SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs.

COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE

GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.
DECISION
PANGANIBAN, J.

May a corporate treasurer, by herself and without any authorization from

the board of directors, validly sell a parcel of land owned by the
corporation? May the veil of corporate fiction be pierced on the mere ground that
almost all of the shares of stock of the corporation are owned by said treasurer and
her husband?

The Case

These questions are answered in the negative by this Court in resolving the
Petition for Review on Certiorari before us, assailing the March 18, 1997
Decision[1] of the Court of Appeals[2] in CA GR CV No. 46801 which, in turn,
modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro
Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC dismissed both the
Complaint and the Counterclaim filed by the parties. On the other hand, the Court
of Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH

MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or
return to plaintiff-appellant the downpayment of P100,000.00 which she received
from plaintiff-appellant. There is no pronouncement as to costs.[4]

The petition also challenges the June 10, 1997 CA Resolution denying
reconsideration.[5]

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s

amended complaint alleged that on 14 February 1989, plaintiff-appellant
entered into an agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land identified as Lot 30,
Block 1 of the Acropolis Greens Subdivision located in the District of Murphy,
Quezon City, Metro Manila, containing an area of Four Hundred Fourteen (414)
square meters, covered by TCT No. (362909) 2876; that as stipulated in the
Agreement of 14 February 1989, plaintiff-appellant paid the down payment in
the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid
on or before March 2, 1989; that on March 1, 1989, Mr. Andres T. Co, president

1
of plaintiff-appellant corporation, wrote a letter to defendant-appellee
Motorich Sales Corporation requesting for a computation of the balance
to be paid; that said letter was coursed through defendant-appellees broker,
Linda Aduca, who wrote the computation of the balance; that on March 2,
1989, plaintiff-appellant was ready with the amount corresponding to the balance,
covered by Metrobank Cashiers Check No. 004223, payable to defendant-appellee
Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee
Motorich Sales Corporation were supposed to meet in the office of plaintiff-
appellant but defendant-appellees treasurer, Nenita Lee Gruenberg, did not
appear; that defendant-appellee Motorich Sales Corporation despite repeated
demands and in utter disregard of its commitments had refused to execute the
Transfer of Rights/Deed of Assignment which is necessary to transfer the
certificate of title; that defendant ACL Development Corp. is impleaded as a
necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the
name of said defendant; while defendant JNM Realty & Development
Corp. is likewise impleaded as a necessary party in view of the fact that it
is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation; that on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered into a Deed of
Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of Quezon City
issued a new title in the name of Motorich Sales Corporation, represented
by defendant-appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under
Transfer Certificate of Title No. 3571; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales Corporations bad faith in
refusing to execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages which may be assessed
against defendants-appellees in the sum of Five Hundred Thousand (500,000.00)
Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporations unjustified and unwarranted failure to execute the required
Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-
appellant, defendants-appellees should be assessed exemplary damages in the
sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-
appellees bad faith in refusing to execute a Transfer of Rights/Deed of Assignment
in favor of plaintiff-appellant, the latter lost the opportunity to construct a
residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and
that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporations bad faith in refusing to execute a deed of sale in favor of
plaintiff-appellant, it has been constrained to obtain the services of counsel at an
agreed fee of One Hundred Thousand (P100,000.00) Pesos plus appearance fee for
every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee

Gruenberg interposed as affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3 of the amended
complaint; that Mrs. Gruenbergs signature on the agreement (ref: par. 3 of

2
Amended Complaint) is inadequate to bind Motorich. The other signature, that of
Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required; that
plaintiff knew this from the very beginning as it was presented a copy of the
Transfer of Rights (Annex B of amended complaint) at the time the Agreement
(Annex B of amended complaint) was signed; that plaintiff-appellant itself drafted
the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as
earnest money; that granting, without admitting, the enforceability of the
agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the
stipulated period (up to March 2, 1989); that it was the understanding between
Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of
Assignment will be signed only upon receipt of cash payment; thus they agreed
that if the payment be in check, they will meet at a bank designated by plaintiff-
appellant where they will encash the check and sign the Transfer of Rights/Deed.
However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of
the check, by phone, only after banking hours.

On the basis of the evidence, the court a quo rendered the judgment appealed
from[,] dismissing plaintiff-appellants complaint, ruling that:

'The issue to be resolved is: whether plaintiff had the right to compel
defendants to execute a deed of absolute sale in accordance with the
agreement of February 14, 1989; and if so, whether plaintiff is entitled to
damages.

As to the first question, there is no evidence to show that defendant

Nenita Lee Gruenberg was indeed authorized by defendant corporation,
Motorich Sales, to dispose of that property covered by T.C.T. No. (362909)
2876. Since the property is clearly owned by the corporation, Motorich
Sales, then its disposition should be governed by the requirement laid
down in Sec. 40, of the Corporation Code of the Philippines, to wit:

Sec. 40, Sale or other disposition of assets. Subject to the provisions of

existing laws on illegal combination and monopolies, a corporation may
by a majority vote of its board of directors xxx sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill xxx when authorized by the
vote of the stockholders representing at least two third (2/3) of the
outstanding capital stock x x x.

No such vote was obtained by defendant Nenita Lee Gruenberg for that
proposed sale[;] neither was there evidence to show that the supposed
transaction was ratified by the corporation. Plaintiff should have been on the
look out under these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on
corporation matters.

3
Regarding the question of damages, the Court likewise, does not find
substantial evidence to hold defendant Nenita Lee Gruenberg liable
considering that she did not in anyway misrepresent herself to be
authorized by the corporation to sell the property to plaintiff (tsn dated
September 27, 1991, p. 8).

In the light of the foregoing, the Court hereby renders judgment DISMISSING the
complaint at instance for lack of merit.

Defendants counterclaim is also DISMISSED for lack of basis. (Decision, pp.

7-8; Rollo, pp. 34-35)

For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing under

and by virtue of Philippine Laws, with principal office address at 5510 South Super
Hi-way cor. Balderama St., Pio del Pilar, Makati, Metro Manila, represented herein
by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the
TRANSFEROR;

- and --

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and
existing under and by virtue of the laws of the Philippines, with principal office
address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented
herein by its President, ANDRES T. CO, hereinafter referred to as the TRANSFEREE.

WITNESSETH, That:

WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30

Block 1 of the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy,
Quezon City, Metro Manila, containing an area of FOUR HUNDRED FOURTEEN (414)
SQUARE METERS, covered by a TRANSFER OF RIGHTS between JNM Realty & Dev.
Corp. as the Transferor and Motorich Sales Corp. as the Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties
have agreed as follows:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to the following terms:

4
a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00),
will be paid upon the execution of this agreement and shall form part of the total
purchase price;

b. Balance shall be payable on or before March 2, 1989;

2. That the monthly amortization for the month of February 1989 shall be for the
account of the Transferor; and that the monthly amortization starting March 21,
1989 shall be for the account of the Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-described
property and that there [are] no existing liens and/or encumbrances of whatsoever
nature;

In case of failure by the Transferee to pay the balance on the date specified on 1.
(b), the earnest money shall be forfeited in favor of the Transferor.

That upon full payment of the balance, the TRANSFEROR agrees to execute a
TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of
February, 1989 at Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN STRUCTURAL &

TRANSFEROR STEEL FABRICATORS
TRANSFEREE

[SGD.] [SGD.]
By: NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President

Signed in the presence of:

[SGD.] [SGD.]
_________________________ _____________________[6]

In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale

in accordance with the Agreement of February 14, 1989,

2. Plaintiff is entitled to damages.[7]

As stated earlier, the Court of Appeals debunked petitioners arguments and

affirmed the Decision of the RTC with the modification that Respondent

5
Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the
amount remitted as downpayment or earnest money. Hence, this petition
before us.[8]

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is

applicable in the instant case

II. Whether or not the appellate court may consider matters which the parties
failed to raise in the lower court

III. Whether or not there is a valid and enforceable contract between the
petitioner and the respondent corporation

IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s]

V. Whether or not respondents are liable for damages and attorneys fees[9]

The Court synthesized the foregoing and will thus discuss them seriatim as follows:

1. Was there a valid contract of sale between petitioner and Motorich?

2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?

3. Is the alleged alteration of Gruenbergs testimony as recorded in the transcript of

stenographic notes material to the disposition of this case?

4. Are respondents liable for damages and attorneys fees?

The Courts Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February
14, 1989, it entered through its president, Andres Co, into the disputed Agreement
with Respondent Motorich Sales Corporation, which was in turn allegedly
represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that [w]hen
Gruenberg and Co affixed their signatures on the contract they both consented to
be bound by the terms thereof. Ergo, petitioner contends that the contract is
binding on the two corporations. We do not agree.

6
True, Gruenberg and Co signed on February 14, 1989, the Agreement
according to which a lot owned by Motorich Sales Corporation was
purportedly sold. Such contract, however, cannot bind Motorich, because
it never authorized or ratified such sale.

A corporation is a juridical person separate and distinct from its

stockholders or members. Accordingly, the property of the corporation is
not the property of its stockholders or members and may not be sold by
the stockholders or members without express authorization from the
corporations board of directors.[10] Section 23 of BP 68, otherwise
known as the Corporation Code of the Philippines, provides:

SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this
Code, the corporate powcers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified.

Indubitably, a corporation may act only through its board of directors, or, when
authorized either by its bylaws or by its board resolution, through its officers or
agents in the normal course of business. The general principles of agency govern
the relation between the corporation and its officers or agents, subject to the
articles of incorporation, bylaws, or relevant provisions of law.[11] Thus, this Court
has held that a corporate officer or agent may represent and bind the corporation
in transactions with third persons to the extent that the authority to do so has
been conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer
or agent, and such apparent powers as the corporation has caused persons dealing
with the officer or agent to believe that it has conferred.[12]

Furthermore, the Court has also recognized the rule that persons dealing with an
assumed agent, whether the assumed agency be a general or special one, are
bound at their peril, if they would hold the principal liable, to ascertain not only the
fact of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19).[13] Unless duly authorized, a treasurer, whose powers are
limited, cannot bind the corporation in a sale of its assets.[14]

In the case at bar, Respondent Motorich categorically denies that it ever authorized
Nenita Gruenberg, its treasurer, to sell the subject parcel of land.[15]
Consequently, petitioner had the burden of proving that Nenita Gruenberg was in

7
fact authorized to represent and bind Motorich in the transaction. Petitioner failed
to discharge this burden. Its offer of evidence before the trial court contained no
proof of such authority.[16] It has not shown any provision of said respondents
articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg
possessed such power.

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

Neither was such real estate sale shown to be a normal business activity
of Motorich. The primary purpose of Motorich is marketing, distribution,
export and import in relation to a general merchandising business.[18]
Unmistakably, its treasurer is not cloaked with actual or apparent
authority to buy or sell real property, an activity which falls way beyond
the scope of her general authority.

Articles 1874 and 1878 of the Civil Code of the Philippines provides:

ART. 1874. When a sale of a piece of land or any interest therein is through an
agent, the authority of the latter shall be in writing; otherwise, the sale shall be
void.

ART. 1878 Special powers of attorney are necessary in the following case:

xxxxxxxxx

(5) To enter any contract by which the ownership of an immovable is transmitted or

acquired either gratuitously or for a valuable consideration;

x x x x x x x x x.

Petitioner further contends that Respondent Motorich has ratified said contract of
sale because of its acceptance of benefits, as evidenced by the receipt issued by
Respondent Gruenberg.[19] Petitioner is clutching at straws.

As a general rule, the acts of corporate officers within the scope of their
authority are binding on the corporation. `.[20]

In this case, there is a clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the authority, to sell
its land or to receive the earnest money. Neither was there any proof that Motorich

8
ratified, expressly or impliedly, the contract. Petitioner rests its argument on the
receipt, which, however, does not prove the fact of ratification. The document is a
hand-written one, not a corporate receipt, and it bears only Nenita Gruenbergs
signature. Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.

Article 1318 of the Civil Code lists the requisites of a valid and perfected contract:
(1) consent of the contracting parties; (2) object certain which is the subject matter
of the contract; (3) cause of the obligation which is established. As found by the
trial court[21] and affirmed by the Court of Appeals,[22] there is no evidence that
Gruenberg was authorized to enter into the contract of sale, or that the said
contract was ratified by Motorich. This factual finding of the two courts is binding
on this Court.[23] As the consent of the seller was not obtained, no contract to bind
the obligor was perfected. Therefore, there can be no valid contract of sale
between petitioner and Motorich.

Because Motorich had never given a written authorization to Respondent

Gruenberg to sell its parcel of land, we hold that the February 14, 1989 Agreement
entered into by the latter with petitioner is void under Article 1874 of the Civil
Code. Being inexistent and void from the beginning, said contract cannot be
ratified.[24]

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be
pierced, because the latter is a close corporation. Since Spouses Reynaldo L.
Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be
accurate, of the subscribed capital stock[25] of Motorich, petitioner argues that
Gruenberg needed no authorization from the board to enter into the
subject contract.[26] It adds that, being solely owned by the Spouses
Gruenberg, the company can be treated as a close corporation which can
be bound by the acts of its principal stockholder who needs no specific
authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly,[27] not having
done so during the trial, but only when it filed its sur-rejoinder before the Court of
Appeals.[28] Thus, this Court cannot entertain said issue at this late stage of the
proceedings. It is well-settled that points of law, theories and arguments not
brought to the attention of the trial court need not be, and ordinarily will not be,
considered by a reviewing court, as they cannot be raised for the first time on
appeal.[29] Allowing petitioner to change horses in midstream, as it were, is to run
roughshod over the basic principles of fair play, justice and due process.

Second, even if the above-mentioned argument were to be addressed at this time,

the Court still finds no reason to uphold it. True, one of the advantages of a

9
corporate form of business organization is the limitation of an investors liability to
the amount of the investment.[30] This feature flows from the legal theory that a
corporate entity is separate and distinct from its stockholders. However, the
statutorily granted privilege of a corporate veil may be used only for legitimate
purposes.[31] On equitable considerations, the veil can be disregarded when it is
utilized as a shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego or business
conduit of a person or an instrumentality, agency or adjunct of another
corporation.[32]

Thus, the Court has consistently ruled that [w]hen the fiction is used as a means of
perpetrating a fraud or an illegal act or as 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.[33]

We stress that the corporate fiction should be set aside when it becomes a shield
against liability for fraud, illegality or inequity committed on third persons. The
question of piercing the veil of corporate fiction is essentially, then, a matter of
proof. In the present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to establish that
said corporation was formed, or that it is operated, for the purpose of shielding any
alleged fraudulent or illegal activities of its officers or stockholders; or that the said
veil was used to conceal fraud, illegality or inequity at the expense of third
persons, like petitioner.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section
96 of the Corporation Code defines a close corporation as follows:

SEC. 96. Definition and Applicability of Title. -- A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All of
the corporations issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding
twenty (20); (2) All of the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public offering of any of its stock
of any class. Notwithstanding the foregoing, a corporation shall be deemed not a
close corporation when at least two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation which is not a close corporation
within the meaning of this Code. xxx.

The articles of incorporation[34] of Motorich Sales Corporation does not contain

any provision stating that (1) the number of stockholders shall not exceed 20, or

10
(2) a preemption of shares is restricted in favor of any stockholder or of the
corporation, or (3) listing its stocks in any stock exchange or making a public
offering of such stocks is prohibited. From its articles, it is clear that Respondent
Motorich is not a close corporation.[35] Motorich does not become one either, just
because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The [m]ere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate
corporate personalities.[36] So too, a narrow distribution of ownership
does not, by itself, make a close corporation.

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals[37] wherein

the Court ruled that xxx petitioner corporation is classified as a close corporation
and, consequently, a board resolution authorizing the sale or mortgage of the
subject property is not necessary to bind the corporation for the action of its
president.[38] But the factual milieu in Dulay is not on all fours with the present
case. In Dulay, the sale of real property was contracted by the president
of a close corporation with the knowledge and acquiescence of its board
of directors.[39] In the present case, Motorich is not a close corporation,
as previously discussed, and the agreement was entered into by the
corporate treasurer without the knowledge of the board of directors.

