the delegates were
goaded by the desire (1) to insure their conservation for Filipino posterity; (2) to serve as an instrument of national
defense, helping prevent the extension into the country of foreign control through peaceful economic penetration; and
(3) to prevent making the Philippines a source of international conflicts with the consequent danger to its internal
security and independence (See The Framing of the Philippine Constitution by Professor Jose M. Aruego, a Delegate
to the Constitutional Convention, Vol. II. P. 592-604). In the same book Delegate Aruego, explaining the reason behind
the first consideration, wrote:
At the time of the framing of Philippine Constitution, Filipino capital had been to be rather shy. Filipinos hesitated s a
general rule to invest a considerable sum of their capital for the development, exploitation and utilization of the natural
resources of the country. They had not as yet been so used to corporate as the peoples of the west. This general
apathy, the delegates knew, would mean the retardation of the development of the natural resources, unless foreign
capital would be encouraged to come and help in that development. They knew that the naturalization of the natural
resources would certainly not encourage theINVESTMENT OF FOREIGN CAPITAL into them. But there was a
general feeling in the Convention that it was better to have such a development retarded or even postpone together
until such time when the Filipinos would be ready and willing to undertake it rather than permit the natural resources to
be placed under the ownership or control of foreigners in order that they might be immediately be developed, with the
Filipinos of the future serving not as owners but utmost as tenants or workers under foreign masters. By all means, the
delegates believed, the natural resources should be conserved for Filipino posterity.
It could be distilled from the foregoing that the farmers of the Constitution intended said provisions as barrier for
foreigners or corporations financed by such foreigners to acquire, exploit and develop our natural resources, saving
these undeveloped wealth for our people to clear and enrich when they are already prepared and capable of doing so.
But that is not the case of corporations sole in the Philippines, for, We repeat, they are mere administrators of the
"temporalities" or properties titled in their name and for the benefit of the members of their respective religion
composed of an overwhelming majority of Filipinos. No mention nor allusion whatsoever is made in the Constitution as
to the prohibition against or the liability of the Roman Catholic Church in the Philippines to acquire and hold
agricultural lands. Although there were some discussions on landholdings, they were mostly confined in the inclusion
of the provision allowing the Government to break big landed estates to put an end to absentee landlordism.
But let us suppose, for the sake of argument, that the above referred to inhibitory clause of Section 1 of Article XIII of
the constitution does have bearing on the petitioner's case; even so the clause requiring that at least 60 per centum of
the capital of the corporation be owned by Filipinos is subordinated to the petitioner's aforesaid right already existing
at the time of the inauguration of the Commonwealth and the Republic of the Philippines. In the language of Mr.
Justice Jose P. Laurel (a delegate to the Constitutional Convention), in his concurring opinion of the case of Gold
Creek mining Corporation, petitioner vs. Eulogio Rodriguez, Secretary of Agriculture and Commerce, and Quirico
Abadilla, Director of the Bureau of Mines, respondent, 66 Phil. 259:
The saving clause in the section involved of the Constitution was originally embodied in the report submitted by the
Committee on Naturalization and Preservation of Land and Other Natural Resources to the Constitutional Convention
on September 17, 1954. It was later inserted in the first draft of the Constitution as section 13 of Article XIII thereof,
and finally incorporated as we find it now. Slight have been the changes undergone by the proviso from the time when
it comes out of the committee until it was finally adopted. When first submitted and as inserted to the first draft of the
Constitution it reads: 'subject to any right, grant, lease, or concession existing in respect thereto on the date of the
adoption of the Constitution'. As finally adopted, the proviso reads: 'subject to any existing right, grant, lease, or
concession at the time of the inauguration of the Government established under this Constitution'. This recognition is
not mere graciousness but springs form the just character of the government established. The framers of the
Constitution were not obscured by the rhetoric of democracy or swayed to hostility by an intense spirit of nationalism.
They well knew that conservation of our natural resources did not mean destruction or annihilation of acquired
property rights. Withal, they erected a government neither episodic nor stationary but well-nigh conservative in the
protection of property rights. This notwithstanding nationalistic and socialistic traits discoverable upon even a sudden
dip into a variety of the provisions embodied in the instrument.
The writer of this decision wishes to state at this juncture that during the deliberation of this case he submitted to the
consideration of the Court the question that may be termed the "vested right saving clause" contained in Section 1,
Article XII of the Constitution, but some of the members of this Court either did not agree with the theory of the writer,
or were not ready to take a definite stand on the particular point I am now to discuss deferring our ruling on such
debatable question for a better occasion, inasmuch as the determination thereof is not absolutely necessary for the
solution of the problem involved in this case. In his desire to face the issues squarely, the writer will endeavor, at least
as a disgression, to explain and develop his theory, not as a lucubration of the Court, but of his own, for he deems it
better and convenient to go over the cycle of reasons that are linked to one another and that step by step lead Us to
conclude as We do in the dispositive part of this decision.
It will be noticed that Section 1 of Article XIII of the Constitution provides, among other things, that "all agricultural
lands of the public domain and their disposition shall be limited to citizens of the Philippines or to corporations at least
60 per centum of the capital of which is owned by such citizens, SUBJECT TO ANY EXISTING RIGHT AT THE TIME
OF THE INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER THIS CONSTITUTION."
As recounted by Mr. Justice Laurel in the aforementioned case of Gold Creek Mining Corporation vs. Rodriguez et al.,
66 Phil. 259, "this recognition (in the clause already quoted), is not mere graciousness but springs from the just
character of the government established. The farmers of the Constitution were not obscured by the rhetoric of
democracy or swayed to hostility by an intense spirit of nationalism. They well knew that conservation of our natural
resources did not mean destruction or annihilation of ACQUIRED PROPERTY RIGHTS".
But respondents' counsel may argue that the preexisting right of acquisition of public or private lands by a corporation
which does not fulfill this 60 per cent requisite, refers to purchases of the Constitution and not to later transactions.
This argument would imply that even assuming that petitioner had at the time of the enactment of the Constitution the
right to purchase real property or right could not be exercised after the effectivity of our Constitution, because said
power or right of corporations sole, like the herein petitioner, conferred in virtue of the aforequoted provisions of the
Corporation Law, could no longer be exercised in view of the requisite therein prescribed that at least 60 per centum of
the capital of the corporation had to be Filipino. It has been shown before that: (1) the corporation sole, unlike the
ordinary corporations which are formed by no less than 5 incorporators, is composed of only one persons, usually the
head or bishop of the diocese, a unit which is not subject to expansion for the purpose of determining any percentage
whatsoever; (2) the corporation sole is only the administrator and not the owner of the temporalities located in the
territory comprised by said corporation sole; (3) such temporalities are administered for and on behalf of the faithful
residing in the diocese or territory of the corporation sole; and (4) the latter, as such, has no nationality and the
citizenship of the incumbent Ordinary has nothing to do with the operation, management or administration of the
corporation sole, nor effects the citizenship of the faithful connected with their respective dioceses or corporation sole.
In view of these peculiarities of the corporation sole, it would seem obvious that when the specific provision of the
Constitution invoked by respondent Commissioner (section 1, Art. XIII), was under consideration, the framers of the
same did not have in mind or overlooked this particular form of corporation. If this were so, as the facts and
circumstances already indicated tend to prove it to be so, then the inescapable conclusion would be that this
requirement of at least 60 per cent of Filipino capital was never intended to apply to corporations sole, and the
existence or not a vested right becomes unquestionably immaterial.
But let us assumed that the questioned proviso is material. yet We might say that a reading of said Section 1 will show
that it does not refer to any actual acquisition of land up to the right, qualification or power to acquire and hold private
real property. The population of the Philippines, Catholic to a high percentage, is ever increasing. In the practice of
religion of their faithful the corporation sole may be in need of more temples where to pray, more schools where the
children of the congregation could be taught in the principles of their religion, more hospitals where their sick could be
treated, more hallow or consecrated grounds or cemeteries where Catholics could be buried, many more than those
actually existing at the time of the enactment of our Constitution. This being the case, could it be logically maintained
that because the corporation sole which, by express provision of law, has the power to hold and acquire real estate
and personal property of its churches, charitable benevolent, or educational purposes (section 159, Corporation Law)
it has to stop its growth and restrain its necessities just because the corporation sole is a non-stock corporation
composed of only one person who in his unity does not admit of any percentage, especially when that person is not
the owner but merely an administrator of the temporalities of the corporation sole? The writer leaves the answer to
whoever may read and consider this portion of the decision.
Anyway, as stated before, this question is not a decisive factor in disposing the case, for even if We were to disregard
such saving clause of the Constitution, which reads: subject to any existing right, grant, etc., at the same time of the
inauguration of the Government established under this Constitution, yet We would have, under the evidence on
record, sufficient grounds to uphold petitioner's contention on this matter.
In this case of the Register of Deeds of Rizal vs. Ung Sui Si Temple, 2 G.R. No. L-6776, promulgated May 21, 1955,
wherein this question was considered from a different angle, this Court through Mr. Justice J.B.L. Reyes, said:
The fact that the appellant religious organization has no capital stock does not suffice to escape the Constitutional
inhibition, since it is admitted that its members are of foreign nationality. The purpose of the sixty per centum
requirement is obviously to ensure that corporation or associations allowed to acquire agricultural land or to exploit
natural resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of Filipino citizens.
In that case respondent-appellant Ung Siu Si Temple was not a corporation sole but a corporation aggregate, i.e., an
unregistered organization operating through 3 trustees, all of Chinese nationality, and that is why this Court laid down
the doctrine just quoted. With regard to petitioner, which likewise is a non-stock corporation, the case is different,
because it is a registered corporation sole, evidently of no nationality and registered mainly to administer the
temporalities and manage the properties belonging to the faithful of said church residing in Davao. But even if we were
to go over the record to inquire into the composing membership to determine whether the citizenship requirement is
satisfied or not, we would find undeniable proof that the members of the Roman Catholic Apostolic faith within the
territory of Davao are predominantly Filipino citizens. As indicated before, petitioner has presented evidence to
establish that the clergy and lay members of this religion fully covers the percentage of Filipino citizens required by the
Constitution. These facts are not controverted by respondents and our conclusion in this point is sensibly obvious.
Dissenting OpinionDiscussed. After having developed our theory in the case and arrived at the findings and
conclusions already expressed in this decision. We now deem it proper to analyze and delve into the basic foundation
on which the dissenting opinion stands up. Being aware of the transcendental and far-reaching effects that Our ruling
on the matter might have, this case was thoroughly considered from all points of view, the Court sparing no effort to
solve the delicate problems involved herein.
At the deliberations had to attain this end, two ways were open to a prompt dispatch of the case: (1) the reversal of the
doctrine We laid down in the celebrated Krivenko case by excluding urban lots and properties from the group of the
term "private agricultural lands" use in this section 5, Article XIII of the Constitution; and (2) by driving Our reasons to a
point that might indirectly cause the appointment of Filipino bishops or Ordinary to head the corporations sole created
to administer the temporalities of the Roman Catholic Church in the Philippines. With regard to the first way, a great
majority of the members of this Court were not yet prepared nor agreeable to follow that course, for reasons that are
obvious. As to the second way, it seems to be misleading because the nationality of the head of a diocese constituted
as a corporation sole has no material bearing on the functions of the latter, which are limited to the administration of
the temporalities of the Roman Catholic Apostolic Church in the Philippines.
Upon going over the grounds on which the dissenting opinion is based, it may be noticed that its author lingered on
the outskirts of the issues, thus throwing the main points in controversy out of focus. Of course We fully agree, as
stated by Professor Aruego, that the framers of our Constitution had at heart to insure the conservation of the natural
resources of Our motherland of Filipino posterity; to serve them as an instrument of national defense, helping prevent
the extension into the country of foreign control through peaceful economic penetration; and to prevent making the
Philippines a source of international conflicts with the consequent danger to its internal security and independence.
But all these precautions adopted by the Delegates to Our Constitutional Assembly could have not been intended for
or directed against cases like the one at bar. The emphasis and wonderings on the statement that once the capacity of
a corporation sole to acquire private agricultural lands is admitted there will be no limit to the areas that it may hold
and that this will pave the way for the "revival or revitalization of religious landholdings that proved so troublesome in
our past", cannot even furnish the "penumbra" of a threat to the future of the Filipino people. In the first place, the right
of Filipino citizens, including those of foreign extraction, and Philippine corporations, to acquire private lands is not
subject to any restriction or limit as to quantity or area, and We certainly do not see any wrong in that. The right of
Filipino citizens and corporations to acquire public agricultural lands is already limited by law. In the second place,
corporations sole cannot be considered as aliens because they have no nationality at all. Corporations sole are, under
the law, mere administrators of the temporalities of the Roman Catholic Church in the Philippines. In the third place,
every corporation, be it aggregate or sole, is only entitled to purchase, convey, sell, lease, let, mortgage, encumber
and otherwise deal with real properties when it is pursuant to or in consonance with the purposes for which the
corporation was formed, and when the transactions of the lawful business of the corporation reasonably and
necessarily require such dealing section 13-(5) of the Corporation Law, Public Act No. 1459 and considering
these provisions in conjunction with Section 159 of the same law which provides that a corporation sole may only
"purchase and hold real estate and personal properties for its church, charitable, benevolent or educational purposes",
the above mentioned fear of revitalization of religious landholdings in the Philippines is absolutely dispelled. The fact
that the law thus expressly authorizes the corporations sole to receive bequests or gifts of real properties (which were
the main source that the friars had to acquire their big haciendas during the Spanish regime), is a clear indication that
the requisite that bequests or gifts of real estate be for charitable, benevolent, or educational purposes, was, in the
opinion of the legislators, considered sufficient and adequate protection against the revitalization of religious
landholdings.