The Court is not unaware that there are exceptional cases where an action by a
director, who singly is the controlling stockholder, may be considered as a binding
corporate act and a board action as nothing more than a mere formality.[40] The
present case, however, is not one of them.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost

99.866% of Respondent Motorich.[41] Since Nenita is not the sole controlling
stockholder of Motorich, the aforementioned exception does not apply. Granting
arguendo that the corporate veil of Motorich is to be disregarded, the subject
parcel of land would then be treated as conjugal property of Spouses Gruenberg,
because the same was acquired during their marriage. There being no indication
that said spouses, who appear to have been married before the effectivity of the
Family Code, have agreed to a different property regime, their property relations
would be governed by conjugal partnership of gains.[42] As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot because [t]here is no
co-ownership between the spouses in the properties of the conjugal partnership of
gains. Hence, neither spouse can alienate in favor of another his or her interest in
the partnership or in any property belonging to it; neither spouse can ask for a
partition of the properties before the partnership has been legally dissolved.[43]

Assuming further, for the sake of argument, that the spouses property regime is
the absolute community of property, the sale would still be invalid. Under this
regime, alienation of community property must have the written consent of the

11
other spouse or the authority of the court without which the disposition or
encumbrance is void.[44] Both requirements are manifestly absent in the instant
case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of

stenographic notes(TSN):

Q Did you ever represent to Mr. Co that you were authorized by the corporation to
sell the property?

A Yes, sir.[45]

Petitioner claims that the answer Yes was crossed out, and, in its place was written
a No with an initial scribbled above it.[46] This, however, is insufficient to prove
that Nenita Gruenberg was authorized to represent Respondent Motorich in the
sale of its immovable property. Said excerpt should be understood in the context of
her whole testimony. During her cross-examination, Respondent Gruenberg
testified:

Q So, you signed in your capacity as the treasurer?

[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not authorized?

A Yes, sir.

Q You stated on direct examination that you did not represent that you were
authorized to sell the property?

A Yes, sir.

Q But you also did not say that you were not authorized to sell the property, you
did not tell that to Mr. Co, is that correct?

A That was not asked of me.

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the
president who [was] also authorized to sign on behalf of the corporation.

Q You did not say that you were not authorized nor did you say that you were
authorized?

12
A Mr. Co was very interested to purchase the property and he offered to put up a
P100,000.00 earnest money at that time. That was our first meeting.[47]

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to
sell its property. On the other hand, her testimony demonstrates that the president
of Petitioner Corporation, in his great desire to buy the property, threw caution to
the wind by offering and paying the earnest money without first verifying
Gruenbergs authority to sell the lot.

Fourth Issue:
Damages and Attorneys Fees

Finally, petitioner prays for damages and attorneys fees, alleging that [i]n an utter
display of malice and bad faith, [r]espondents attempted and succeeded in
impressing on the trial court and [the] Court of Appeals that Gruenberg did not
represent herself as authorized by Respondent Motorich despite the receipt issued
by the former specifically indicating that she was signing on behalf of Motorich
Sales Corporation. Respondent Motorich likewise acted in bad faith when it claimed
it did not authorize Respondent Gruenberg and that the contract [was] not binding,
[insofar] as it [was] concerned, despite receipt and enjoyment of the proceeds of
Gruenbergs act.[48] Assuming that Respondent Motorich was not a party to the
alleged fraud, petitioner maintains that Respondent Gruenberg should be held
liable because she acted fraudulently and in bad faith [in] representing herself as
duly authorized by [R]espondent [C]orporation.[49]

As already stated, we sustain the findings of both the trial and the appellate courts
that the foregoing allegations lack factual bases. Hence, an award of damages or
attorneys fees cannot be justified. The amount paid as earnest money was not
proven to have redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent Motorich, because it
was deposited with the account of Aren Commercial c/o Motorich Sales
Corporation.[50] Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:

Q You voluntarily accepted the P100,000.00, as a matter of fact, that was

encashed, the check was encashed.

A Yes, sir, the check was paid in my name and I deposit[ed] it . . .

Q In your account?

A Yes, sir. [51]

In any event, Gruenberg offered to return the amount to petitioner xxx since the
sale did not push through.[52]

13
Moreover, we note that Andres Co is not a neophyte in the world of corporate
business. He has been the president of Petitioner Corporation for more than ten
years and has also served as chief executive of two other corporate entities.[53]
Co cannot feign ignorance of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope
of Gruenbergs authorization to enter into a contract to sell a parcel of land
belonging to Motorich.

Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to
persuade the Court. Indubitably, petitioner appears to be the victim of its own
officers negligence in entering into a contract with and paying an unauthorized
officer of another corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be

ordered to return to petitioner the amount she received as earnest money, as no
one shall enrich himself at the expense of another,[54] a principle embodied in
Article 2154 of the Civil Code.[55] Although there was no binding relation between
them, petitioner paid Gruenberg on the mistaken belief that she had the authority
to sell the property of Motorich.[56] Article 2155 of the Civil Code provides that
[p]ayment by reason of a mistake in the construction or application of a difficult
question of law may come within the scope of the preceding article.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.

SO ORDERED.

G.R. No. 102300. March 17, 1993.

CITIBANK, N.A., petitioner, vs. HON. SEGUNDINO G. CHUA, SANTIAGO M.

KAPUNAN and LUIS L. VICTOR, ASSOCIATE JUSTICES OF THE HON. COURT
OF APPEALS, THIRD DIVISION, MANILA, HON. LEONARDO B. CANARES,
Judge of Regional, Trial Court of Cebu, Branch 10, and SPOUSES
CRESENCIO AND ZENAIDA VELEZ, respondents.

SYLLABUS

1. COMMERCIAL LAW; PRIVATE CORPORATIONS; LEVELS OF CONTROL IN

CORPORATE HIERARCHY; BOARD OF DIRECTORS MAY VALIDLY DELEGATE SOME
FUNCTIONS TO INDIVIDUAL OFFICERS OR AGENTS. In the corporate hierarchy,
there are three levels of control: (1) the board of directors, which is responsible
for corporate policies and the general management of the business affairs of the
corporation; (2) the officers, who in theory execute the policies laid down by the
board, but in practice often have wide latitude in determining the course of

14
business operations; and (3) the stockholders who have the residual power over
fundamental corporate changes, like amendments of the articles of incorporation.
However, just as a natural person may authorize another to do certain acts in his
behalf, so may the board of directors of a corporation validly delegate some of its
functions to individual officers or agents appointed by it.

2. ID.; ID.; HOW CORPORATE POWERS CONFERRED UPON CORPORATE OFFICERS

OR AGENTS; EXERCISE OF POWERS INCIDENTAL TO EXPRESS POWERS
CONFERRED. Corporate powers may be directly conferred upon corporate
officers or agents by statute, the articles of incorporation, the by-laws or by
resolution or other act of the board of directors. In addition, an officer who is not a
director may also appoint other agents when so authorized by the by-laws or by
the board of directors. Such are referred to as express powers. There are also
powers incidental to express powers conferred. It is a fundamental principle in the
law of agency that every delegation of authority, whether general or special,
carries with it, unless the contrary be expressed, implied authority to do all of
those acts, naturally and ordinarily done in such cases, which are reasonably
necessary and proper to be done in order to carry into effect the main authority
conferred. Since the by-laws are a source of authority for corporate officers and
agents of the corporation, a resolution of the Board of Directors of Citibank
appointing an attorney in fact to represent and bind it during the pre-trial
conference of the case at bar is not necessary because its by-laws allow its
officers, the Executing Officer and the Secretary Pro-Tem, to execute a power of
attorney to a designated bank officer, William W. Ferguson in this case, clothing
him with authority to direct and manage corporate affairs.

3. ID.; ID.; ADOPTION OF BY-LAWS; PROVISION OF SECTION 46 OF

CORPORATION CODE REFERRING TO EFFECTIVITY OF CORPORATE BY-LAWS
APPLICABLE ONLY TO DOMESTIC CORPORATIONS. A corporation can submit its
by-laws, prior to incorporation, or within one month after receipt of official notice of
the issuance of its certificate of incorporation by the SEC. When the third
paragraph of the above provision mentions "in all cases", it can only refer to these
two options; i.e., whether adopted prior to incorporation or within one month after
incorporation, the by-laws shall be effective only upon the approval of the SEC. But
even more important, said provision starts with the phrase "Every corporation
formed under this Code", which can only refer to corporations incorporated in the
Philippines. Hence, Section 46, in so far as it refers to the effectivity of
corporate by-laws, applies only to domestic corporations and not to foreign
corporations.

4. ID.; FOREIGN CORPORATIONS; ISSUANCE OF LICENSE TO TRANSACT

BUSINESS IN THE PHILIPPINES; REQUISITES; GRANT OF LICENSE IN EFFECT
APPROVAL BY SEC OF FOREIGN CORPORATION'S BY-LAWS. Section 125 of the
same Code requires that a foreign corporation applying for a license to transact
business in the Philippines must submit, among other documents, to the SEC, a
copy of its articles of incorporation and by-laws, certified in accordance with law.

15
Unless these documents are submitted, the application cannot be acted upon by
the SEC. In the following section, the Code specifies when the SEC can grant the
license applied for. Section 126 provides in part: "SEC. 126. Issuance of a license.
If the Securities and Exchange Commission is satisfied that the applicant has
complied with all the requirements of this Code and other special laws, rules and
regulations, the Commission shall issue a license to the applicant to transact
business in the Philippines for the purpose or purposes specified in such
license . . ." Since the SEC will grant a license only when the foreign corporation
has complied with all the requirements of law, it follows that when it decides to
issue such license, it is satisfied that the applicant's by-laws, among the other
documents, meet the legal requirements. This, in effect, is an approval of the
foreign corporations by-laws. It may not have been made in express terms, still it is
clearly an approval. Therefore, petitioner bank's by-laws, though originating from a
foreign jurisdiction, are valid and effective in the Philippines.

5. CIVIL LAW; AGENCY; SPECIAL POWER OF ATTORNEY; WHEN POWER OF

ATTORNEY COMPREHENSIVE ENOUGH TO INCLUDE AUTHORITY TO APPEAR AT PRE-
TRIAL CONFERENCE. It is also error on the part of the Court of Appeals to state
that the power of attorney given to the four (4) Citibank employees is not a special
power of attorney as required in paragraph 3, Article 1878 of the Civil Code and
Section 1 (a), Rule 20 of the Rules of Court. In the case of Tropical Homes, Inc. vs.
Villaluz, the special power of attorney executed by petitioner bank therein
contained the following pertinent terms "to appear for and in its behalf in the
above-entitled case in all circumstances where its appearance is required and to
bind it in all said instances". The court ruled that: "Although the power of attorney
in question does not specifically mention the authority of petitioner's counsel to
appear and bind the petitioner at the pre-trial conference, the terms of said power
of attorney are comprehensive enough as to include the authority to appear for the
petitioner at the pre-trial conference."

6. ID.; ID.; ID.; LEGAL COUNSEL APPOINTED TO REPRESENT BANK IN COURT

PURSUANT TO BY-LAW PROVISION CONSIDERED AN EMPLOYEE FOR A SPECIAL
PURPOSE. Attorney was sufficient under the by-law provision authorizing
Ferguson to delegate any of his functions to any one or more employees of the
petitioner bank. A reasonable interpretation of this provision would include an
appointment of a legal counsel to represent the bank in court, for, under the
circumstances, such legal counsel can be considered, and in fact was considered
by the petitioner bank, an employee for a special purpose. Furthermore, Ferguson,
who heads the Philippine office thousands of miles away from its main office in the
United States, must be understood to have sufficient powers to act promptly in
order to protect the interests of his principal.

7. REMEDIAL LAW; CIVIL PROCEDURE; PRECIPITATE ORDERS OF DEFAULT

FROWNED UPON BY SUPREME COURT; REASON THEREFOR; WHEN PARTY MAY BE
PROPERLY DEFAULTED. We reiterate the previous admonitions of this Court
against "precipitate orders of default as these have the effect of denying the

16
litigant the chance to be heard. While there are instances, to be sure, when a party
may be properly defaulted, these should be the exceptions rather than the rule
and should be allowed only in clear cases of an obstinate refusal or inordinate
neglect to comply with the orders of the court. Absent such a showing, the party
must be given every reasonable opportunity to present his side and to refute the
evidence of the adverse party in deference to due process of law".

8. LEGAL ETHICS; AUTHORITY OF ATTORNEYS TO BIND CLIENTS. Under Rule

138, Section 23 of the Rules of Court, an attorney has authority to bind his client in
any case by an agreement in relation thereto made in writing, and this authority
would include taking appeals and all matters of ordinary judicial procedure. But he
cannot, without special authority, compromise his client's litigation or receive
anything in discharge of a client's claim but the full amount in cash. The special
powers of attorney separately executed by Florencia Tarriela and William W.
Ferguson granted to J.P. Garcia & Associates are very explicit in their terms as to
the counsel's authority in the case at bar.

DECISION

CAMPOS, JR., J p:

Petitioner is a foreign commercial banking corporation duly licensed to

do business in the Philippines. Private respondents, spouses Cresencio and
Zenaida Velez, were good clients of petitioner bank's b ranch in Cebu until
March 14, 1986 when they filed a complaint for specific performance and damages
against it in Civil Case No. CEB-4751 before the Regional Trial Court of Cebu,
Branch 10.

Private respondents alleged in their complaint that the petitioner bank

extended to them credit lines sufficiently secured with real estate and
chattel mortgages on equipment. They claim that petitioner offered them
special additional accommodation of Five Million Pesos (P5,000,000.00) to be
availed of in the following manner:

"a. Defendant would and did purchase check or checks from the plaintiffs by
exchanging it with defendant's manager's check on a regular daily basis as
reflected in the defendant's own ledger furnished to plaintiffs;

b. It was further agreed that on the following day, defendant CITIBANK would
again purchase from the plaintiffs, check or checks, by exchanging the same with
defendant's manager's check, which check, however, will be deposited by the
plaintiffs with their other banks to cover the check or checks previously issued by
the plaintiffs mentioned above;

c. The same regular and agreed activity would be undertaken by the plaintiffs
and defendant CITIBANK herein every banking day thereafter;" 1

17
This arrangement started on September 4, 1985 until March 11, 1986, when
private respondents tried to exchange with petitioner bank six checks amounting
to P3,095,000.00 but petitioner bank allegedly refused to continue with the
arrangement even after repeated demands. Instead, petitioner bank
suggested to private respondents that the total amount covered by the
"arrangement be restructured to thirty (30) months with prevailing interest rate on
the diminishing balance". 2 Private respondents agreed to such a proposal. Then as
a sign of good faith, they issued and delivered a check for P75,000.00 in favor of
petitioner bank which was refused by the latter demanding instead full payment of
the entire amount.

For the failure of petitioner bank to comply with this restructuring

agreement private respondents sued for specific performance and
damages.

Petitioner bank has a different version of the business relationship that existed
between it and private respondents. Thus:

". . . starting sometime on September 4 of 1985, he (private respondent Crescencio

Velez) deposited his unfunded personal checks with his current account with the
petitioner. But prior to depositing said checks, he would present his personal
checks to a bank officer asking the latter to have his personal checks immediately
credited as if it were a cash deposit and at the same time assuring the bank officer
that his personal checks were fully funded. Having already gained the trust and
confidence of the officers of the bank because of his past transactions, the bank's
officer would always accommodate his request. After his requests are granted
which is done by way of the bank officer affixing his signature on the personal
checks, private respondent Cresencio Velez would then deposit his priorly
approved personal checks to his current account and at the same time withdraw
sums of money from said current account by way of petitioner bank's manager's
check. Private respondent would then deposit petitioner bank's manager's check to
his various current accounts in other commercial banks to cover his previously
deposited unfunded personal checks with petitioner bank. Naturally, petitioner
bank and its officers never discovered that his personal check deposits were
unfunded. On the contrary, it gave the petitioner bank the false impression that
private respondent's construction business was doing very well and that he was
one big client who could be trusted. This deceptive and criminal scheme he did
every banking day without fail from September 4, 1985 up to March 11, 1986. The
amounts that he was depositing and withdrawing during this period (September 4,
1985 to March 11, 1986) progressively became bigger. It started at P46,000.00 on
September 4, 1985 and on March 11, 1986 the amount of deposit and withdrawal
already reached over P3,000,000.00. At this point in time (March 11, 1986), the
private respondent Cresencio Velez presumably already feeling that sooner or later
he would be caught and that he already wanted to cash in on his evil scheme,
decided to run away with petitioner's money. On March 11, 1986, he deposited

18
various unfunded personal checks totalling P3,095,000.00 and requested a bank
officer that the same be credited as cash and after securing the approval of said
bank officer, deposited his various personal checks in the amount of P3,095,000.00
with his current account and at the same time withdrew the sum of P3,244,000.00
in the form of petitioner's manager's check. Instead of using the proceeds of his
withdrawals to cover his unfunded personal checks, he ran away with petitioner
bank's money. Thus, private respondent Cresencio Velez's personal checks
deposited with petitioner bank on March 11, 1986 in the total aggregate amount of
P3,095,000.00 bounced. The checks bounced after said personal checks were
made the substantial basis of his withdrawing the sum of P3,244,000.00 from his
current account with petitioner bank." 3

Subsequently, on August 19, 1986, petitioner bank filed a criminal

complaint against private respondents for violation of Batas Pambansa
Blg. 22 (Bouncing Checks Law) and estafa (six counts) under Article 315 par.
2(d) of the Revised Penal Code. On April 28, 1988, the investigating fiscal
recommended the filing of an information against private respondents for
violations of the mentioned laws.

On June 13, 1989, petitioner bank submitted its answer to the complaint filed by
private respondents. In the Order dated February 20, 1990, the case was set for
pre-trial on March 30, 1990 and petitioner bank was directed to submit its pre-trial
brief at least 3 days before the pre-trial conference. Petitioner bank only filed its
pre-trial brief on March 30, 1990.

On March 30, 1990, the date of the pre-trial conference, counsel for
petitioner bank appeared, presenting a special power of attorney
executed by Citibank officer Florencia Tarriela in favor of petitioner
bank's counsel, the J.P. Garcia & Associates, to represent and bind
petitioner bank at the pre-trial conference of the case at bar.

Inspite of this special power of attorney, counsel for private respondents

orally moved to declare petitioner bank as in default on the ground that
the special power of attorney was not executed by the Board of Directors
of Citibank. Petitioner bank was then required to file a written opposition to this
oral motion to declare it as in default. In said opposition petitioner bank
attached another special power of attorney made by William W.
Ferguson, Vice President and highest ranking officer of Citibank,
Philippines, constituting and appointing the J.P. Garcia & Associates to
represent and bind the BANK at the pre-trial conference and/or trial of
the case of "Cresencio Velez, et al. vs. Citibank, N.A.". 4 In an Order dated
April 23, 1990, respondent judge denied private respondents' oral motion
to declare petitioner bank as in default and set the continuation of the
pre-trial conference for May 2, 1990.

19
On the scheduled pre-trial conference, private respondents reiterated, by way of
asking for reconsideration, their oral motion to declare petitioner bank as
in default for its failure to appear through an authorized agent and that the
documents presented are not in accordance with the requirements of the law.
Petitioner bank again filed on May 14, 1990 its opposition thereto, stating as
follows:

". . . While it has been the practice of Citibank to appoint its counsels as its
attorney-in-fact in civil cases because it considers said counsels equivalent to a
Citibank employee, yet, in order to avoid further arguments on the matter, the
defendant Citibank will secure another power of attorney from Mr.
William W. Ferguson in favor of its employee/s who will represent the
defendant Citibank in the pre-trial conferences of this case. As soon as the
said special power of attorney is secured, the defendant will present it before this
Honorable Court and in pursuance therewith, the defendant hereby makes a
reservation to present such document as soon as available." 5

In compliance with the above promise, petitioner bank filed a manifestation, dated
May 23, 1990, attaching therewith a special power of attorney executed by William
W. Ferguson in favor of Citibank employees to represent and bind Citibank on the
pre-trial conference of the case at bar. 6

On August 15, 1990, respondent judge issued an order declaring petitioner

bank as in default. This order, received by petitioner bank on September 27,
1990, cited the following as reason for the declaration of default:

"Defendant-bank, although a foreign corporation, is bound by Philippine laws when

doing and conducting business in the Philippines (Sec. 129, B.P. Blg. 68), and its
corporate powers could only be exercised by its Board of Directors (Sec. 23, B.P.
Blg. 68). The exercise by the Board of Directors of such power could only
be valid if it bears the approval of the majority of the Board (Sec. 25, par.
2, Corporation Code). The records does not show the requisite document.
The alleged authority (Special Power of Attorney, Annex "A") executed by Mr.
William W. Ferguson in favor of the alleged Citibank employees, assuming the
same to be a delegable authority, to represent the defendant in the pre-trial
conference, made no mention of J.P. Garcia & Associates as one of the employees
of the defendant.

It stands to reason therefore, that the defendant-bank has no proper

representation during the pre-trial conference on May 2, 1990 for purposes of Sec.
2, Rule 20 of the Rules of Court." 7

On October 1, 1990, petitioner bank filed a motion for reconsideration of the above
order but it was denied on December 10, 1990.

20
Petitioner bank then filed a petition for certiorari, prohibition and mandamus with
preliminary injunction and/or temporary restraining order with the Court of
Appeals. On June 26, 1991, the Court of Appeals dismissed the petition on the
following grounds:

". . . In the first place, petitioner admitted that it did not and could not present a
Board resolution from the bank's Board of Directors appointing its counsel, Atty.
Julius Z. Neri, as its attorney-in-fact to represent and bind it during the pre-trial
conference of this case. This admission is contained on pages 12 and 13 of the
instant petition.

In the second place, the "By-Laws" of petitioner which on its face authorizes (sic)
the appointment of an attorney-in-fact to represent it in any litigation, has not
been approved by the Securities and Exchange Commission, as required by Section
46 of the Corporation Code of the Philippines. Apparently, the "By-Laws" in
question was (sic) approved under the laws of the United States, but there is no
showing that the same was given the required imprimatur by the Securities and
Exchange Commission. Since petitioner is a foreign corporation doing business in
the Philippines, it is bound by all laws, rules and regulations applicable to domestic
corporations (Sec. 129, Corporation Code).

In the third place, no special power of attorney was presented authorizing

petitioner's counsel of record, Atty. Julius Neri and/or J.P. Garcia Associates, to
appear for and in behalf of petitioner during the pre-trial.

What petitioner exhibited to the court a quo was a general power of attorney given
to one William W. Ferguson who in turn executed a power of attorney in favor of
five (5) (sic) Citibank employees to act as attorney-in-fact in Civil Case No. CEB-
4751. Yet, during the pre-trial not one of said employees appeared, except counsel
who is not even a bank employee.

Furthermore, even assuming the validity of the power of attorney issued by

petitioner in favor of Ferguson as well as the power of attorney he issued to five (5)
(sic) Citibank employees, said power of attorney has not been shown to be a
Special Power of Attorney precisely intended not only to represent the bank at the
pre-trial of the case on a certain date but also to enter into any compromise as
required in paragraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20,
Rules of Court." 8

Hence, this instant petition.

Petitioner bank contends that no board resolution was necessary for its legal
counsel, Atty. Julius Z. Neri, or Citibank employees to act as its attorney-in-fact in
the case at bar because petitioner bank's by-laws grant to its Executing Officer and
Secretary Pro-Tem the power to delegate to a Citibank officer, in this case William
W. Ferguson, the authority to represent and defend the bank and its interests.

21
Furthermore, it contends that the Court of Appeals erred in holding that the by-
laws of petitioner bank cannot be given effect because it did not have the
imprimatur of the Securities and Exchange Commission (SEC) as required by
Section 46 of the Corporation Code of the Philippines.

Private respondents refute both contentions. They assail the authority of petitioner
bank's legal counsel to appear at the pre-trial conference on two grounds, namely:
first, that the authority did not come from the Board of Directors which
has the exclusive right to exercise corporate powers; and second, that
the authority granted to the Executing Officer in the by-laws was
ineffective because the same were not submitted to, nor approved by,
the SEC.

There are thus two issues in this case. First, whether a resolution of the board of
directors of a corporation is always necessary for granting authority to an agent to
represent the corporation in court cases. And second, whether the by-laws of the
petitioner foreign corporation which has previously been granted a license to do
business in the Philippines, are effective in this jurisdiction. If the by-laws are valid
and a board resolution is not necessary as petitioner bank claims, then the
declaration of default would have no basis.

In the corporate hierarchy, there are three levels of control: (1) the board of
directors, which is responsible for corporate policies and the general
management of the business affairs of the corporation; (2) the officers,
who in theory execute the policies laid down by the board, but in practice
often have wide latitude in determining the course of business
operations; and (3) the stockholders who have the residual power over
fundamental corporate changes, like amendments of the articles of
incorporation. However, just as a natural person may authorize another to do
certain acts in his behalf, so may the board of directors of a corporation
validly delegate some of its functions to individual officers or agents
appointed by it.

Section 23 of the Corporation Code of the Philippines in part provides:

"SEC. 23. The board of directors or trustees. Unless otherwise provided in

this Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors
are elected and qualified.

xxx xxx xxx" (Emphasis supplied).

22
Thus, although as a general rule, all corporate powers are to be exercised by the
board of directors, exceptions are made where the Code provides
otherwise.

Section 25 of said Code provides that the directors of the corporation shall elect its
corporate officers, and further provides as follows:

"SEC. 25. Corporate officers; quorum. . . . The directors or trustees and

officers to be elected shall perform the duties enjoined on them by law and by the
by-laws of the corporation . . ."

Furthermore, Section 47 of the same Code enumerates what may be contained in

the by-laws, among which is a provision for the "qualifications, duties and
compensation of directors or trustees, officers and employees". (Emphasis
supplied.)

Taking all the above provisions of law together, it is clear that corporate powers
may be directly conferred upon corporate officers or agents by statute, the articles
of incorporation, the by-laws or by resolution or other act of the board of directors.
In addition, an officer who is not a director may also appoint other agents when so
authorized by the by-laws or by the board of directors. Such are referred to as
express powers. 9 There are also powers incidental to express powers conferred. It
is a fundamental principle in the law of agency that every delegation of authority,
whether general or special, carries with it, unless the contrary be expressed,
implied authority to do all of those acts, naturally and ordinarily done in such
cases, which are reasonably necessary and proper to be done in order to carry into
effect the main authority conferred. 10

Since the by-laws are a source of authority for corporate officers and
agents of the corporation, a resolution of the Board of Directors of
Citibank appointing an attorney in fact to represent and bind it during the pre-trial
conference of the case at bar is not necessary because its by-laws allow its
officers, the Executing Officer and the Secretary Pro-Tem, ** to execute a
power of attorney to a designated bank officer, William W. Ferguson in
this case, clothing him with authority to direct and manage corporate
affairs. The relevant provision in the general power of attorney granted to him are
as follows:

"A. That the Executing Officer and the Secretary Pro-Tem are of full age,
competent to act in the premises, to me personally known, and that they are
authorized to execute this instrument by virtue of the powers granted to them
pursuant to the By-Laws of the Bank and the laws of the United States of America,
and that the Executing Officer said that he, on the one hand, hereby revokes and
cancels any instrument of power of attorney previously executed on behalf of the
Bank for use in the PHILIPPINES, in favor of WILLIAM W. FERGUSON (hereinafter
referred to as the "Attorney-in-fact"), of legal age, a Banker, and now residing in

23
the PHILIPPINES, and that he (the Executing Officer), on the other hand, does
hereby authorize and empower the Attorney-in-fact, acting in the name or on
behalf of the Bank, or any of its Branches, or any interest it or they may have or
represent, said revocation and authorization to be effective as of this date as
follows:

xxx xxx xxx

XVII. To represent and defend the Bank and its interest before any and all judges
and courts, of all classes and jurisdictions, in any action, suit or proceeding in
which the Bank may be a party or may be interested in administrative, civil,
criminal, contentious or contentious-administrative matters, and in all kinds of
lawsuits, recourses or proceedings of any kind or nature, with complete and
absolute representation of the Bank, whether as plaintiff or defendant, or as an
interested party for any reason whatsoever . . .

xxx xxx xxx

XXI. To substitute or delegate this Power of Attorney in whole or in part in favor of

such one or more employees of the Bank, as he may deem advisable, but without
divesting himself of any of the powers granted to him by this Power of Attorney;
and to grant and execute in favor of any one or more such employees, powers of
attorney containing all or such authorizations, as he may deem advisable. . . " 11

Since paragraph XXI above specifically allows Ferguson to delegate his powers in
whole or in part, there can be no doubt that the special power of attorney in favor,
first, of J.P. Garcia & Associates and later, of the bank's employees, constitutes a
valid delegation of Ferguson's express power (under paragraph XVII above) to
represent petitioner bank in the pre-trial conference in the lower court.

This brings us to the second query: whether petitioner bank's by-laws, which
constitute the basis for Ferguson's special power of attorney in favor of petitioner
bank's legal counsel are effective, considering that petitioner bank has been
previously granted a license to do business in the Philippines.

The Court of Appeals relied on Section 46 of the Corporation Code to support its
conclusion that the by-laws in question are without effect because they were not
approved by the SEC. Said section reads as follows:

"SEC. 46. Adoption of by-laws. Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the issuance
of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not inconsistent
with this Code. For the adoption of by-laws by the corporation, the
affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members in

24
the case of non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the inspection of the stockholders or
members during office hours; and a copy thereof, duly certified to by a majority of
the directors or trustees and countersigned by the secretary of the corporation,
shall be filed with the Securities and Exchange Commission which shall be
attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be

adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities and
Exchange Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with
this Code."

A careful reading of the above provision would show that a corporation

can submit its by-laws, prior to incorporation, or within one month after
receipt of official notice of the issuance of its certificate of incorporation
by the SEC. When the third paragraph of the above provision mentions "in all
cases", it can only refer to these two options; i.e., whether adopted prior to
incorporation or within one month after incorporation, the by-laws shall be
effective only upon the approval of the SEC. But even more important, said
provision starts with the phrase "Every corporation formed under this Code", which
can only refer to corporations incorporated in the Philippines. Hence, Section 46, in
so far as it refers to the effectivity of corporate by-laws, applies only to domestic
corporations and not to foreign corporations.

On the other hand, Section 125 of the same Code requires that a foreign
corporation applying for a license to transact business in the Philippines must
submit, among other documents, to the SEC, a copy of its articles of incorporation
and by-laws, certified in accordance with law. Unless these documents are
submitted, the application cannot be acted upon by the SEC. In the following
section, the Code specifies when the SEC can grant the license applied for. Section
126 provides in part:

"SEC. 126. Issuance of a license. If the Securities and Exchange Commission is

satisfied that the applicant has complied with all the requirements of this Code and
other special laws, rules and regulations, the Commission shall issue a license to
the applicant to transact business in the Philippines for the purpose or purposes
specified in such license . . ."

Since the SEC will grant a license only when the foreign corporation has complied
with all the requirements of law, it follows that when it decides to issue such
license, it is satisfied that the applicant's by-laws, among the other documents,

25
meet the legal requirements. This, in effect, is an approval of the foreign
corporations by-laws. It may not have been made in express terms, still it is clearly
an approval. Therefore, petitioner bank's by-laws, though originating from a foreign
jurisdiction, are valid and effective in the Philippines.

In pursuance of the authority granted to him by petitioner bank's by-laws, its

Executing Officer appointed William W. Ferguson, a resident of the Philippines, as
its Attorney-in-Fact empowering the latter, among other things, to represent
petitioner bank in court cases. In turn, William W. Ferguson executed a power of
attorney in favor of J.P. Garcia & Associates (petitioner bank's counsel) to represent
petitioner bank in the pre-trial conference before the lower court. This act of
delegation is explicity authorized by paragraph XXI of his own appointment, which
we have previously cited.

It is also error for the Court of Appeals to insist that the special power of attorney,
presented by petitioner bank authorizing its counsel, Atty. Julius Neri and/or J.P.
Garcia & Associates, to appear for and in behalf of petitioner bank during the pre-
trial, is not valid. The records do not sustain this finding. We quote with approval
the contention of petitioner bank as it is borne by the records, to wit:

". . . The records of this case would show that at the start, the petitioner, thru
counsel, presented a special power of attorney executed by then Citibank Officer
Florencio (sic) J. Tarriela which was marked as Exhibit "1" in the pre-trial of this
case . . . This is precisely the reason why the court denied, in an Order dated April
23, 1990 . . . the private respondent's oral motion to declare the defendant in fault.
The said special power of attorney executed by Florencio (sic) J. Tarriela was
granted by Mr. Rafael B. Buenaventura, who was then the Senior Vice-President of
Citibank and the highest ranking office of Citibank in the Philippines. Considering
that at the time of the presentation of the said special power of attorney Rafael B.
Buenaventura was no longer connected with Citibank, the petitioner again
presented another special power of attorney executed by William W. Ferguson in
favor of J.P. Garcia & Associates, . . .