Finally, and as previously stated, We have reason to believe that when the Delegates to the Constitutional Convention
drafted and approved Article XIII of the Constitution they do not have in mind the corporation sole. We come to this
finding because the Constitutional Assembly, composed as it was by a great number of eminent lawyers and jurists,
was like any other legislative body empowered to enact either the Constitution of the country or any public statute,
presumed to know the conditions existing as to particular subject matter when it enacted a statute (Board of
Commerce of Orange Country vs. Bain, 92 S.E. 176; N. C. 377).
Immemorial customs are presumed to have been always in the mind of the Legislature in enacting legislation. (In re
Kruger's Estate, 121 A. 109; 277 P. 326).
The Legislative is presumed to have a knowledge of the state of the law on the subjects upon which it legislates.
(Clover Valley Land and Stock Co. vs. Lamb et al., 187, p. 723,726.)
The Court in construing a statute, will assume that the legislature acted with full knowledge of the prior legislation on
the subject and its construction by the courts. (Johns vs. Town of Sheridan, 89 N. E. 899, 44 Ind. App. 620.).
The Legislature is presumed to have been familiar with the subject with which it was dealing . . . . (Landers vs.
Commonwealth, 101 S. E. 778, 781.).
The Legislature is presumed to know principles of statutory construction. (People vs. Lowell, 230 N. W. 202, 250 Mich.
349, followed in P. vs. Woodworth, 230 N.W. 211, 250 Mich. 436.).
It is not to be presumed that a provision was inserted in a constitution or statute without reason, or that a result was
intended inconsistent with the judgment of men of common sense guided by reason" (Mitchell vs. Lawden, 123 N.E.
566, 288 Ill. 326.) See City of Decatur vs. German, 142 N. E. 252, 310 Ill. 591, and may other authorities that can be
cited in support hereof.
Consequently, the Constitutional Assembly must have known:
1. That a corporation sole is organized by and composed of a single individual, the head of any religious society or
church operating within the zone, area or jurisdiction covered by said corporation sole (Article 155, Public Act No.
1459);
2. That a corporation sole is a non-stock corporation;
3. That the Ordinary ( the corporation sole proper) does not own the temporalities which he merely administers;
4. That under the law the nationality of said Ordinary or of any administrator has absolutely no bearing on the
nationality of the person desiring to acquire real property in the Philippines by purchase or other lawful means other
than by hereditary succession, who according to the Constitution must be a Filipino (sections 1 and 5, Article XIII).
5. That section 159 of the Corporation Law expressly authorized the corporation sole to purchase and holdreal estate
for its church, charitable, benevolent or educational purposes, and to receive bequests or giftsfor such purposes;
6. That in approving our Magna Carta the Delegates to the Constitutional Convention, almost all of whom were Roman
Catholics, could not have intended to curtail the propagation of the Roman Catholic faith or the expansion of the
activities of their church, knowing pretty well that with the growth of our population more places of worship, more
schools where our youth could be taught and trained; more hallow grounds where to bury our dead would be needed
in the course of time.
Long before the enactment of our Constitution the law authorized the corporations sole even to receive bequests or
gifts of real estates and this Court could not, without any clear and specific provision of the Constitution, declare that
any real property donated, let as say this year, could no longer be registered in the name of the corporation sole to
which it was conveyed. That would be an absurdity that should not receive our sanction on the pretext that
corporations sole which have no nationality and are non-stock corporations composed of only one person in the
capacity of administrator, have to establish first that at least sixty per centum of their capital belong to Filipino citizens.
The new Civil Code even provides:
ART. 10. In case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body
intended right and justice to prevail.
Moreover, under the laws of the Philippines, the administrator of the properties of a Filipino can acquire, in the name
of the latter, private lands without any limitation whatsoever, and that is so because the properties thus acquired are
not for and would not belong to the administrator but to the Filipino whom he represents. But the dissenting Justice
inquires: If the Ordinary is only the administrator, for whom does he administer? And who can alter or overrule his
acts? We will forthwith proceed to answer these questions. The corporations sole by reason of their peculiar
constitution and form of operation have no designed owner of its temporalities, although by the terms of the law it can
be safely implied that the Ordinary holds them in trust for the benefit of the Roman Catholic faithful to their respective
locality or diocese. Borrowing the very words of the law, We may say that the temporalities of every corporation sole
are held in trust for the use, purpose, behalf and benefit of the religious society, or order so incorporated or of the
church to which the diocese, synod, or district organization is an organized and constituent part (section 163 of the
Corporation Law).
In connection with the powers of the Ordinary over the temporalities of the corporation sole, let us see now what is the
meaning and scope of the word "control". According to the Merriam-Webster's New International Dictionary, 2nd ed., p.
580, on of the acceptations of the word "control" is:
4. To exercise restraining or directing influence over; to dominate; regulate; hence, to hold from action; to curb;
subject; also, Obs. to overpower.
SYN: restrain, rule, govern, guide, direct; check, subdue.
It is true that under section 159 of the Corporation Law, the intervention of the courts is not necessary, to mortgage or
sell real property held by the corporation sole where the rules, regulations and discipline of the religious denomination,
society or church concerned presented by such corporation sole regulates the methods of acquiring, holding, selling
and mortgaging real estate, and that the Roman Catholic faithful residing in the jurisdiction of the corporation sole has
no say either in the manner of acquiring or of selling real property. It may be also admitted that the faithful of the
diocese cannot govern or overrule the acts of the Ordinary, but all this does not mean that the latter can administer the
temporalities of the corporation sole without check or restraint. We must not forget that when a corporation sole is
incorporated under Philippine laws, the head and only member thereof subjects himself to the jurisdiction of the
Philippine courts of justice and these tribunals can thus entertain grievances arising out of or with respect to the
temporalities of the church which came into the possession of the corporation sole as administrator. It may be alleged
that the courts cannot intervene as to the matters of doctrine or teachings of the Roman Catholic Church. That is
correct, but the courts may step in, at the instance of the faithful for whom the temporalities are being held in trust, to
check undue exercise by the corporation sole of its power as administrator to insure that they are used for the purpose
or purposes for which the corporation sole was created.