Finding that the authority of William W. Ferguson to delegate his authority to act for
and in behalf of the bank in any civil suit is limited to individuals who are
employees of the bank the petitioner again on May 23, 1990 presented another
special power of attorney dated May 16, 1990 wherein William W. Ferguson
appointed as attorney-in-fact the following employees of petitioner, namely:
Roberto Reyes, Nemesio Solomon, Aimee Yu and Tomas Yap. The said special power
of attorney was filed and presented by the petitioner through its Manifestation filed
in the Trial Court on May 23, 1990, . . ." 12

Under Rule 138, Section 23 of the Rules of Court, an attorney has authority to bind
his client in any case by an agreement in relation thereto made in writing, and this
authority would include taking appeals and all matters of ordinary judicial
procedure. But he cannot, without special authority, compromise his client's

26
litigation or receive anything in discharge of a client's claim but the full amount in
cash. The special powers of attorney separately executed by Florencia Tarriela and
William W. Ferguson granted to J.P. Garcia & Associates are very explicit in their
terms as to the counsel's authority in the case at bar. We quote the relevant
provisions of the special powers of attorney showing sufficient compliance with the
requirements of Section 23, Rule 138, to wit:

"That the BANK further authorized the said J.P. GARCIA & ASSOCIATES to enter into
an amicable settlement, stipulation of facts and/or compromise agreement with
the party or parties involved under such terms and conditions which the said J.P.
GARCIA & ASSOCIATES may deem reasonable (under parameters previously
defined by the principal) and execute and sign said documents as may be
appropriate.

HEREBY GIVING AND GRANTING unto J.P. GARCIA & ASSOCIATES full power and
authority whatsoever requisite necessary or proper to be done in or about the
premises, as fully to all intents and purposes as the BANK might or could lawfully
do or cause to be done under and by virtue of these presents." 13

It is also error on the part of the Court of Appeals to state that the power of
attorney given to the four (4) Citibank employees is not a special power of attorney
as required in paragraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20
of the Rules of Court. In the case of Tropical Homes, Inc. vs. Villaluz, 14 the special
power of attorney executed by petitioner bank therein contained the following
pertinent terms "to appear for and in its behalf in the above-entitled case in all
circumstances where its appearance is required and to bind it in all said instances".
The court ruled that:

"Although the power of attorney in question does not specifically mention the
authority of petitioner's counsel to appear and bind the petitioner at the pre-trial
conference, the terms of said power of attorney are comprehensive enough as to
include the authority to appear for the petitioner at the pre-trial conference."

In the same manner, the power of attorney granted to petitioner bank's employees
should be considered a special power of attorney. The relevant portion reads:

"WHEREAS, the Bank is the Defendant in Civil Case No. CEB-4751, entitled
"Cresencio Velez, et al. vs. Citibank, N.A.," pending before the Regional Trial Court
of Cebu City, Branch X;

NOW, THEREFORE, under and by virtue of Article XXI of the Power of Attorney
executed by the Bank in favor of the Attorney-in-Fact (Annex "A"), which provision
is quoted above, the Attorney-in-Fact has nominated, designated and appointed, as
by these presents he nominates, designates and appoints, as his substitutes and
delegates, with respect to the said Power of Attorney, ROBERTO REYES, Vice
President and/or NEMESIO SOLOMON, JR., Manager, AIMEE YU, Assistant Vice

27
President and/or TOMAS YAP, Assistant Manager (hereinafter referred to as the
"DELEGATES"), all of legal age, citizens of the Republic of the Philippines and with
business address at Citibank Center, Paseo de Roxas, Makati, Metro Manila,
Philippines, the Attorney-in-Fact hereby granting, conferring and delegating such
authorities and binding the Bank in the Pre-Trial Conference and/or Trial of the
abovementioned case, pursuant to Rule 20 of the Revised Rules of Court, to the
DELEGATES. The attorney-in-Fact furthermore hereby ratifying and confirming all
that the DELEGATES shall lawfully do or cause to be done under and by virtue of
these presents." 15

From the outset, petitioner bank showed a willingness, if not zeal, in pursuing and
defending this case. It even acceded to private respondent's insistence on the
question of proper representation during the pre-trial by presenting not just one,
but three, special powers of attorney. Initially, the special power of attorney was
executed by Florencia Tarriela in favor of J.P. Garcia & Associates, petitioner bank's
counsel. Private respondents insisted that this was not proper authority required by
law. To avoid further argument, a second special power of attorney was presented
by petitioner bank, executed by William W. Fersugon, the highest ranking officer of
Citibank in the Philippines, in favor of its counsel J.P. Garcia & Associates. But since
the authority to delegate of William A. Fersugon in favor of an agent is limited to
bank employees, another special power of attorney from Wiliam W. Fersugon in
favor of the Citibank employees was presented. But the respondent trial court
judge disregarded all these and issued the assailed default order. There is nothing
to show that petitioner bank "miserably failed to oblige"; on the contrary, three
special powers of attorney manifest prudence and diligence on petitioner bank's
part.

In fact, there was no need for the third power of attorney because we believe that
the second power of attorney was sufficient under the by-law provision authorizing
Fersugon to delegate any of his functions to any one or more employees of the
petitioner bank. A reasonable interpretation of this provision would include an
appointment of a legal counsel to represent the bank in court, for, under the
circumstances, such legal counsel can be considered, and in fact was considered
by the petitioner bank, an employee for a special purpose. Furthermore, Fersugon,
who heads the Philippine office thousands of miles away from its main office in the
United States, must be understood to have sufficient powers to act promptly in
order to protect the interests of his principal.

We reiterate the previous admonitions of this Court against "precipitate orders of

default as these have the effect of denying the litigant the chance to be heard.
While there are instances, to be sure, when a party may be properly defaulted,
these should be the exceptions rather than the rule and should be allowed only in
clear cases of an obstinate refusal or inordinate neglect to comply with the orders
of the court. Absent such a showing, the party must be given every reasonable
opportunity to present his side and to refute the evidence of the adverse party in
deference to due process of law". 16

28
Considering further that petitioner bank has a meritorious defense and that the
amount in contest is substantial, the litigants should be allowed to settle their
claims on the arena of the court based on a trial on the merits rather than on mere
technicalities.

WHEREFORE, in view of the foregoing, the petition is hereby GRANTED. The

decision of the Court of Appeals dated June 26, 1991 and its resolution denying the
motion for reconsideration of petitioner bank dated September 26, 1991 are both
REVERSED and SET ASIDE. The order of default issued on August 15, 1990 in Civil
Case CEB-4751 of the Regional Trial Court of Cebu is ANNULLED and SET ASIDE and
the case is hereby REMANDED to the court of origin for further proceedings.

SO ORDERED.

G.R. Nos. 163356-57, July 01, 2015

JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B. MARAMARA, JOSE T.

FRONDOSO, IGNACIO T. MACROHON, JR., AND PAULINO T. LIM, ACTING IN THEIR
CAPACITY AS INDIVIDUAL DIRECTORS OF MAKATI SPORTS CLUB, INC., AND ON
BEHALF OF THE BOARD OF DIRECTORS OF MAKATI SPORTS CLUB, Petitioners, v.
JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G. LIBREA, SAMUEL L.
ESGUERRA, ROLANDO P. DELA CUESTA, RUBEN L. TORRES, ALEX Y. PARDO, MA.
CRISTINA SIM, ROGER T. AGUILING, JOSE B. QUIMSON, CELESTINO L. ANG, ELISEO
V. VILLAMOR, FELIPE L. GOZON, CLAUDIO B. ALTURA, ROGELIO G. VILLAROSA,
MANUEL R. SANTIAGO, BENJAMIN A. CARANDANG, REGINA DE LEON-HERLIHY,
CARLOS Y. RAMOS, JR., ALEJANDRO Z. BARIN, EFRENILO M. CAYANGA AND JOHN
DOES, Respondents.

[G.R. NOS. 163368-69]

JOVENCIO F. CINCO, RICARDO G. LIBREA AND ALEX Y. PARDO, Petitioners, v. JOSE A.

BERNAS, CECILE H. CHENG AND IGNACIO A. MACROHON, Respondents.

DECISION

PEREZ, J.:

Before us are two consolidated Petitions for Review on Certiorari1 assailing the 28
April 2003 Decision and the 27 April 2004 Resolution of the Court of Appeals in CA-
G.R. SP No. 62683,2 which declared the 17 December 1997 Special Stockholders
Meeting of the Makati Sports Club invalid for having been improperly called but
affirmed the actions taken during the Annual Stockholders Meeting held on 20

29
April 1998, 19 April 1999 and 17 April 2000. The dispositive portion of the assailed
decision reads:LawlibraryofCRAlaw

ChanRoblesVirtualawlibrary

WHEREFORE, foregoing considered, the instant petition for review is hereby

GRANTED. The appealed Decision dated December 12, 2000 of the SEC en banc is
SET ASIDE and the Decision dated April 20, 1998 of the Hearing Officer is
REINSTATED and AMENDED as follows:LawlibraryofCRAlaw
The supposed Special Stockholders Meeting of December 17, 1997 was
prematurely or invalidly called by the [Cinco Group]. It therefore failed to produce
any legal effects and did not effectively remove [the Bernas Group] as directors of
the Makati Sports Club, Inc.;chanRoblesvirtualLawlibrary

The expulsion of petitioner Jose A. Bernas as well as the public auction of his
share[s] is hereby declared void and without legal effect;

The ratification of the removal of [the Bernas Group] as directors, the expulsion of
petitioner Bernas and the sale of his share by the defendants and by the
stockholders held in their Regular Stockholders Meeting held in April of 1998, 1999
and 2000, is void and produces no effects as they were not the proper party to
cause the ratification;chanRoblesvirtualLawlibrary

All other actions of the [Cinco Group] and stockholders taken during the Regular
Stockholders Meetings held in April 1998, 1999 and 2000, including the election of
the [Cinco Group] as directors after the expiration of the term of office of
petitioners as directors, are hereby declared valid;chanRoblesvirtualLawlibrary

No awards for damages and attorneys fees.3

The Facts

Makati Sports Club (MSC) is a domestic corporation duly organized and

existing under Philippine laws for the primary purpose of establishing,
maintaining, and providing social, cultural, recreational and athletic
activities among its members.

Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H.

Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T.
Macrohon and Paulino T. Lim (Bernas Group) were among the Members of
the Board of Directors and Officers of the corporation whose terms were
to expire either in 1998 or 1999.

Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea and

Alex Y. Pardo (Cinco Group) are the members and stockholders of the
corporation who were elected Members of the Board of Directors and

30
Officers of the club during the 17 December 1997 Special Stockholders
Meeting.

The antecedent events of the meeting and its results, follow:LawlibraryofCRAlaw

Alarmed with the rumored anomalies in handling the corporate funds, the MSC
Oversight Committee (MSCOC), composed of the past presidents of the club,
demanded from the Bernas Group, who were then incumbent officers of the
corporation, to resign from their respective positions to pave the way for the
election of new set of officers.4 Resonating this clamor were the stockholders of
the corporation representing at least 100 shares who sought the assistance of the
MSCOC to call for a special stockholders meeting for the purpose of removing the
sitting officers and electing new ones.5 Pursuant to such request, the MSCOC
called a Special Stockholders Meeting and sent out notices6 to all stockholders
and members stating therein the time, place and purpose of the meeting. For
failure of the Bernas Group to secure an injunction before the Securities
Commission (SEC), the meeting proceeded wherein Jose A. Bernas, Cecile H.
Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr. and
Paulino T. Lim were removed from office and, in their place and stead,
Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling,
Rogelio G. Villarosa, Armando David, Norberto Maronilla, Regina de Leon-
Herlihy and Claudio B. Altura, were elected.7redarclaw

Aggrieved by the turn of events, the Bernas Group initiated an action before the
Securities Investigation and Clearing Department (SICD) of the SEC docketed as
SEC Case No. 5840 seeking for the nullification of the 17 December 1997 Special
Stockholders Meeting on the ground that it was improperly called. Citing Section
28 of the Corporation Code, the Bernas Group argued that the authority to call a
meeting lies with the Corporate Secretary and not with the MSCOC which
functions merely as an oversight body and is not vested with the power
to call corporate meetings. For being called by the persons not authorized to
do so, the Bernas Group urged the SEC to declare the 17 December 1997 Special
Stockholders Meeting, including the removal of the sitting officers and the election
of new ones, be nullified.

For their part, the Cinco Group insisted that the 17 December 1997 Special
Stockholders Meeting is sanctioned by the Corporation Code and the MSC by-laws.
In justifying the call effected by the MSCOC, they reasoned that Section 258 of the
MSC by-laws merely authorized the Corporate Secretary to issue notices of
meetings and nowhere does it state that such authority solely belongs to him. It
was further asseverated by the Cinco Group that it would be useless to course the
request to call a meeting thru the Corporate Secretary because he repeatedly
refused to call a special stockholders meeting despite demands and even filed a
suit to restrain the holding of a special meeting.9redarclaw

31
Meanwhile, the newly elected directors initiated an investigation on the alleged
anomalies in administering the corporate affairs and after finding Bernas guilty of
irregularities,10 the Board resolved to expel him from the club by selling his shares
at public auction.11 After the notice12 requirement was complied with, Bernas
shares was accordingly sold for P902,000.00 to the highest bidder.

Prior to the resolution of SEC Case No. 5840, an Annual Stockholders Meeting was
held on 20 April 1998 pursuant to Section 8 of the MSC bylaws.13 During the said
meeting, which was attended by 1,017 stockholders representing 2/3 of the
outstanding shares, the majority resolved to approve, confirm and ratify, among
others, the calling and holding of 17 December 1997 Special Stockholders
Meeting, the acts and resolutions adopted therein including the removal of Bernas
Group from the Board and the election of their replacements.14redarclaw

Due to the filing of several petitions for and against the removal of the Bernas
Group from the Board pending before the SEC resulting in the piling up of legal
controversies involving MSC, the SEC En Banc, in its Decision15 dated 30 March
1999, resolved to supervise the holding of the 1999 Annual Stockholders Meeting.
During the said meeting, the stockholders once again approved, ratified and
confirmed the holding of the 17 December 1997 Special Stockholders Meeting.

The conduct of the 17 December 1997 Special Stockholders Meeting was likewise
ratified by the stockholders during the 2000 Annual Stockholders Meeting which
was held on 17 April 2000.16redarclaw

On 9 May 2000, the SICD rendered a Decision17 in SEC Case No. 12-97-5840
finding, among others, that the 17 December 1997 Special Stockholders Meeting
and the Annual Stockholders Meeting conducted on 20 April 1998 and 19 April
1999 are invalid. The SICD likewise nullified the expulsion of Bernas from the
corporation and the sale of his share at the public auction. The dispositive portion
of the said decision reads

WHEREFORE, in view of the foregoing considerations this Office, through the

undersigned Hearing Officer, hereby declares as follows:

(1) The supposed Special Stockholders Meeting of December 17, 1997 was
prematurely or invalidly called by the [the Cinco Group]. It therefore failed to
produce any legal effects and did not effectively remove [the Bernas Group] as
directors of the Makati Sports Club, Inc.

(2) The April 20, 1998 meeting was not attended by a sufficient number of valid
proxies. No quorum could have been present at the said meeting. No corporate
business could have been validly completed and/or transacted during the said
meeting. Further, it was not called by the validly elected Corporate Secretary
Victor Africa nor presided over by the validly elected president Jose A. Bernas.

32
Even if the April 20, 1998 meeting was valid, it could not ratify the December 17,
1997 meeting because being a void meeting, the December 17, 1997 meeting may
not be ratified.

(3) The April 1998 meeting was null and void and therefore produced no legal
effect.

(4) The April 1999 meeting has not been raised as a defense in the Answer nor
assailed in a supplemental complaint. However, it has been raised by [the Cinco
Group] in a manifestation dated April 21, 1999 and in their position paper dated
April 8, 2000. Its legal effects must be the subject of this Decision in order to put
an end to the controversy at hand. In the first place, by [the Cinco Groups] own
admission, the alleged attendance at the April 1999 meeting amounted to less
than 2/3 of the stockholders entitled to vote, the minimum number required to
effect a removal. No removal or ratification of a removal may be effected by less
than 2/3 vote of the stockholders. Further, it cannot ratify the December 1997
meeting for failure to adhere to the requirement of the By-laws on notice as
explained in paragraph (2) above, even if it was accompanied by valid proxies,
which it was not.