American authorities have these to say:
It has been held that the courts have jurisdiction over an action brought by persons claiming to be members of a
church, who allege a wrongful and fraudulent diversion of the church property to uses foreign to the purposes of the
church, since no ecclesiastical question is involved and equity will protect from wrongful diversion of the
property (Hendryx vs. Peoples United Church, 42 Wash. 336, 4 L.R.A. n.s. 1154).
The courts of the State have no general jurisdiction and control over the officers of such corporations in respect to the
performance of their official duties; but as in respect to the property which they hold for the corporation, they stand in
position of TRUSTEES and the courts may exercise the same supervision as in other cases of trust (Ramsey vs.
Hicks, 174 Ind. 428, 91 N.E. 344, 92 N.E. 164, 30 L.R.A. n.s. 665; Hendryx vs. Peoples United Church, supra.).
Courts of the state do not interfere with the administration of church rules or discipline unless civil rights become
involved and which must be protected (Morris St., Baptist Church vs. Dart, 67 S.C. 338, 45 S.E. 753, and others). (All
cited in Vol. II, Cooley's Constitutional Limitations, p. 960-964.).
If the Constitutional Assembly was aware of all the facts above enumerated and of the provisions of law relative to
existing conditions as to management and operation of corporations sole in the Philippines, and if, on the other hand,
almost all of the Delegates thereto embraced the Roman Catholic faith, can it be imagined even for an instant that
when Article XIII of the Constitution was approved the framers thereof intended to prevent or curtail from then on the
acquisition sole, either by purchase or donation, of real properties that they might need for the propagation of the faith
and for there religious and Christian activities such as the moral education of the youth, the care, attention and
treatment of the sick and the burial of the dead of the Roman Catholic faithful residing in the jurisdiction of the
respective corporations sole? The mere indulgence in said thought would impress upon Us a feeling of apprehension
and absurdity. And that is precisely the leit motiv that permeates the whole fabric of the dissenting opinion.
It seems from the foregoing that the main problem We are confronted with in this appeal, hinges around the necessity
of a proper and adequate interpretation of sections 1 and 5 of Article XIII of the Constitution. Let Us then be guided by
the principles of statutory construction laid down by the authorities on the matter:
The most important single factor in determining the intention of the people from whom the constitution emanated is the
language in which it is expressed. The words employed are to be taken in their natural sense, except that legal or
technical terms are to be given their technical meaning. The imperfections of language as a vehicle for conveying
meanings result in ambiguities that must be resolved by result to extraneous aids for discovering the intent of the
framers. Among the more important of these are a consideration of the history of the times when the provision was
adopted and of the purposes aimed at in its adoption. The debates of constitutional convention, contemporaneous
construction, and practical construction by the legislative and executive departments, especially if long continued, may
be resorted to resolve, but not to create, ambiguities. . . . Consideration of the consequences flowing from alternative
constructions of doubtful provisions constitutes an important interpretative device. . . . The purposes of many of the
broadly phrased constitutional limitations were the promotion of policies that do not lend themselves to definite and
specific formulation. The courts have had to define those policies and have often drawn on natural law and natural
rights theories in doing so. The interpretation of constitutions tends to respond to changing conceptions of political and
social values. The extent to which these extraneous aids affect the judicial construction of constitutions cannot be
formulated in precise rules, but their influence cannot be ignored in describing the essentials of the process
(Rottschaeffer on Constitutional Law, 1939 ed., p. 18-19).
There are times that when even the literal expression of legislation may be inconsistent with the general objectives of
policy behind it, and on the basis of equity or spirit of the statute the courts rationalize a restricted meaning of the
latter. A restricted interpretation is usually applied where the effect of literal interpretation will make for injustice and
absurdity or, in the words of one court, the language must be so unreasonable 'as to shock general common sense'.
(Vol. 3, Sutherland on Statutory Construction, 3rd ed., 150.).
A constitution is not intended to be a limitation on the development of a country nor an obstruction to its progress and
foreign relations (Moscow Fire Ins. Co. of Moscow, Russia vs. Bank of New York and Trust Co., 294 N. Y. S.648; 56
N.E. 2d. 745, 293 N.Y. 749).
Although the meaning or principles of a constitution remain fixed and unchanged from the time of its adoption, a
constitution must be construed as if intended to stand for a great length of time, and it is progressive and not static.
Accordingly, it should not receive too narrow or literal an interpretation but rather the meaning given it should be
applied in such manner as to meet new or changed conditions as they arise (U.S. vs. Lassic, 313 U.S. 299, 85 L. Ed.,
1368).
Effect should be given to the purpose indicated by a fair interpretation of the language used and that construction
which effectuates, rather than that which destroys a plain intent or purpose of a constitutional provision, is not only
favored but will be adopted (State ex rel. Randolph Country vs. Walden, 206 S.W. 2d 979).
It is quite generally held that in arriving at the intent and purpose the construction should be broad or liberal or
equitable, as the better method of ascertaining that intent, rather than technical (Great Southern Life Ins. Co. vs. City
of Austin, 243 S.W. 778).
All these authorities uphold our conviction that the framers of the Constitution had not in mind the corporations sole,
nor intended to apply them the provisions of section 1 and 5 of said Article XIII when they passed and approved the
same. And if it were so as We think it is, herein petitioner, the Roman Catholic Apostolic Administrator of Davao, Inc.,
could not be deprived of the right to acquire by purchase or donation real properties for charitable, benevolent and
educational purposes, nor of the right to register the same in its name with the Register of Deeds of Davao, an
indispensable requisite prescribed by the Land Registration Act for lands covered by the Torrens system.
We leave as the last theme for discussion the much debated question above referred to as "the vested right saving
clause" contained in section 1, Article XIII of the Constitution. The dissenting Justice hurls upon the personal opinion
expressed on the matter by the writer of the decision the most pointed darts of his severe criticism. We think, however,
that this strong dissent should have been spared, because as clearly indicated before, some members of this Court
either did not agree with the theory of the writer or were not ready to take a definite stand on that particular point, so
that there being no majority opinion thereon there was no need of any dissension therefrom. But as the criticism has
been made the writer deems it necessary to say a few words of explanation.
The writer fully agrees with the dissenting Justice that ordinarily "a capacity to acquire (property) in futuro, is not in
itself a vested or existing property right that the Constitution protects from impairment. For a property right to be
vested (or acquired) there must be a transition from the potential or contingent to the actual, and the proprietary
interest must have attached to a thing; it must have become 'fixed and established'" (Balboa vs. Farrales, 51 Phil.
498). But the case at bar has to be considered as an exception to the rule because among the rights granted by
section 159 of the Corporation Law was the right to receive bequests or gifts of real properties for charitable,
benevolent and educational purposes. And this right to receive such bequests or gifts (which implies donations in
futuro), is not a mere potentiality that could be impaired without any specific provision in the Constitution to that effect,
especially when the impairment would disturbingly affect the propagation of the religious faith of the immense majority
of the Filipino people and the curtailment of the activities of their Church. That is why the writer gave us a basis of his
contention what Professor Aruego said in his book "The Framing of the Philippine Constitution" and the enlightening
opinion of Mr. Justice Jose P. Laurel, another Delegate to the Constitutional Convention, in his concurring opinion in
the case of Goldcreek Mining Co. vs. Eulogio Rodriguez et al., 66 Phil. 259. Anyway the majority of the Court did not
deem necessary to pass upon said "vested right saving clause" for the final determination of this case.
JUDGMENT
Wherefore, the resolution of the respondent Land Registration Commission of September 21, 1954, holding that in
view of the provisions of sections 1 and 5 of Article XIII of the Philippine Constitution the vendee (petitioner) is not
qualified to acquire lands in the Philippines in the absence of proof that at least 60 per centum of the capital,
properties or assets of the Roman Catholic Apostolic Administrator of Davao, Inc. is actually owned or controlled by
Filipino citizens, and denying the registration of the deed of sale in the absence of proof of compliance with such
requisite, is hereby reversed. Consequently, the respondent Register of Deeds of the City of Davao is ordered to
register the deed of sale executed by Mateo L. Rodis in favor of the Roman Catholic Apostolic Administrator of Davao,
Inc., which is the subject of the present litigation. No pronouncement is made as to costs. It is so ordered.
Bautista Angelo and Endencia, JJ., concur.
Paras, C.J., and Bengzon, J., concur in the result.

[G.R. No. 147402. January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District
(LMWD), Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN,
 Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region
VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the Commission on Audits (COA) Resolution dated 3 January 2000 and
the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo
C. Felicianos request for COA to cease all audit services, and to stop charging auditing fees, to Leyte Metropolitan
Water District (LMWD). The COA also denied petitioners request for COA to refund all auditing fees previously paid by
LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD
received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD,
petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district could not pay
the auditing fees.Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 (PD 198) [2], as
well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred petitioners reply to the COA
Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees
LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000
denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30
January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas
Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the
petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City
Water District v. Civil Service Commission and Commission on Audit,[3] as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners contention that they
are private corporations. It is clear therefrom that the power to appoint the members who will comprise the members
of the Board of Directors belong to the local executives of the local subdivision unit where such districts are located. In
contrast, the members of the Board of Directors or the trustees of a private corporation are elected from among
members or stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is created
for the private purpose, benefit, aim and end of its members or stockholders. Necessarily, said members or
stockholders should be given a free hand to choose who will compose the governing body of their corporation. But this
is not the case here and this clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA
to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by
auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District (LWD) created under PD 198, as amended, is a government-owned or
controlled corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing
local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled
corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws[4] mandate COA to audit all government agencies, including government-
owned and controlled corporations (GOCCs) with original charters. An LWD is a GOCC with an original
charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through
the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy
or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the
deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government agencies or instrumentalities, but also to government-
owned and controlled corporations with original charters as well as other government-owned or controlled
corporations without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long
line of cases culminating in Davao City Water District v. Civil Service Commission [5] and just recently reiterated
in De Jesus v. Commission on Audit.[6] Petitioner maintains that LWDs are not government-owned and
controlled corporations with original charters. Petitioner even argues that LWDs are private
corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would
give a new perspective to the issue of the true character of water districts. [7]
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration (LWUA) and not the
LWDs. Petitioner claims that LWDs are created pursuant to and not created directly by PD 198. Thus, petitioner
concludes that PD 198 is not an original charter that would place LWDs within the audit jurisdiction of COA as defined
in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does
not expressly direct the creation of such entities, but only provides for their formation on an optional or voluntary basis.
[8]
Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as specified
in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The Constitution recognizes two
classes of corporations. The first refers to private corporations created under a general law. The second refers
to government-owned or controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a general law applicable
to all citizens.[9] The purpose of this constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups special privileges denied to other
citizens.[10]
In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general law. Stated differently, only corporations
created under a general law can qualify as private corporations. Under existing laws, that general law is the
Corporation Code,[11] except that the Cooperative Code governs the incorporation of cooperatives. [12]
The Constitution authorizes Congress to create government-owned or controlled corporations through
special charters. Since private corporations cannot have special charters, it follows that Congress can create
corporations with special charters only if such corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs
are not registered with the Securities and Exchange Commission.Section 14 of the Corporation Code states that [A]ll
corporations organized under this code shall file with the Securities and Exchange Commission articles of
incorporation x x x. LWDs have no articles of incorporation, no incorporators and no stockholders or members. There
are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with
the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs
for a fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those
corporations created pursuant to the Corporation Code. Significantly, petitioners are not created under the said
code, but on the contrary, they were created pursuant to a special law and are governed primarily by its
provision.[13] (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only
government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are
government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that
their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs
derive their legal existence and power from PD 198. Sections 6 and 25 of PD 198[14] provide:
Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a
district. For purposes of this Act, a district shall be considered as a quasi-public corporation performing
public service and supplying public wants. As such, a district shall exercise the powers, rights and privileges
given to private corporations under existing laws, in addition to the powers granted in, and subject to such
restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region
thereof, served by said system, followed by the words Water District.
(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all
lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions
thereof.
 (c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or
under the control of such city, municipality or province to such district upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in
Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44
of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter
or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar
resolution shall be adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by this Title or
which are necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of
carrying out the objectives of this Act, a district is hereby granted the power of eminent domain, the exercise thereof
shall, however, be subject to review by the Administration.(Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate
powers. Section 6 of PD 198 provides that LWDs shall exercise the powers, rights and privileges given to private
corporations under existing laws. Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes
the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled
corporations with a special charter.