(5) The [the Cinco Group], their agents, representatives and all persons acting for
and conspiring on their behalf, are hereby permanently enjoined from carrying into
effect the resolutions and actions adopted during the 17 December 1997 and April
20, 1998 meetings and of the Board of Directors and/or other stockholders
meetings resulting therefrom, and from performing acts of control and
management of the club.

(6) The expulsion of complainant Jose A. Bernas as well as the public auction of his
share is hereby declared void and without legal effect, as prayed for. While it is
true that [the Cinco Group] were not restrained from acting as directors during the
pendency of this case, their tenure as directors prior to this Decision is in the
nature of de facto directors of a de facto Board. Only the ordinary acts of
administration which [the Cinco Group] carried out de facto in good faith are valid.
Other acts, such as political acts and the expulsion or other disciplinary acts
imposed on the [the Bernas Group] may not be appropriately taken by de facto
officers because the legality of their tenure as directors is not complete and
subject to the outcome of this case.

(7) No awards for damages and attorneys fees.18

On appeal, the SEC En Banc, in its 12 December 2000 Decision19 reversed the
findings of the SICD and validated the holding of the 17 December 1997 Special
Stockholders Meeting as well as the Annual Stockholders Meeting held on 20 April
1998 and 19 April 1999.

33
On 28 April 2003, the Court of Appeals rendered a Decision20 declaring the 17
December 1997 Special Stockholders Meeting invalid for being improperly called
but affirmed the actions taken during the Annual Stockholders Meeting held on 20
April 1998, 19 April 1999 and 17 April 2000.

In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its
earlier decision.

Aggrieved by the disquisition of the Court of Appeals, both parties elevated the
case before this Court by filing their respective Petitions for Review on Certiorari.
While the Bernas Group agrees with the disquisition of the appellate court that the
Special Stockholders Meeting is invalid for being called by the persons not
authorized to do so, they urge the Court to likewise invalidate the holding of the
subsequent Annual Stockholders Meetings invoking the application of the holdover
principle. The Cinco Group, for its part, insists that the holding of 17 December
1997 Special Stockholders Meeting is valid and binding underscoring the
overwhelming ratification made by the stockholders during the subsequent annual
stockholders meetings and the previous refusal of the Corporate Secretary to call
a special stockholders meeting despite demand. For the resolution of the Court
are the following issues:LawlibraryofCRAlaw

The Issues

I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT

THE 17 DECEMBER 1997 SPECIAL STOCKHOLDERS MEETING IS INVALID; AND

II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO

NULLIFY THE HOLDING OF THE ANNUAL STOCKHOLDERS MEETING ON 20 APRIL
1998, 19 APRIL 1999 AND 17 APRIL 2000.

The Courts Ruling

The Corporation Code laid down the rules on the removal of the Directors
of the corporation by providing, inter alia, the persons authorized to call
the meeting and the number of votes required for the purpose of
removal,

Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation

may be removed from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding capital stock, or

34
if the corporation be a non-stock corporation, by a vote of at least two-
thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of
the outstanding capital stock, or, if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon such demand or fail or
refuse to give the notice, or if there is no secretary, the call for the meeting may
be addressed directly to the stockholders or members by any stockholder or
member of the corporation signing the demand. Notice of the time and place of
such meeting, as well as of the intention to propose such removal, must be given
by publication or by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may
be entitled under Section 24 of this Code. (Emphasis supplied)

Corollarily, the pertinent provisions of MSC by-laws which govern the manner of
calling and sending of notices of the annual stockholders meeting and the special
stockholders meeting provide:

SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the
Clubhouse on the third Monday of April of every year unless such day be a holiday
in which case the annual meeting shall be held on the next succeeding business
day. At such meeting, the President shall render a report to the stockholders of the
clubs.

xxxx

SEC. 10. Special Meetings. Special meetings of stockholders shall be held at

the Clubhouse when called by the President or by the Board of Directors
or upon written request of the stockholders representing not less than
one hundred (100) shares. Only matters specified in the notice and call
will be taken up at special meetings.

xxxx

SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the
corporate seal, which he shall stamp on all documents requiring such seal, fill and
sign together with the President, all the certificates of stocks issued, give or
caused to be given all notices required by law of these By-laws as well as notices of

35
all meeting of the Board and of the stockholders; shall certify as to quorum at
meetings; shall approve and sign all correspondence pertaining to the Office of the
Secretary; shall keep the minutes of all meetings of the stockholders, the Board of
Directors and of all committees in a book or books kept for that purpose; and shall
be acting President in the absence of the President and Vice-:President. The
Secretary must be a citizen and a resident of the Philippines. The Secretary shall
keep a record of all the addresses and telephone numbers of all stockholders. 22

Textually, only the President and the Board of Directors are authorized by the by-
laws to call a special meeting. In cases where the person authorized to call a
meeting refuses, fails or neglects to call a meeting, then the stockholders
representing at least 100 shares, upon written request, may file a petition to call a
special stockholders meeting.

In the instant case, there is no dispute that the 17 December 1997 Special
Stockholders Meeting was called neither by the President nor by the Board of
Directors but by the MSCOC. While the MSCOC, as its name suggests, is created
for the purpose of overseeing the affairs of the corporation, nowhere in the by-laws
does it state that it is authorized to exercise corporate powers, such as the power
to call a special meeting, solely vested by law and the MSC by-laws on the
President or the Board of Directors.

The board of directors is the directing and controlling body of the corporation. It is
a creation of the stockholders and derives its power to control and direct the affairs
of the corporation from them. The board of directors, in drawing to itself the power
of the corporation, occupies a position of trusteeship in relation to the
stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of the corporate affairs.23

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood
for election, and who have actually been elected by the stockholders, on an annual
basis. Only in that way can the continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporations stockholders, be assured.
The shareholder vote is critical to the theory that legitimizes the exercise of power
by the directors or officers over the properties that they do not own.24

Even the Corporation Code is categorical in stating that a corporation exercises its
powers through its board of directors and/or its duly authorized officers and
agents, except in instances where the Corporation Code requires stockholders
approval for certain specific acts:

SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this
Code, the corporate powers of all the corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors and trustees x x x.

36
A corporations board of directors is understood to be that body which (1)
exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all
the property of the corporation. Its members have been characterized as
trustees or directors clothed with fiduciary character.25redarclaw

It is ineluctably clear that the fiduciary relation is between the stockholders and
the board of directors and who are vested with the power to manage the affairs of
the corporation. The ordinary trust relationship of directors of a corporation and
stockholders is not a matter of statutory or technical law.26 It springs from the
fact that directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders.27 Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the
only beneficiaries thereof.28 Should the board fail to perform its fiduciary duty to
safeguard the interest of the stockholders or commit acts prejudicial to their
interest, the law and the by-laws provide mechanisms to remove and replace the
erring director.29redarclaw

Relative to the powers of the Board of Directors, nowhere in the Corporation Code
or in the MSC by-laws can it be gathered that the Oversight Committee is
authorized to step in wherever there is breach of fiduciary duty and call a special
meeting for the purpose of removing the existing officers and electing their
replacements even if such call was made upon the request of shareholders.
Needless to say, the MSCOC is neither empowered by law nor the MSC by-laws to
call a meeting and the subsequent ratification made by the stockholders did not
cure the substantive infirmity, the defect having set in at the time the void act was
done. The defect goes into the very authority of the persons who made the call for
the meeting. It is apt to recall that illegal acts of a corporation which contemplate
the doing of an act which is contrary to law, morals or public order, or contravenes
some rules of public policy or public duty, are, like similar transactions between
individuals, void.30 They cannot serve as basis for a court action, nor acquire
validity by performance, ratification or estoppel.31 The same principle can apply
in the present case. The void election of 17 December 1997 cannot be
ratified by the subsequent Annual Stockholders Meeting.

A distinction should be made between corporate acts or contracts which are illegal
and those which are merely ultra vires. The former contemplates the doing of an
act which are contrary to law, morals or public policy or public duty, and are, like
similar transactions between individuals, void. They cannot serve as basis of a
court action nor acquire validity by performance, ratification or estoppel. Mere
ultra vires acts, on the other hand, or those which are not illegal or void
ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.32 The 17 December 1997

37
Meeting belongs to the category of the latter, that is, it is void ab initio
and cannot be validated.

Consequently, such Special Stockholders Meeting called by the Oversight

Committee cannot have any legal effect. The removal of the Bernas
Group, as well as the election of the Cinco Group, effected by the
assembly in that improperly called meeting is void, and since the Cinco
Group has no legal right to sit in the board, their subsequent acts of
expelling Bernas from the club and the selling of his shares at the public
auction, are likewise invalid.

The Cinco Group cannot invoke the application of de facto officership doctrine to
justify the actions taken after the invalid election since the operation of the
principle is limited to third persons who were originally not part of the corporation
but became such by reason of voting of government- sequestered shares.33 In
Cojuangco v. Roxas,34 the Court deemed the directors who were elected through
the voting of government of sequestered shares who assumed office in good faith
as de facto officers,

In the light of the foregoing discussion, the Court finds and so holds that the PCGG
has no right to vote the sequestered shares of petitioners including the
sequestered corporate shares. Only their owners, duly authorized representatives
or proxies may vote the said shares. Consequently, the election of private
respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda as members of
the board of directors of SMC for 1990-1991 should be set aside.

However, petitioners cannot be declared as duly elected members of the board of

directors thereby. An election for the purpose should be held where the questioned
shares may be voted by their owners and/or their proxies. Such election may be
held at the next shareholders meeting in April 1991 or at such date as may be set
under the by-laws of SMC.

Private respondents in both cases are hereby declared to be de facto officers who
in good faith assumed their duties and responsibilities as duly elected members of
the board of directors of the SMC. They are thereby legally entitled to emoluments
of the office including salary, fees and other compensation attached to the office
until they vacate the same. (Emphasis supplied)

Apparently, the assumption of office of the Cinco Group did not bear parallelism
with the factual milieu in Cojuangco and as such they cannot be considered as de
facto officers and thus, they are without colorable authority to authorize the
removal of Bernas and the sale of his shares at the public auction. They cannot
bind the corporation to third persons who acquired the shares of Bernas and such
third persons cannot be deemed as buyer in good faith.35redarclaw

38
The case would have been different if the petitioning stockholders went directly to
the SEC and sought its assistance to call a special stockholders meeting citing the
previous refusal of the Corporate Secretary to call a meeting. Where there is an
officer authorized to call a meeting and that officer refuses, fails, or neglects to call
a meeting, the SEC can assume jurisdiction and issue an order to the petitioning
stockholder to call a meeting pursuant to its regulatory and administrative powers
to implement the Corporation Code.36 This is clearly provided for by Section 50 of
the Corporation Code which we quote:LawlibraryofCRAlaw

ChanRoblesVirtualawlibrary
Sec. 50. Regular and special meetings of stockholders or members. x x x

xxxx

Whenever, for any cause, there is no person authorized to call a meeting, the
Securities and Exchange Commission, upon petition of a stockholder or
member, and on a showing of good cause therefore, may issue an order
to the petitioning stockholder or member directing him to call a meeting
of the corporation by giving proper notice required by this Code or by the
by-laws. The petitioning stockholder or member shall preside thereat until at
least majority of the stockholders or members present have chosen one of their
member[s] as presiding officer.

As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now
the SEC)38 is empowered to call a meeting upon petition of the stockholder or
member and upon showing of good cause, thus:LawlibraryofCRAlaw

ChanRoblesVirtualawlibrary
On the showing of good cause therefore, the court may authorize a stockholder to
call a meeting and to preside thereat until the majority stockholders representing a
majority of the stock present and permitted to be voted shall have chosen one
among them to preside it. And this showing of good cause therefor exists when
the court is apprised of the fact that the by-laws of the corporation require the
calling of a general meeting of the stockholders to elect the board of directors but
the call for such meeting has not been done.39

The same jurisprudential rule resonates in Philippine National Construction

Corporation v. Pabion,40 where the Court validated the order of the SEC to compel
the corporation to conduct a stockholders meeting in the exercise of its regulatory
and administrative powers to implement the Corporation Code:

SEC's assumption of jurisdiction over this case is proper, as the controversy

involves the election of PNCC's directors. Petitioner does not really contradict the
nature of the question presented and agrees that there is an intra-corporate
question involved.

39
xxxx

Prescinding from the above premises, it necessarily follows that SEC can compel
PNCC to hold a stockholders' meeting for the purpose of electing members of the
latter's board of directors.

xxxx

As respondents point out, the SEC's action is also justified by its regulatory and
administrative powers to implement the Corporation Code, specifically to compel
the PNCC to hold a stockholders' meeting for election purposes.41

Given the broad administrative and regulatory powers of the SEC outlined under
Section 50 of the Corporation Code and Section 6 of Presidential Decree (PD) No.
902-A, the Cinco Group cannot claim that if was left without recourse after the
Corporate Secretary previously refused to heed its demand to call a special
stockholders meeting. If it be true that the Corporate Secretary refused to call a
meeting despite fervent demand from the MSCOC, the remedy of the
stockholders would have been to file a petition to the SEC to direct him to
call a meeting by giving proper notice required under the Code. To rule
otherwise would open the floodgates to abuse where any stockholder, who
consider himself aggrieved by certain corporate actions, could call a special
stockholders meeting for the purpose of removing the sitting officers in direct
violation of the rules pertaining to the call of meeting laid down in the by-laws.

Every corporation has the inherent power to adopt by-laws for its internal
government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of
its affairs.42 The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation. They are in
effect written into the charter. In this sense they become part of the fundamental
law of the corporation with which the corporation and its directors and officers
must comply.43 The general rule is that a corporation, through its board of
directors, should act in the manner and within the formalities, if any, prescribed in
its charter or by the general law. Thus, directors must act as a body in a meeting
called pursuant to the law or the corporations by-laws, otherwise, any action taken
therein may be questioned by the objecting director or shareholder.44

Certainly, the rules set in the by-laws are mandatory for every member of the
corporation to respect. They are the fundamental law of the corporation with
which the corporation and its officers and members must comply. It is on this
score that we cannot upon the other hand sustain the Bernas Groups stance that
the subsequent annual stockholders meetings were invalid.

40
First, the 20 April 1998 Annual Stockholders Meeting was valid because it was
sanctioned by Section 845 of the MSC bylaws. Unlike in Special Stockholders
Meeting46 wherein the bylaws mandated that such meeting shall be called by
specific persons only, no such specific requirement can be obtained under Section
8.

Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because
in addition to the fact that it was conducted in accordance to Section 8 of the
MSC bylaws, such meeting was supervised by the SEC in the exercise of
its regulatory and administrative powers to implement the Corporation
Code.47redarclaw

Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave
rise to the presumption that the corporate officers who won the election were duly
elected to their positions and therefore can be rightfully considered as de jure
officers. As de jure officials, they can lawfully exercise functions and
legally perform such acts that are within the scope of the business of the
corporation except ratification of actions that are deemed void from the
beginning.

Considering that a new set of officers were already duly elected in 1998 and 1999
Annual Stockholders Meetings, the Bernas Group cannot be permitted to use the
holdover principle as a shield to perpetuate in office. Members of the group had no
right to continue as directors of the corporation unless reelected by the
stockholders in a meeting called for that purpose every year. 48 They had no right
to hold-over brought about by the failure to perform the duty incumbent upon
them.49 If they were sure to be reelected, why did they fail, neglect, or refuse to
call the meeting to elect the members of the board?50redarclaw

Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like

the SEC, if supported by substantial evidence, are generally accorded not only
great respect but even finality, and are binding upon this Court unless it was
shown that the quasi-judicial agencies had arbitrarily disregarded evidence before
it had misapprehended evidence to such an extent as to compel a contrary
conclusion if such evidence had been properly appreciated.51 It is not the function
of this Court to analyze or weigh all over again the evidence and credibility of
witnesses presented before the lower court, tribunal, or office, as we are not trier
of facts.52 Our jurisdiction is limited to reviewing and revising errors of law
imputed to the lower court, the latters finding of facts being conclusive and not
reviewable by this Court.53 However, when it can be shown that administrative
bodies grossly misappreciated evidence of such nature as to compel a contrary
conclusion, the Court will not hesitate to reverse its factual findings.54 In the case
at bar, the incongruent findings of the SEC on the one hand, and the Court of
Appeals on the other, constrained the Court to review the records to ascertain
which body correctly appreciated the facts vis--vis the standing statutory and
jurisprudential principles.

41
After finding that the ruling of the appellate court was in accordance with the
existing laws and jurisprudence as exhaustively discussed above, we hereby quote
with approval its disquisition:LawlibraryofCRAlaw

ChanRoblesVirtualawlibrary
(1) The supposed Special Stockholders Meeting of 17 December 1997 was
prematurely or invalidly called by the [Cinco Group]. It therefore failed to produce
any legal effects and did not effectively remove [the Bernas Group] as directors of
the Makati Sports Club, Inc.;

(2) The expulsion of [Bernas] as well as the public auction of his shares is hereby
declared void and without legal effect;

(3) The ratification of the removal of [the Bernas Group] as directors, the expulsion
of Bernas and the sale of his share by the [Cinco Group] and by the stockholders
held in their Regular Stockholders Meeting held in April of 1998, 1999 and 2000, is
void and produces no effects as they were not the proper party to cause the
ratification;

(4) All other actions of the [Cinco Group] and stockholders taken during the Regular
Stockholders Meetings held in April 1998, 1999 and 2000, including the election of
the [Cinco Group] as directors after the expiration of the term of office of [Bernas
Group] as directors, are hereby declared valid.55

In fine, we hold that 17 December 1997 Special Stockholders Meeting is null

and void and produces no effect; the resolution expelling the Bernas Group
from the corporation and authorizing the sale of Bernas shares at the public
auction is likewise null and void. The subsequent Annual Stockholders Meeting
held on 20 April 1998, 19 April 1999 and 17 April 2000 are valid and binding except
the ratification of the removal of the Bernas Group and the sale of Bernas shares
at the public auction effected by the body during the said meetings. The expulsion
of the Bernas Group and the subsequent auction of Bernas shares are void from
the very beginning and therefore the ratifications effected during the subsequent
meetings cannot be sustained. A void act cannot be the subject of
ratification.56redarclaw

WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile H. Cheng,

Victor Africa, Jesus B. Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino
T. Lim in G.R. Nos. 163356-57 and of Jovencio Cinco, Ricardo Librea and Alex Y.
Pardo in G.R. Nos. 163368-69 are hereby DENIED. The assailed Decision dated 28
April 2003 and Resolution dated 27 April 2004 of the Court of Appeals are hereby
AFFIRMED.

SO ORDERED.

42
G.R. No. L-53820 June 15, 1992
YAO KA SIN TRADING vs. HON. COURT OF APPEALS
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-53820 June 15, 1992

YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner,

vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT CORPORATION,
represented by its President-Chairman, CONSTANCIO B. MALAGNA, respondents.

DAVIDE, JR., J.:

Assailed in this petition for review is the decision of the respondent Court of
Appeals in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December 1979, reversing
the decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte
dated 20 November 1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus
Prime White Cement Corporation."

The root of this controversy is the undated letter-offer of Constancio B. Maglana,

President and Chairman of the Board of private respondent Prime White Cement
Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter
referred to as YKS, which describes itself as "a business concern of single
proprietorship," 3 and is represented by its manager, Mr. Henry Yao; the letter
reads as follows:

PRIME WHITE CEMENT CORPORATION

602 Cardinal Life Building
Herran Street, Manila

Yao Ka Sin
Tacloban City

Gentlemen:

We have the pleasure to submit hereby our firm offer to you under the following
quotations, terms, and conditions, to wit:

1). Commodity Prime White Cement

43
2). Price At your option: a) P24.30 per 94 lbs. bag net, FOB Cebu City; and b)
P23.30 per 94 lbs. bag net, FOB Asturias Cebu.

3). Quality As fully specified in certificate No. 224-73 by Bureau of Public

Works, Republic of the Philippines.

4). Quantity Forty-five Thousand (45,000) bags at 94 lbs. net per bag
withdrawable in guaranteed monthly quantity of Fifteen Thousand (15,000) bags
minimum effective from June, 1973 to August 1973.

5). Delivery Schedule Shipment be made within four (4) days upon receipt of
your shipping instruction.

6). Bag/Container a) All be made of Standard Kraft (water resistant paper, 4

ply, with bursting strength of 220 pounds, and b) Breakage allowance additional
four percent (4%) over the quantity of each shipment.

7). Terms of Payment Down payment of PESOS: TWO HUNDRED FORTY THREE
THOUSAND (P243,000.00) payable on the signing of this contract and the balance
to be paid upon presentation of corresponding shipping documents.

It is understood that in the event of a delay in our shipment, you hold the option to
discount any price differential resulting from a lower market price vis-a-vis the
contract price. In addition, grant (sic) you the option to extend this contract until
the complete delivery of Forty Five Thousand (45,000) bags of 94 lbs. each is made
by us. You are also hereby granted the option to renew this contract under the
same price, terms and conditions.

Please countersign on the space provided for below as your acknowledgement and
confirmation of the above transaction. Thank You.

Very truly yours,

PRIME WHITE CEMENT CORPORATION

BY: (SGD) CONSTANCIO B. MAGLANA

President & Chairman

CONFORME:

YAO KA SIN TRADING

BY: (SGD) HENRY YAO

WITNESSES:

44
(SGD) T. CATINDIG (SGD) ERNESTO LIM

RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above
offer, the sum of Pesos: TWO HUNDRED FORTY THREE THOUSAND ONLY
(P243,000.00) in the form of Producers' Bank of the Philippines Check No. C-
153576 dated June 7, 1973.

PRIME WHITE CEMENT CORPORATION

BY:

(SGD) CONSTANCIO B. MAGLANA

President & Chairman 4

This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and
signed on 7 June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President of
the Consolidated Bank and Trust Corporation (Solid Bank). 5

The principal issue raised in this case is whether or not the aforesaid letter-offer, as
accepted by YKS, is a contract that binds the PWCC. The trial court rule in favor of
the petitioner, but the respondent Court held otherwise.

The records disclose the following material operative facts:

In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the
signing of Exhibit "A", the Board of Directors of PWCC disapproved the same; the
rejection is evidenced by the following Minutes (Exhibit "10"):

the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of
the alledged letter-contract adhered to by them, but must be understood as a new
and separate contract, and has in no way to do with the letter-offer which they
(sic) as consummated is by this resolution totally disapproved and is unacceptable
to the corporation.

On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the
disapproval of Exhibit "A". Pursuant, however, to its decision with respect to the
10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4")
and Official Receipt No. 0394 (Exhibit "5") for the payment of the same in the
amount of P243,000.00 This is the same amount received and acknowledged by
Maglana in Exhibit "A".

YKS accepted without protest both the Delivery and Official Receipts.

While YKS denied having received a copy of Exhibit "1", it was established that the
original thereof was shown to Mr. Henry Yao; since no one would sign a receipt for
it, the original was left at the latter's office and this fact was duly noted in Exhibit
"1" (Exhibit "l-A").

45
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's
4 August 1973 letter stating that it is "withdrawing or taking delivery of not less
than 10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V
Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter
(Exhibit "1") and told the latter that PWCC "only committed to you and which you
correspondingly paid 10,000 bags of white cement of which 4,150 bags were
already delivered to you as of August 11, 1973. 6 Unfortunately, no copy of the
said 4 August 1973 letter of YKS was presented in evidence.

On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the
latter's letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit "2".
While the records reveal that YKS received this reply also on 21 August 1973
(Exhibit "3" "A"), 8 it still denied having received it. Likewise, no copy of the so-
called 15 August 1973 letter was presented in evidence.

On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a

follow-up to the letter of 15 August 1973; YKS insisted on the delivery of 45,030
bags of white cement. 10

On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the
latter's attention to the statement of delivery dated 24 August 1973, particularly
the price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11

On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on

the full compliance with the terms of Exhibit "A" and informing the latter that it is
exercising the option therein stipulated.

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the
2 November 1973 telegram, but this was returned to sender as unclaimed. 13

As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.

On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last
time, compliance by the latter with its obligation under
Exhibit "A". 14

On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned

letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit "A". 15

On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a
complaint for Specific Performance with Damages against PWCC. The complaint 16
was based on Exhibit "A" and was docketed as Civil Case No. 5064.

In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath
the material averments in the complaint and alleged that: (a) YKS "has no legal

46
personality to sue having no legal personality even by fiction to represent itself;"
(b) Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c)
such signing was subject to the condition that Exhibit "A" be approved by the
Board of Directors of PWCC, as corporate commitments are made through it; (d)
the latter disapproved it, hence Exhibit "A" was never consummated and is not
enforceable against PWCC; (e) it agreed to sell 10,000 bags of white cement, not
under Exhibit "A", but under a separate contract prepared by the Board; (f) the
rejection by the Board of Exhibit "A" was made known to YKS through various
letters sent to it, copies of which were attached to the Answer as Annexes 1, 2 and
3; 18 (g) YKS knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC,
that only 10;000 bags were sold to it without any terms or conditions, at P24.30
per bag FOB Asturias, Cebu; (h) YKS is solely to blame for the failure to take
complete delivery of 10,000 bags for it did not send its boat or truck to PWCC's
plant; and (i) YKS has, therefore, no cause of action.

In its Counterclaim, PWCC asks for moral damages in the amount of not less than
P10,000.00, exemplary damages in the sum of P500,000.00 and attorney's fees in
the sum of P10,000.00.

On 24 July 1974, YKS filed its Answer to the Counterclaim. 21

Issues having been joined, the trial court conducted a pre-trial. 22 On that
occasion, the parties admitted that according to the By-Laws of PWCC, the
Chairman of the Board, who is also the President of the corporation, "has the power
to execute and sign, for and in behalf of the corporation, all contracts or
agreements which the corporation enters into," subject to the qualification that "all
the president's actuations, prior to and after he had signed and executed said
contracts, shall be given to the board of directors of defendant Corporation."
Furthermore, it was likewise stated for the record "that the corporation is a semi-
subsidiary of the government because of the NIDC participation in the same, and
that all contracts of the corporation should meet the approval of the NIDC and/or
the PNB Board because of an exposure and financial involvement of around P10
million therein. 23

During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding
upon it because Mr. Maglana was not authorized to make the offer and sign the
contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of
Directors has the power . . . (7) To enter into (sic) agreement or contract of any
kind with any person in the name and for and in behalf of the corporation through
its President, subject only to the declared objects and purpose of the corporation
and the existing provisions of law. 24 Among the powers of the President is "to
operate and conduct the business of the corporation according to his own
judgment and discretion, whenever the same is not expressly limited by such
orders, directives or resolutions." 25 Per standard practice of the corporation,
contracts should first pass through the marketing and intelligence unit before they
are finalized. Because of its interest in the PWCC, the NIDC, through its

47
comptroller, goes over contracts involving funds of and white cement produced by
the PWCC. Finally, among the duties of its legal counsel is to review proposed
contracts before they are submitted to the Board. While the president. may be
tasked with the preparation of a contract, it must first pass through the legal
counsel and the comptroller of the corporation. 26

On 20 November 1975, after trial on the merits, the court handed down its decision
in favor of herein petitioner, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

(1) Ordering defendant: to complete the delivery of 45,000 bags of prime white
cement at 94 lbs. net per bag at the price agreed, with a breakage allowance of
empty bags at 4% over the quantity agreed;

(2) Ordering defendant to pay P50,000.00, as moral damages; P5,000.00 as

exemplary damages; P3,000.00 as attorney's fees; and the costs of these
proceedings.

SO ORDERED. 27

In disregarding PWCC's theory, the trial court interpreted the provision of the By-
Laws granting its Board of Directors the power to enter into an agreement or
contract of any kind with any person through the President, to mean that the
latter may enter into such contract or agreement at any time and that the same is
not subject to the ratification of the board of directors but "subject only to the
declared objects and purpose of the corporation and existing laws." It then
concluded:

It is obvious therefore, that it is not the whole membership of the board of directors
who actually enters into any contract with any person in the name and for and in
behalf of the corporation, but only its president. It is likewise crystal clear that this
automatic representation of the board by the president is limited only by the
"declared objects and purpose of the corporation and existing provisions of law."
28

It likewise interpreted the provision on the power of the president to "operate and
conduct the business of the corporation according to the orders, directives or
resolutions of the board of directors and according to his own judgment and
discretion whenever the same is not expressly limited by such orders, directives
and resolutions," to mean that the president can operate and conduct the business
of the corporation according to his own judgment and discretion as long as it is not
expressly limited by the orders, directives or resolutions of the board of directors.
29 The trial court found no evidence that the board had set a prior limitation upon
the exercise of such judgment and discretion; it further ruled that the By-Laws,
does not require that Exhibit "A" be approved by the Board of Directors. Finally, in

48
the light of the Chairman's power to "execute and sign for and in behalf of the
corporation all contracts or agreements which the corporation may enter into"
(Exhibit "I-1"), it concluded that Mr. Maglana merely followed the By-Laws
"presumably both as president and chairman of the board thereof." 30 Hence,
Exhibit "A" was validly entered into by Maglana and thus binds the corporation.

The trial court, however, ruled that the option to sell is not valid because it is not
supported by any consideration distinct from the price; it was exercised before
compliance with the original contract by PWCC; and the repudiation of the original
contract by PWCC was deemed a withdrawal of the option before acceptance by
the petitioner.

Both parties appealed from the said decision to the respondent Court of Appeals
before which petitioner presented the following Assignment of Errors:

THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE
CONTRACT OF SALE IS NOT ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN
BEFORE THE COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY DEFENDANT AND
THAT DEFENDANT'S PROMISE TO SELL IS NOT SUPPORTED BY ANY CONSIDERATION
DISTINCT FROM THE PRICE.

II

THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES,
SUFFICIENT EXEMPLARY DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE
COMPLAINT AND PROVEN DURING THE TRIAL." 31

while the private respondent cited the following errors:

THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A VALID CONTRACT OR
PLAINTIFF CAN CLAIM THAT THE PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS
LEGALLY ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED PROPOSAL, NOT
HAVING BEEN PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR LATER ON
RATIFIED BY THE DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS
TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE DEFENDANT'S BOARD OF
DIRECTORS IN CLEAR, PLAIN LANGUAGE AND DULY INFORMED AND TRANSMITTED
TO PLAINTIFF.

II

49
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE
COURTS AS THE FORUM TO GIVE LIFE AND VALIDITY TO A TOTALLY
UNENFORCEABLE OR NON-EXISTING CONTRACT.

III

THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT
HIS VERY OWN ACTUATIONS AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF
BENEFITS FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS OF
CEMENT ONLY, UNDER THE PRICE, TERMS AND CONDITIONS TOTALLY FOREIGN TO
AND WHOLLY DIFFERENT FROM THOSE WHICH APPEAR IN EXHIBIT "A".

IV

THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S COUNTER-CLAIMS AS THE

SAME ARE DULY SUPPORTED BY CLEAR AND INDUBITABLE EVIDENCE. 32

In its decision 33 promulgated on 21 December 1979, the respondent Court

reversed the decision of the trial court, thus:

WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiff's
complaint is dismissed with costs. Plaintiff is ordered to pay defendant corporation
P25,000.00 exemplary damages, and P10,000.00 attorney's fees.

SO ORDERED.

Such conclusion is based on its findings, to wit:

Before resolving the issue, it is helpful to bring out some preliminary facts. First,
the defendant corporation is supervised and principally financed by the National
Investment and Development Corporation (NIDC), a subsidiary investment of the
Philippine National Bank (PNB), with cash financial exposure of some
P10,000,000.00. PNB is a government financial institution whose Board is
chairmaned (sic) by the Minister of National Defense. This fact is very material to
the issue of whether defendant corporations president can bind the corporation
with his own act.

Second, for failure to deny under oath the following actionable documents in
support of defendant's counterclaim:

1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973,

on the 10,000 bags of white cement delivered to plaintiff was not by reason of the
letter contract, Exhibit "A", which was totally disapproved by defendant
corporation's board of directors, clearly stating that "If within ten (10) days from
date hereof, we will not hear from you but you will withdraw cement at P24.30 per
bag from our plant, then we will deposit your check of P243,000.00 dated June 7,

50
1973 issued by the Producers Bank of the Philippines, per instruction of the Board."
(Annex "I" to defendant's Answer).