The phrase government-owned and controlled corporations with original charters means GOCCs created under
special laws and not under the general incorporation law. There is no difference between the term original charters
and special charters. The Court clarified this in National Service Corporation v. NLRC[15] by citing the deliberations in
the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows:
including government-owned or controlled corporations WITH ORIGINAL CHARTERS. The purpose of this
amendment is to indicate that government corporations such as the GSIS and SSS, which have original charters, fall
within the ambit of the civil service. However, corporations which are subsidiaries of these chartered agencies such as
the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters, what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission,[16] the Court reiterated the meaning of the
phrase government-owned and controlled corporations with original charters in this wise:
By government-owned or controlled corporation with original charter, We mean government owned or
controlled corporation created by a special law and not under the Corporation Code of the Philippines. Thus,
in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No.
69870, promulgated on 29 November 1988, quoting extensively from the deliberations of the 1986
Constitutional Commission in respect of the intent and meaning of the new phrase with original charter, in
effect held that government-owned and controlled corporations with original charter refer to corporations
chartered by special law as distinguished from corporations organized under our general incorporation
statute the Corporation Code. In NASECO, the company involved had been organized under the general
incorporation statute and was a subsidiary of the National Investment Development Corporation (NIDC) which in turn
was a subsidiary of the Philippine National Bank, a bank chartered by a special statute. Thus, government-owned or
controlled corporations like NASECO are effectively, excluded from the scope of the Civil Service. (Emphasis
supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang
Bayan has the power to create corporations. This is a patently baseless assumption. The Local Government
Code[17] does not vest in the Sangguniang Bayan the power to create corporations. [18] What the Local Government
Code empowers the Sangguniang Bayan to do is to provide for the establishment of a waterworks system subject to
existing laws. Thus, Section 447(5)(vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the legislative body of
the municipality, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the
municipality and its inhabitants pursuant to Section 16 of this Code and in the proper exercise of the corporate powers
of the municipality as provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient
waterworks system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of
hydrants, pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and,
for this purpose, extend the coverage of appropriate ordinances over all territory within the drainage area of said water
supply and within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed
used in connection with the water service; and regulate the consumption, use or wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD
198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks
system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a
water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan has the power to create
corporations, the LWDs would remain government-owned or controlled corporations subject to COAs audit
jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the LWD a
government-owned and controlled corporation with an original charter. In any event, the Court has already ruled
in Baguio Water District v. Trajano[19] that the Sangguniang Bayan resolution is not the special charter of LWDs,
thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of
the opinion that said resolution cannot be considered as its charter, the same being intended only to implement the
provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an
original charter. In short, petitioner argues that one special law cannot serve as enabling law for several GOCCs but
only for one GOCC. Section 16, Article XII of the Constitution mandates that Congress shall not, except by general
law,[20] provide for the creation of private corporations. Thus, the Constitution prohibits one special law to create one
private corporation, requiring instead a general law to create private corporations. In contrast, the same Section 16
states that Government-owned or controlled corporations may be created or established by special charters. Thus,
the Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on
Congress to create several GOCCs of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not apply to
GOCCs. There is no danger of creating special privileges to certain individuals, families or groups if there is one
special law creating each GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or
one special enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special charters
specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies
only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 198 [21] declares that LWDs
shall be considered quasi-public in nature. Petitioners rationale is that only private corporations may be deemed
quasi-public and not public corporations. Put differently, petitioner rationalizes that a public corporation cannot be
deemed quasi-public because such corporation is already public. Petitioner concludes that the term quasi-public can
only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the
governments ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public, or
public is immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and controlled corporations with
original charters, as well as government-owned or controlled corporations without original charters. GOCCs with
original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-
audit. GOCCs without original charters refer to corporations created under the Corporation Code but are owned or
controlled by the government. The nature or purpose of the corporation is not material in determining COAs audit
jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law.
The determining factor of COAs audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank,[22] the Court even
ruled that the criterion of ownership and control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that the Civil Service
embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned
or controlled corporations with original charters. As the Bank is not owned or controlled by the Government
although it does have an original charter in the form of R.A. No. 3518, [23] it clearly does not fall under the Civil
Service and should be regarded as an ordinary commercial corporation. Section 28 of the said law so
provides. The consequence is that the relations of the Bank with its employees should be governed by the labor laws,
under which in fact they have already been paid some of their claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a
specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the
creation of LWDs, the national or local government owns and controls all their assets. The government controls LWDs
because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the board directors of an
LWD for a fixed term of six years.[24] The board directors of LWDs are not co-owners of the LWDs.LWDs have no
private stockholders or members. The board directors and other personnel of LWDs are government employees
subject to civil service laws[25] and anti-graft laws.[26]
While Section 8 of PD 198 states that [N]o public official shall serve as director of an LWD, it only means that the
appointees to the board of directors of LWDs shall come from the private sector. Once such private sector
representatives assume office as directors, they become public officials governed by the civil service law and anti-graft
laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution declaring that the
civil service includes government-owned or controlled corporations with original charters.