2. Letter of defendant to plaintiff dated August 4, 1973 that defendant "only

committed to you and which you accordingly paid 10,000 bags of white cement of
which 4,150 bags were already delivered to you as of August 1, 1973" (Annex "2"
of defendant's Answer).

3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of

August 4, 1973 (Annex "3" to defendant's Answer).

4. Letter to stores dated August 21, 1973,

5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white

cement at P24.30 per bag (Annex "5", to defendant's Answer).

plaintiff is deemed to have admitted, not only the due execution and genuiness
(sic) of said documents, (Rule 8 Sec. 8, Rules of Court) but also the allegations
therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing documents tend to
prove that the letter-offer, Exhibit "A", was rejected by defendant corporation's
Board of Directors and plaintiff was duly notified thereof and that the P243,000.00
check was considered by both parties as payment of the 10,000 bags of cement
under a separate transaction. As proof of which plaintiff did not complain nor
protest until February 9, 1974, when he threatened legal action.

Third, Maglana's signing the letter-offer prepared for him in the Solidbank was
made clearly upon the condition that it was subject to the approval of the board of
directors of defendant corporation. We find consistency herein because according
to the Corporation Law, and the By-Laws of defendant corporation, all corporate
commitments and business are conducted by, and contracts entered into through,
the express authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I" or "8").

Fourth, What Henry Yao and Maglana agreed upon as embodied in Exhibit "A",
insofar as defendant corporation is concerned, was an unauthorized contract (Arts.
1317 and 1403 (1), Civil Code). And because Maglana was not authorized by the
Board of Directors of defendant corporation nor was his, actuation ratified by the
Board, the agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs.
Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O-G. 3224).

While it may be true that Maglana is President of defendant corporation nowhere in

the Articles of Incorporation nor in the By-Laws of said corporation was he
empowered to enter into any contract all by himself and bind the corporation
without first securing the authority and consent of the Board of Directors.
Whatever authority Maglana may have must be derived from the Board of
Directors of defendant corporation. A corporate officers power as an agent must be
sought from the law, the articles of incorporation and the By-Laws or from a

51
resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of Liquidators
vs. Kalaw, 20 SCRA 987).

It clearly results from the foregoing that the judgment appealed from is untenable.
Having no cause of action against defendant corporation, plaintiff is not entitled to
any relief. We see no justification, therefore, for the court a quo's awards in its
favor. . . . 34

Its motion for reconsideration having been denied by the respondent Court in its
resolution 35 dated 15 April 1980, petitioner filed the instant petition based on the
following grounds:

1. That the contract (Exh. "A") entered into by the President and Chairman of
the Board of Directors Constancio B. Maglana in behalf of the respondent
corporation binds the said corporation.

2. That the contract (Exh. "A") was never novated nor superceded (sic) by a
subsequent contract.

3. That the option to renew the contract as contained in Exhibit "A" is

enforceable.

4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party
appear (sic) to be a party to the instrument but not to one who is not a party to the
instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to denying under
oath refers only to allegations of
usury. 36

We gave due course 37 to the petition after private respondent filed its Comment
38 and required the parties to submit simultaneously their Memoranda, which the
parties subsequently complied with. 39

Before going any further, this Court must first resolve an issue which, although
raised in the Answer of private respondent, was neither pursued in its appeal
before the respondent Court nor in its Comment and Memorandum in this case. It
also eluded the attention of the trial court and the respondent Court. The issue,
which is of paramount importance, concerns the lack of capacity of
plaintiff/petitioner to sue. In the caption of both the complaint and the instant
petition, the plaintiff and the petitioner, respectively, is:

YAO KA SIN TRADING,

owned and operated by
YAO KA SIN. 40

and is described in the body thereof as "a business concern of single proprietorship
owned and operated by Yao Ka Sin." 41 In the body of the petition, it is described

52
as "a single proprietorship business concern." 42 It also appears that, as gathered
from the decision of the trial court, no Yao Ka Sin testified. Instead, one Henry Yao
took the witness stand and testified that he is the "manager of Yao Ka Sin Trading"
and "it was in representation of the plaintiff" that he signed Exhibit "A" 43 Under
Section 1, Rule 3 of the Rules of Court, only natural or juridical persons or entities
authorized by law may be parties in a civil action. In Juasing Hardware vs.
Mendoza, 44 this Court held that a single proprietorship is neither a natural person
nor a juridical person under Article 44 of the Civil Code; it is not an entity
authorized by law to bring suit in court:

The law merely recognizes the existence of a sole proprietorship as a form of

business organization conducted for profit by a single individual, and requires the
proprietor or owner thereof to secure licenses and permits, register the business
name, and pair taxes to the national government. It does not vest juridical or legal
personality upon the sole proprietorship nor empower it to file or defend an action
in court. 45

Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46

The complaint then should have been amended to implead Yao Ka Sin as plaintiff in
substitution of Yao Ka Sin Trading. However, it is now too late in the history of this
case to dismiss this petition and, in effect, nullify all proceedings had before the
trial court and the respondent Court on the sole ground of petitioner's lack of
capacity to sue. Considering that private respondent did not pursue this issue
before the respondent Court and this Court; that, as We held in Juasing, the defect
is merely formal and not substantial, and an amendment to cure such defect is
expressly authorized by Section 4, Rule 10 of the Rules of Court which provides
that "[a] defect in the designation of the parties may be summarily corrected at
any stage of the action provided no prejudice is caused thereby to the adverse
party;" and that "[a] sole proprietorship does not, of coarse, possess any juridical
personality separate and apart from the personality of the owner of the enterprise
and the personality of the persons acting in the name of such proprietorship," 47
We hold and declare that Yao Ka Sin should be deemed as the plaintiff in Civil Case
No. 5064 and the petitioner in the instant case. As this Court stated nearly eighty
(80) years ago in Alonso vs. Villamor: 48

No one has been misled by the error in the name of the party plaintiff. If we should
by reason of this error send this case back for amendment and new trial, there
would be on the retrial the same complaint, the same answer, the same defense,
the same interests, the same witnesses, and the same evidence. The name of the
plaintiff would constitute the only difference between the old trial and the new. In
our judgment there is not enough in a name to justify such action.

And now to the merits of the petition.

53
The respondent Court correctly ruled that Exhibit "A" is not binding upon the
private respondent. Mr. Maglana, its President and Chairman, was not empowered
to execute it. Petitioner, on the other hand, maintains that it is a valid contract
because the Maglana has the power to enter into contracts for the corporation as
implied from the following provisions of the By-Laws of private respondent:

a) The power of the Board of Directors to . . . enter into (sic) agreement or

contract of any kind with any person in the name and for and in behalf of the
corporation through its President, subject only to the declared objects and purpose
of the corporation and the existing provisions of law. (Exhibit "8-A"); and

b) The power of the Chairman of the Board of Directors to "execute and sign, for
and in behalf of the corporation, all contracts or agreements which the corporation
may enter into" (Exhibit "I-1").

And even admitting, for the sake of argument, that Mr. Maglana was not so
authorized under the By-Laws, the private respondent, pursuant to the doctrine
laid down by this Court in Francisco vs. Government Service Insurance
System 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for
clothing him with apparent authority.

We are not persuaded.

Since a corporation, such as the private respondent, can act only through its
officers and agents, "all acts within the powers of said corporation may be
performed by agents of its selection; and, except so far as limitations or
restrictions may be imposed by special charter, by-law, or statutory provisions, the
same general principles of law which govern the relation of agency for a natural
person govern the officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and agents when once appointed,
or members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons." 51 Moreover, " . . . a
corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that authority to do so has been conferred upon
him, and this includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are incidental to, or
may be implied from, the powers intentionally conferred, powers added by custom
and usage, as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred. 52

While there can be no question that Mr. Maglana was an officer the President
and Chairman of private respondent corporation at the time he signed Exhibit
"A", the above provisions of said private respondent's By-Laws do not in any way
confer upon the President the authority to enter into contracts for the corporation
independently, of the Board of Directors. That power is exclusively lodged in the

54
latter. Nevertheless, to expedite or facilitate the execution of the contract, only the
President and not all the members of the Board, or so much thereof as are
required for the act shall sign it for the corporation. This is the import of the
words through the president in Exhibit "8-A" and the clear intent of the power of
the chairman "to execute and sign for and in behalf of the corporation all contracts
and agreements which the corporation may enter into" in Exhibit "I-1". Both
powers presuppose a prior act of the corporation exercised through the Board of
Directors. No greater power can be implied from such express, but limited,
delegated authority. Neither can it be logically claimed that any power greater than
that expressly conferred is inherent in Mr. Maglana's position as president and
chairman of the corporation.

Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he has
authority to make contract and do acts within the course of its ordinary business,"
53 We find such inapplicable in this case. We note that the private corporation has
a general manager who, under its By-Laws has, inter alia, the following powers:
"(a) to have the active and direct management of the business and operation of
the corporation, conducting the same accordingly to the order, directives or
resolutions of the Board of Directors or of the president." It goes without saying
then that Mr. Maglana did not have a direct and active and in the management of
the business and operations of the corporation. Besides, no evidence was adduced
to show that Mr. Maglana had, in the past, entered into contracts similar to that of
Exhibit "A" either with the petitioner or with other parties.

Petitioner's last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it and had
caused persons dealing with it to believe that he was conferred with such power.
The rule is of course settled that "[a]lthough an officer or agent acts without, or in
excess of, his actual authority if he acts within the scope of an apparent authority
with which the corporation has clothed him by holding him out or permitting him to
appear as having such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously and publicly, for a considerable
time." 54 Also, "if a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, the corporation will
be estopped to deny that such apparent authority in real, as to innocent third
persons dealing in good faith with such officers or agents." 55 This "apparent
authority may result from (1) the general manner, by which the corporation holds
out an officer or agent as having power to act or, in other words, the apparent
authority with which it clothes him to act in general or (2) acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof, whether
within or without the scope of his ordinary powers. 56

55
It was incumbent upon the petitioner to prove that indeed the private respondent
had clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any
similar contract. This could have been easily done by evidence of similar acts
executed either in its favor or in favor of other parties. Petitioner miserably failed
to do that. Upon the other hand, private respondent's evidence overwhelmingly
shows that no contract can be signed by the president without first being approved
by the Board of Directors; such approval may only be given after the contract
passes through, at least, the comptroller, who is the NIDC representative, and the
legal counsel.

The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are
hopelessly unavailing to the petitioner. In said cases, this Court found sufficient
evidence, based on the conduct and actuations of the corporations concerned, of
apparent authority conferred upon the officer involved which bound the
corporations on the basis of ratification. In the first case, it was established that
the offer of compromise made by plaintiff in the letter, Exhibit "A", was validly
accepted by the GSIS. The terms of the trial offer were clear, and over the
signature of defendant's general manager Rodolfo Andal, plaintiff was informed
telegraphically that her proposal had been accepted. It was sent by the GSIS Board
Secretary and defendant did not disown the same. Moreover, in a letter remitting
the payment of P30,000 advanced by her father, plaintiff quoted verbatim the
telegram of acceptance. This was in itself notice to the corporation of the terms of
the allegedly unauthorized telegram. Notwithstanding this notice, GSIS pocketed
the amount and kept silent about the telegram. This Court then ruled that:

This silence, taken together with the unconditional acceptance of three other
subsequent remittances from plaintiff, constitutes in itself a binding ratification of
the original agreement (Civil Code, Art. 1393).

Art. 1393. Ratification may be effected expressly or tactly it is understood that

there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive his
right

In the second case, this Court found:

In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and
in NACOCO's behalf without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all corporate
contracts. But that board itself, by its acts and through acquiescence, practically
laid aside the by-laws requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

56
The inevitable conclusion then is that Exhibit "A" is an unenforceable contract
under Article 1317 of the Civil Code which provides as follows:

Art. 1317. No one may contract in the name of another without being authorized
by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or
legal representation, or who has acted beyond his powers, shall be unenforceable,
unless it is ratified, expressly or impliedly, by the person on whose behalf it, has
been execrated, before it is revoked by the other contracting party.

The second ground is based on a wrong premise. It assumes, contrary to Our

conclusion above, that Exhibit "A" is a valid contract binding upon the private
respondent. It was effectively disapproved and rejected by the Board of Directors
which, at the same time, considered the amount of P243,000.00 received Mr.
Maglana as payment for 10,000 bags of white cement, treated as an entirely
different contract, and forthwith notified petitioner of its decision that "If within ten
(10) days from date hereof we will not hear from you but you will withdraw cement
at P24.30 per bag from our plant, then we will deposit your check of P243,000.00
dated June 7, 1973 issued by the Producers Bank of the Philippines, per instruction
of the Board." 57 Petitioner received the copy of this notification and thereafter
accepted without any protest the Delivery Receipt covering the 10,000 bags and
the Official Receipt for the P243,000.00. The respondent Court thus correctly ruled
that petitioner had in fact agreed to a new transaction involving only 10,000 bags
of white cement.

The third ground must likewise fail. Exhibit "A" being unenforceable, the option to
renew it would have no leg to stand on. The river cannot rise higher than its
source. In any event, the option granted in. this case is without any consideration
Article 1324 of the Civil Code expressly provides that:

When the offerer has allowed the offeree a certain period to accept, the offer may
be withdrawn at any time before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as something paid or
promised.

while Article 1749 of the same Code provides:

A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price

certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price.

57
Accordingly, even if it were accepted, it can not validly bind the private
respondent. 58

The fourth ground is, however, meritorious.

Section 8, Rule 8 of the Rules of Court provides:

Sec. 8. How to contest genuineness of such documents When an action or

defense is founded upon a written instrument, copied in or attached in the
corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse
party, under oath, specifically denies them, and sets forth what he claims to be the
facts; but this provision does not apply when the adverse party does not appear, to
be a party to the instrument or when compliance with an order for an inspection of
the original instrument is refused.

It is clear that the petitioner is not a party to any of the documents attached to the
private respondent's Answer. Thus, the above quoted rule is not applicable. 59
While the respondent Court, erred in holding otherwise, the challenged decision
must, nevertheless, stand in view of the above disquisitions on the first to the third
grounds of the petition.

WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent

Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21 December 1979.

Cost against the petitioner.

FIRST DIVISION

PAUL LEE TAN, ANDREW G.R. No. 153468

LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus -
PAUL SYCIP and MERRITTO
LIM, Promulgated:
Respondents. August 17, 2006

58
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ.:

For stock corporations, the quorum referred to in Section 52 of the Corporation

Code is based on the number of outstanding voting stocks. For nonstock
corporations, only those who are actual, living members with voting rights shall be
counted in determining the existence of a quorum during members meetings.
Dead members shall not be counted.
The Case

The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court
seeks the reversal of the January 23[2] and May 7, 2002,[3] Resolutions of the
Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution
dismissed the appeal filed by petitioners with the CA. Allegedly, without the proper
authorization of the other petitioners, the Verification and Certification of Non-
Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The
second Resolution denied reconsideration.
The Facts

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational

corporation with fifteen (15) regular members, who also constitute the board of
trustees.[4] During the annual members meeting held on April 6, 1998, there were
only eleven (11)[5] living member-trustees, as four (4) had already died. Out of the
eleven, seven (7)[6] attended the meeting through their respective proxies. The
meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of
Atty. Antonio C. Pacis, who argued that there was no quorum.[7] In the meeting,
Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to
replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC),
petitioners maintained that the deceased member-trustees should not be counted
in the computation of the quorum because, upon their death, members
automatically lost all their rights (including the right to vote) and interests in the
corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and
void for lack of quorum. She held that the basis for determining the quorum in a
meeting of members should be their number as specified in the articles of
incorporation, not simply the number of living members.[8] She explained that the
qualifying phrase entitled to vote in Section 24[9] of the Corporation Code, which
provided the basis for determining a quorum for the election of directors or
trustees, should be read together with Section 89.[10]

59
The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS,
insofar as it prescribed the mode of filling vacancies in the board of trustees, must
be interpreted in conjunction with Section 29[12] of the Corporation Code. The SEC
en banc denied the appeal of petitioners and affirmed the Decision of the hearing
officer in toto.[13] It found to be untenable their contention that the word
members, as used in Section 52[14] of the Corporation Code, referred only to the
living members of a nonstock corporation.[15]

As earlier stated, the CA dismissed the appeal of petitioners, because the

Verification and Certification of Non-Forum Shopping had been signed only by Atty.
Sabino Padilla Jr. No Special Power of Attorney had been attached to show his
authority to sign for the rest of the petitioners.