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under
the term agencies or instrumentalities of the government and thus still subject to COAs audit jurisdiction. However, the
stark and undeniable fact is that the government owns LWDs. Section 45[27] of PD 198 recognizes government
ownership of LWDs when Section 45 states that the board of directors may dissolve an LWD only on the condition
that another public entity has acquired the assets of the district and has assumed all obligations and liabilities
attached thereto. The implication is clear that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner
advances the theory that the Water Districts owner is the District itself.[28] Assuming for the sake of argument that an
LWD is self-owned,[29] as petitioner describes an LWD, the government in any event controls all LWDs. First,
government officials appoint all LWD directors to a fixed term of office. Second, any per diem of LWD directors in
excess of P50 is subject to the approval of the Local Water Utilities Administration, and directors can receive no other
compensation for their services to the LWD.[30] Third, the Local Water Utilities Administration can require LWDs to
merge or consolidate their facilities or operations.[31] This element of government control subjects LWDs to COAs audit
jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of
ownership of water facilities from local government units to their respective water districts as mandated by PD
198. Petitioner is grasping at straws. Privatization involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD 198 is no other than the
LWD itself.[32] The transfer of assets mandated by PD 198 is a transfer of the water systems facilities managed,
operated by or under the control of such city, municipality or province to such (water) district. [33] In short, the transfer is
from one government entity to another government entity. PD 198 is bereft of any indication that the transfer is to
privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20
of PD 198 prevents COA from auditing LWDs. [34] Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe and define by
resolution a system of business administration and accounting for the district, which shall be patterned upon and
conform to the standards established by the Administration. Auditing shall be performed by a certified public
accountant not in the government service. The Administration may, however, conduct annual audits of the fiscal
operations of the district to be performed by an auditor retained by the Administration. Expenses incurred in
connection therewith shall be borne equally by the water district concerned and the Administration. [35] (Emphasis
supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from
auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198 when it states
that [A]uditing shall be performed by a certified public accountant not in the government service. [36]
PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from
COAs audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or devise to escape COAs
audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or
any investment of public funds, from the jurisdiction of the Commission on Audit.(Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of
Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange
in the deliberations of the Constitutional Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW
SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON
AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a legislature in the
past to obtain presidential decrees exempting themselves from the jurisdiction of the Commission on Audit,
one notable example of which is the Philippine National Oil Company which is really an empty shell. It is a holding
corporation by itself, and strictly on its own account. Its funds were not very impressive in quantity but underneath that
shell there were billions of pesos in a multiplicity of companies. The PNOC the empty shell under a presidential decree
was covered by the jurisdiction of the Commission on Audit, but the billions of pesos invested in different corporations
underneath it were exempted from the coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut
levy is a form of taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in
effect, public funds. And that was, I think, the basis of the PCGG in undertaking that last major sequestration of up to
94 percent of all the shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential
decree, exempted it from the jurisdiction of the Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS,
FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the
amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: (c) government-owned or controlled corporations and their
subsidiaries? So that if these government-owned and controlled corporations and their subsidiaries are subjected to
the audit of the COA, any law exempting certain government corporations or subsidiaries will be already
unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by
Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same
provision was in the 1973 Constitution and yet somehow a law or a decree was passed where certain institutions were
exempted from audit. We are just reaffirming, emphasizing, the role of the Commission on Audit so that this problem
will never arise in the future.[37]
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors
from auditing LWDs and Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all
GOCCs. We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1)
and 3, Article IX-D of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section 18
of RA 6758,[38] which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In order to preserve the
independence and integrity of the Commission on Audit (COA), its officials and employees are prohibited from
receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government
unit, government-owned or controlled corporations, and government financial institutions, except those
compensation paid directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including financial institutions and local
government units are hereby prohibited from assessing or billing other government entities, including government-
owned or controlled corporations including financial institutions or local government units for services rendered by its
officials and employees as part of their regular functions for purposes of paying additional compensation to said
officials and employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no doubt, [39] petitioner asks COA to discontinue its practice of charging
auditing fees to LWDs since such practice allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government
entity except compensation paid directly by COA out of its appropriations and contributions. Thus, RA
6758 itself recognizes an exception to the statutory ban on COA personnel receiving compensation from
GOCCs. In Tejada v. Domingo,[40]the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to
preserve the independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees
from receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local
government unit, GOCCs and government financial institutions, except such compensation paid directly by the
COA out of its appropriations and contributions, and (2) government entities, including GOCCs, government
financial institutions and local government units from assessing or billing other government entities, GOCCs,
government financial institutions or local government units for services rendered by the latters officials and employees
as part of their regular functions for purposes of paying additional compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the
GOCCs and government financial institutions. Under the first, COA personnel assigned to auditing units of
GOCCs or government financial institutions can receive only such salaries, allowances or fringe benefits paid
directly by the COA out of its appropriations and contributions.The contributions referred to are the cost of
audit services earlier mentioned which cannot include the extra emoluments or benefits now claimed by
petitioners. The COA is further barred from assessing or billing GOCCs and government financial institutions for
services rendered by its personnel as part of their regular audit functions for purposes of paying additional
compensation to such personnel. x x x. (Emphasis supplied)
In Tejada, the Court explained the meaning of the word contributions in Section 18 of RA 6758, which allows
COA to charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of
the audit function in the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit
cost shall include personnel services, maintenance and other operating expenses, depreciation on capital and
equipment and out-of-pocket expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the
COA personnel assigned to the formers auditing units, the same shall be directly defrayed by COA from its own
appropriations x x x. [41]
COA may charge GOCCs actual audit cost but GOCCs must pay the same directly to COA and not to COA
auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs actual audit cost. Neither
has petitioner alleged that the auditing fees are paid by LWDs directly to individual COA auditors. Thus, petitioners
contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30
January 2001 denying petitioners Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of
Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the
Constitution. No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,
Corona, Carpio-Morales, Callejo, Sr., and Azcuna, and Tinga, JJ., concur.

G.R. No. 51765 March 3, 1997

REPUBLIC PLANTERS BANK, petitioner,
vs.
HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay
City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES, respondents.

HERMOSISIMA, JR., J.:

This is a petition for certiorari seeking the annulment of the Decision 1 of the then Court of First Instance of Rizal 2 for
having been rendered in grave abuse of discretion. Private respondents Robes-Francisco Realty and Development
Corporation (hereafter, "the Corporation") and Adalia F. Robes filed in the court a quo, an action for specific
performance to compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to pay
1% quarterly interest thereon as quarterly dividend owing them under the terms and conditions of the certificates of
stock.
The court a quo rendered judgment in favor of private respondents; hence, this instant petition.
Herein parties debate only legal issues, no issues of fact having been raised by them in the court a quo. For ready
reference, however, the following narration of pertinent transactions and events is in order:
On September 18, 1961, private respondent Corporation secured a loan from petitioner in the amount of P120,000.00.
As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent Corporation, through
its officers then, private respondent Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the
legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the
form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par
value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of
private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of
Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating.
xxx xxx xxx
2. That such preferred shares may be redeemed, by the system of drawing lots, at any time after two (2) years from
the date of issue at the option of the Corporation. . . .
On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint anchored on private
respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem
the same under the terms and conditions of the stock certificates. Private respondents attached to their complaint, a
letter-demand dated January 5, 1979 which, significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds: (1) that the trial court
had no jurisdiction over the subject-matter of the action; (2) that the action was unenforceable under substantive law;
and (3) that the action was barred by the statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16, 1979. 4 Petitioner then filed its
Answer on May 2, 1979. 5 Thereafter, the trial court gave the parties ten (10) days from July 30, 1979 to submit their
respective memoranda after the submission of which the case would be deemed submitted for resolution. 6
On September 7, 1979, the trial court rendered the herein assailed decision in favor of private respondents. In
ordering petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1%
quarterly interest thereon until full payment, the trial court ruled:
There being no issue of fact raised by either of the parties who filed their respective memoranda delineating their
respective contentions, a judgment on the pleadings, conformably with an earlier order of the Court, appears to be in
order.
From a further perusal of the pleadings, it appears that the provision of the stock certificates in question to the effect
that the plaintiffs shall have the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating, clearly and unequivocably [sic] indicates that the same are "interest bearing stocks" which are stocks
issued by a corporation under an agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As
such, plaintiffs become entitled to the payment thereof as a matter of right without necessity of a prior declaration of
dividend.
On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms
and conditions in said stock certificates clearly allows the same.
To allow the herein defendant not to redeem said preferred shares of stock and/or pay the interest due thereon despite
the clear import of said provisions by the mere invocation of alleged Central Bank Circulars prohibiting the same is
tantamount to an impairment of the obligation of contracts enshrined in no less than the fundamental law itself.
Moreover, the herein defendant is considered in estoppel from taking shelter behind a General Banking Act provision
to the effect that it cannot buy its own shares of stocks considering that the very terms and conditions in said stock
certificates allowing their redemption are its own handiwork.
As to the claim by the defendant that plaintiffs' cause of action is barred by prescription, suffice it to state that the
running of the prescriptive period was considered interrupted by the written extrajudicial demands made by the
plaintiffs from the defendant. 7
Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially on pure questions of law.
Petitioner's statement of the issues that it submits for us to adjudicate upon, is as follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION IN ORDERING PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT OF
P8213.69 AS INTERESTS FROM 1961 TO 1979 ON HER PREFERRED SHARES.
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION IN ORDERING PETITIONER TO REDEEM RESPONDENT ADALIA F. ROBES' PREFERRED
SHARES FOR P8,000.00.
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION IN DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER TO DESIST
FROM REDEEMING ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS THEREON . . . .
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE COMPLAINT DOES NOT STATE A CAUSE OF
ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF RESPONDENT ADALIA F. ROBES IS
BARRED BY PRESCRIPTION OR LACHES. 8
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to provide an overview on the nature of preferred
shares and the redemption thereof, considering that these issues lie at the heart of the dispute.
A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the
holders of common stock. The preferences are designed to induce persons to subscribe for shares of a
corporation. 9 Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder
thereof preference in the distribution of the assets of the corporation in case of liquidation; 10 the latter is a share the
holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are
paid to the holders of common stock. 11 There is no guaranty, however, that the share will receive any dividends.
Under the old Corporation Law in force at the time the contract between the petitioner and the private respondents
was entered into, it was provided that "no corporation shall make or declare any dividend except from the surplus
profits arising from its business, or distribute its capital stock or property other than actual profits among its members
or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful
dissolution." 12 Similarly, the present Corporation Code 13 provides that the board of directors of a stock corporation
may declare dividends only out of unrestricted retained earnings. 14 The Code, in Section 43, adopting the change
made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be a more precise
term, in place of "surplus profits arising from its business" in the former law. Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences
granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make
them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus
payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits,
the board of directors has the discretion to determine whether or not dividends are to be declared. 15 Shareholders,
both common and preferred, are considered risk takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid. 16
Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed
date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. 17 A
redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. 18 The present Code allows
redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of
current retained earnings. 19 However, while redeemable shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets
in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the
corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as
they mature. 20
We come now to the merits of the case. The petitioner argues that it cannot be compelled to redeem the preferred
shares issued to the private respondent. We agree. Respondent judge, in ruling that petitioner must redeem the
shares in question, stated that:
On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms
and conditions in said stock certificates clearly allows the same. 21
What respondent judge failed to recognize was that while the stock certificate does allow redemption, the option to do
so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional". Thus,
except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse the redemption of its stock. 22 Furthermore, the terms and
conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may"
denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how respondent judge can
ignore what, in his words, are the "very wordings of the terms and conditions in said stock certificates" and construe
what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in question.
The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central Bank made a finding
that said petitioner has been suffering from chronic reserve deficiency, 23 and that such finding resulted in a directive,
issued on January 31, 1973 by then Gov. G.S. Licaros of the Central Bank, to the President and Acting Chairman of
the Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. 24 Redemption of
preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was
obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have
resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole.
The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an
exercise of police power. The respondent judge insists that the directive constitutes an impairment of the obligation of
contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of obligations of contract is
limited by the exercise of the police power of the state, the reason being that public welfare is superior to private
rights. 25
The respondent judge also stated that since the stock certificate granted the private respondents the right to receive a
quarterly dividend of One Per Centum (1%) cumulative and participating, it "clearly and unequivocably (sic) indicates
that the same are "interest bearing stocks" or stocks issued by a corporation under an agreement to pay a certain rate
of interest thereon. As such, plaintiffs (private respondents herein) become entitled to the payment thereof as a matter
of right without necessity of a prior declaration of dividend." 26 There is no legal basis for this observation. Both Sec. 16
of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend
without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends
to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the
corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when
construed as requiring payment of interest as dividends from net earnings or surplus only. 27 Clearly, the respondent
judge, in compelling the petitioner to redeem the shares in question and to pay the corresponding dividends,
committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and
conditions specified in the stock certificate, as well as the clear mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of private respondent is already barred by
prescription as well as laches. Art. 1144 of the New Civil Code provides that a right of action that is founded upon a
written contract prescribes in ten (10) years. The letter-demand made by the private respondents to the petitioner was
made only on January 5, 1979, or almost eighteen years after receipt of the written contract in the form of the stock
certificate. As noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any other
evidence of demand presented. Therefore, we conclude that the only time the private respondents saw it fit to assert
their rights, if any, to the preferred shares of stock, was after the lapse of almost eighteen years. The same clearly
indicates that the right of the private respondents to any relief under the law has already prescribed. Moreover, the
claim of the private respondents is also barred by laches. Laches has been defined as the failure or neglect, for an
unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to
assert it either has abandoned it or declined to assert it. 28
Considering that the terms and conditions set forth in the stock certificate clearly indicate that redemption of the
preferred shares may be made at any time after the lapse of two years from the date of issue, private respondents
should have taken it upon themselves, after the lapse of the said period, to inquire from the petitioner the reason why
the said shares have not been redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional
sixteen years passed before the private respondents saw it fit to demand their right. The petitioner, at the time it issued
said preferred shares to the private respondents in 1961, could not have known that it would be suffering from chronic
reserve deficiency twelve years later. Had the private respondents been vigilant in asserting their rights, the
redemption could have been effected at a time when the petitioner bank was not suffering from any financial crisis.
WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The challenged decision of
respondent judge is set aside and the complaint against the petitioner is dismissed.
Costs against the private respondents.
SO ORDERED.