Hence, this Petition.[16]

Issues

Petitioners state the issues as follows:

Petitioners principally pray for the resolution of the legal question of whether or not
in NON-STOCK corporations, dead members should still be counted in
determination of quorum for purposed of conducting the Annual Members Meeting.

Petitioners have maintained before the courts below that the DEAD members
should no longer be counted in computing quorum primarily on the ground that
members rights are personal and non-transferable as provided in Sections 90 and
91 of the Corporation Code of the Philippines.

The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion
that did not even involve a non-stock corporation as petitioner GCHS.
The Honorable Court of Appeals on the other hand simply refused to resolve this
question and instead dismissed the petition for review on a technicality the failure
to timely submit an SPA from the petitioners authorizing their co-petitioner Padilla,
their counsel and also a petitioner before the Court of Appeals, to sign the petition
on behalf of the rest of the petitioners.

Petitioners humbly submit that the action of both the SEC and the Court of Appeals
are not in accord with law particularly the pronouncements of this Honorable Court
in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development
Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360
SCRA 183). Due course should have been given the petition below and the merits
of the case decided in petitioners favor.[17]

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in
denying the Petition below, on the basis of a defective Verification and
Certification; and 2) whether dead members should still be counted in the

60
determination of the quorum, for purposes of conducting the annual members
meeting.
The Courts Ruling

The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification
of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and
Certification of Non-Forum Shopping were signed by only one, not by all, of the
petitioners; further, it failed to show proof that the signatory was authorized to sign
on behalf of all of them. Subsequently, however, petitioners submitted a Special
Power of Attorney, attesting that Atty. Padilla was authorized to file the action on
their behalf.[18]
In the interest of substantial justice, this initial procedural lapse may be excused.
[19] There appears to be no intention to circumvent the need for proper
verification and certification, which are aimed at assuring the truthfulness and
correctness of the allegations in the Petition for Review and at discouraging forum
shopping.[20] More important, the substantial merits of petitioners case and the
purely legal question involved in the Petition should be considered special
circumstances[21] or compelling reasons that justify an exception to the strict
requirements of the verification and the certification of non-forum shopping.[22]
Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of

electing directors or trustees[23] and transacting some other business calling for
or requiring the action or consent of the shareholders or members,[24] such as the
amendment of the articles of incorporation and bylaws, sale or disposition of all or
substantially all corporate assets, consolidation and merger and the like, or any
other business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the board
of directors or trustees, who are charged with the management of the corporation.
[25] The board, in turn, periodically elects officers to carry out management
functions on a day-to-day basis. As owners, though, the stockholders or members
have residual powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive
profits, the management and direction of the corporation are lodged with their
representatives and agents -- the board of directors or trustees.[26] In other words,
acts of management pertain to the board; and those of ownership, to the
stockholders or members. In the latter case, the board cannot act alone, but must
seek approval of the stockholders or members.[27]

61
Conformably with the foregoing principles, one of the most important rights of a
qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to
manage the corporate affairs.[28] The right to choose the persons who will direct,
manage and operate the corporation is significant, because it is the main way in
which a stockholder can have a voice in the management of corporate affairs, or in
which a member in a nonstock corporation can have a say on how the purposes
and goals of the corporation may be achieved.[29] Once the directors or trustees
are elected, the stockholders or members relinquish corporate powers to the board
in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the

general rule is that every member of a nonstock corporation, and every legal
owner of shares in a stock corporation, has a right to be present and to vote in all
corporate meetings. Conversely, those who are not stockholders or members have
no right to vote.[30] Voting may be expressed personally, or through proxies who
vote in their representative capacities.[31] Generally, the right to be present and
to vote in a meeting is determined by the time in which the meeting is held.[32]

Section 52 of the Corporation Code states:

Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders representing a majority of
the outstanding capital stock or a majority of the members in the case of non-stock
corporations.

In stock corporations, the presence of a quorum is ascertained and counted on the

basis of the outstanding capital stock, as defined by the Code thus:

SECTION 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (Underscoring supplied)

The Right to Vote in

Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks.
[33] It is settled that unissued stocks may not be voted or considered in
determining whether a quorum is present in a stockholders meeting, or whether a
requisite proportion of the stock of the corporation is voted to adopt a certain
measure or act. Only stock actually issued and outstanding may be voted.[34]
Under Section 6 of the Corporation Code, each share of stock is entitled to vote,

62
unless otherwise provided in the articles of incorporation or declared
delinquent[35] under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that
have never passed to the ownership of stockholders; or, having so passed, have
again been purchased by the corporation.[36] These shares are not to be taken
into consideration in determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have
passed from the corporation, and that may be voted.[37]

Section 6 of the Corporation Code, in part, provides:

Section 6. Classification of shares. The shares of stock of stock corporations may

be divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be deprived of voting rights
except those classified and issued as preferred or redeemable shares, unless
otherwise provided in this Code: Provided, further, that there shall always be a
class or series of shares which have complete voting rights.

xxxxxxxxx

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to
vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights.

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that
the intention of the lawmakers was to base the quorum mentioned in Section 52 on
the number of outstanding voting stocks.[38]

The Right to Vote in

63
Nonstock Corporations

In nonstock corporations, the voting rights attach to membership.[39] Members

vote as persons, in accordance with the law and the bylaws of the corporation.
Each member shall be entitled to one vote unless so limited, broadened, or denied
in the articles of incorporation or bylaws.[40] We hold that when the principle for
determining the quorum for stock corporations is applied by analogy to nonstock
corporations, only those who are actual members with voting rights should be
counted.

Under Section 52 of the Corporation Code, the majority of the members

representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum.[41]

The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase
majority vote of the members; likewise Section 48 of the Corporation Code refers
to 50 percent of 94 (the number of registered members of the association
mentioned therein) plus one. The best evidence of who are the present members
of the corporation is the membership book; in the case of stock corporations, it is
the stock and transfer book.[43]

Section 25 of the Code specifically provides that a majority of the directors or

trustees, as fixed in the articles of incorporation, shall constitute a quorum for the
transaction of corporate business (unless the articles of incorporation or the bylaws
provide for a greater majority). If the intention of the lawmakers was to base the
quorum in the meetings of stockholders or members on their absolute number as
fixed in the articles of incorporation, it would have expressly specified so.
Otherwise, the only logical conclusion is that the legislature did not have that
intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members meeting is to be reckoned

as the actual number of members of the corporation, the next question to resolve
is what happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on
the death of a shareholder, the executor or administrator duly appointed by the
Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are
held by the administrator or executor.[44]

64
On the other hand, membership in and all rights arising from a nonstock
corporation are personal and non-transferable, unless the articles of incorporation
or the bylaws of the corporation provide otherwise.[45] In other words, the
determination of whether or not dead members are entitled to exercise their voting
rights (through their executor or administrator), depends on those articles of
incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others,
be terminated by the death of the member.[46] Section 91 of the Corporation Code
further provides that termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of incorporation or the
bylaws.

Applying Section 91 to the present case, we hold that dead members who are
dropped from the membership roster in the manner and for the cause provided for
in the By-Laws of GCHS are not to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the annual members meeting. With
11 remaining members, the quorum in the present case should be 6. Therefore,
there being a quorum, the annual members meeting, conducted with six[47]
members present, was valid.

Vacancy in the
Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the

Corporation Code provides:
SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to fill a vacancy shall be elected
only for the unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those
remaining still constitute a quorum. The phrase may be filled in Section 29 shows
that the filling of vacancies in the board by the remaining directors or trustees
constituting a quorum is merely permissive, not mandatory.[48] Corporations,
therefore, may choose how vacancies in their respective boards may be filled up --
either by the remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose.[49]

65
The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies
in its board of directors; that is, by a majority vote of the remaining members of
the board.[50]

While a majority of the remaining corporate members were present, however, the
election of the four trustees cannot be legally upheld for the obvious reason that it
was held in an annual meeting of the members, not of the board of trustees. We
are not unmindful of the fact that the members of GCHS themselves also constitute
the trustees, but we cannot ignore the GCHS bylaw provision, which specifically
prescribes that vacancies in the board must be filled up by the remaining trustees.
In other words, these remaining member-trustees must sit as a board in order to
validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by
the board and that by the constituent members of the corporation. The board of
trustees must act, not individually or separately, but as a body in a lawful meeting.
On the other hand, in their annual meeting, the members may be represented by
their respective proxies, as in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the Court
of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the
board of trustees of Grace Christian High School (GCHS) may convene and fill up
the vacancies in the board, in accordance with this Decision. No pronouncement as
to costs in this instance.

SO ORDERED.

THIRD DIVISION

ASSOCIATED BANK (now UNITED OVERSEAS BANK [PHILS.]),

Petitioner,

- versus -

SPOUSES RAFAEL and MONALIZA PRONSTROLLER,

Respondents.

G.R. No. 148444

Present:

YNARES-SANTIAGO, J.,
Chairperson,

66
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:

July 14, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court filed
by petitioner Associated Bank (now United Overseas Bank [Phils.]) assailing the
Court of Appeals (CA) Decision[1] dated February 27, 2001, which in turn affirmed
the Regional Trial Court[2] (RTC) Decision[3] dated November 14, 1997 in Civil
Case No. 94-3298 for Specific Performance. Likewise assailed is the appellate
courts Resolution[4] dated May 31, 2001 denying petitioners motion for
reconsideration.

The facts of the case are as follows:

On April 21, 1988, the spouses Eduardo and Ma. Pilar Vaca (spouses Vaca)
executed a Real Estate Mortgage (REM) in favor of the petitioner[5] over their
parcel of residential land with an area of 953 sq. m. and the house constructed
thereon, located at No. 18, Lovebird Street, Green Meadows Subdivision 1, Quezon
City (herein referred to as the subject property). For failure of the spouses Vaca to
pay their obligation, the subject property was sold at public auction with the
petitioner as the highest bidder. Transfer Certificate of Title (TCT) No. 254504, in
the name of spouses Vaca, was cancelled and a new one --TCT No. 52593-- was
issued in the name of the petitioner.[6]

The spouses Vaca, however, commenced an action for the nullification of the real
estate mortgage and the foreclosure sale. Petitioner, on the other hand, filed a
petition for the issuance of a writ of possession which was denied by the RTC.
Petitioner, thereafter, obtained a favorable judgment when the CA granted its
petition but the spouses Vaca questioned the CA decision before this Court in the
case docketed as G.R. No. 109672.[7]

67
During the pendency of the aforesaid cases, petitioner advertised the subject
property for sale to interested buyers for P9,700,000.00.[8] Respondents Rafael
and Monaliza Pronstroller offered to purchase the property for P7,500,000.00. Said
offer was made through Atty. Jose Soluta, Jr. (Atty. Soluta), petitioners Vice-
President, Corporate Secretary and a member of its Board of Directors.[9]
Petitioner accepted respondents offer of P7.5 million. Consequently, respondents
paid petitioner P750,000.00, or 10% of the purchase price, as down payment.[10]

On March 18, 1993, petitioner, through Atty. Soluta, and respondents, executed a
Letter-Agreement setting forth therein the terms and conditions of the sale, to wit:

1. Selling price shall be at P7,500,000.00 payable as follows:

a. 10% deposit and balance of P6,750,000.00 to be deposited under escrow

agreement. Said escrow deposit shall be applied as payment upon delivery of the
aforesaid property to the buyers free from occupants.

b. The deposit shall be made within ninety (90) days from date hereof. Any
interest earned on the aforesaid investment shall be for the buyers account.
However, the 10% deposit is non-interest earning.[11]

Prior to the expiration of the 90-day period within which to make the escrow
deposit, in view of the pendency of the case between the spouses Vaca and
petitioner involving the subject property,[12] respondents requested that the
balance of the purchase price be made payable only upon service on them of a
final decision or resolution of this Court affirming petitioners right to possess the
subject property. Atty. Soluta referred respondents proposal to petitioners Asset
Recovery and Remedial Management Committee (ARRMC) but the latter deferred
action thereon.[13]

On July 14, 1993, a month after they made the request and after the payment
deadline had lapsed, respondents and Atty. Soluta, acting for the petitioner,
executed another Letter-Agreement allowing the former to pay the balance of the
purchase price upon receipt of a final order from this Court (in the Vaca case)
and/or the delivery of the property to them free from occupants.[14]

Towards the end of 1993, or in early 1994, petitioner reorganized its management.
Atty. Braulio Dayday (Atty. Dayday) became petitioners Assistant Vice-President
and Head of the Documentation Section, while Atty. Soluta was relieved of his
responsibilities. Atty. Dayday reviewed petitioners records of its outstanding
accounts and discovered that respondents failed to deposit the balance of the
purchase price of the subject property. He, likewise, found that respondents
requested for an extension of time within which to pay. The matter was then
resubmitted to the ARRMC during its meeting on March 4, 1994, and it was

68
disapproved. ARRMC, thus, referred the matter to petitioners Legal Department for
rescission or cancellation of the contract due to respondents breach thereof.[15]

On May 5, 1994, Atty. Dayday informed respondents that their request for
extension was disapproved by ARRMC and, in view of their breach of the contract,
petitioner was rescinding the same and forfeiting their deposit. Petitioner added
that if respondents were still interested in buying the subject property, they had to
submit their new proposal.[16] Respondents went to the petitioners office, talked
to Atty. Dayday and gave him the Letter-Agreement of July 14, 1993 to show that
they were granted an extension. However, Atty. Dayday claimed that the letter was
a mistake and that Atty. Soluta was not authorized to give such extension.[17]

On June 6, 1994, respondents proposed to pay the balance of the purchase price as
follows: P3,000,000.00 upon the approval of their proposal and the balance after
six (6) months.[18] However, the proposal was disapproved by the petitioners
President. In a letter dated June 9, 1994, petitioner advised respondents that the
former would accept the latters proposal only if they would pay interest at the rate
of 24.5% per annum on the unpaid balance. Petitioner also allowed respondents a
refund of their deposit of P750,000.00 if they would not agree to petitioners new
proposal.[19]
For failure of the parties to reach an agreement, respondents, through their
counsel, informed petitioner that they would be enforcing their agreement dated
July 14, 1993.[20] Petitioner countered that it was not aware of the existence of the
July 14 agreement and that Atty. Soluta was not authorized to sign for and on
behalf of the bank. It, likewise, reiterated the rescission of their previous
agreement because of the breach committed by respondents.[21]

On July 14, 1994, in the Vaca case, this Court upheld petitioners right to possess
the subject property.

On July 28, 1994, respondents commenced the instant suit by filing a Complaint for
Specific Performance before the RTC of Antipolo, Rizal.[22] The case was raffled to
Branch 72 and was docketed as Civil Case No. 94-3298. Respondents prayed that
petitioner be ordered to sell the subject property to them in accordance with their
letter-agreement of July 14, 1993. They, likewise, caused the annotation of a notice
of lis pendens at the dorsal portion of TCT No. 52593.

For its part, petitioner contended that their contract had already been rescinded
because of respondents failure to deposit in escrow the balance of the purchase
price within the stipulated period.[23]

During the pendency of the case, petitioner sold the subject property to the
spouses Vaca, who eventually registered the sale; and on the basis thereof, TCT
No. 52593 was cancelled and TCT No. 158082 was issued in their names.[24] As
new owners, the spouses Vaca started demolishing the house on the subject

69
property which, however, was not completed by virtue of the writ of preliminary
injunction issued by the court.[25]

On November 14, 1997, the trial court finally resolved the matter in favor of
respondents, disposing, as follows:

WHEREFORE, premises considered, the Court finds defendants rescission of the

Agreement to Sell to be null and void for being contrary to law and public policy.

ACCORDINGLY, defendant bank is hereby ordered to accept plaintiffs payment of

the balance of the purchase price in the amount of Six Million Seven Hundred Fifty
Thousand Pesos (P6,750,000.00) and to deliver the title and possession to subject
property, free from all liens and encumbrances upon receipt of said payment.
Likewise, defendant bank is ordered to pay plaintiffs moral damages and attorneys
fees in the amount of One Hundred Thirty Thousand Pesos (P130,000.00) and
expenses of litigation in the amount of Twenty Thousand Pesos (P20,000.00).

SO ORDERED.[26]

Applying the rule of apparent authority,[27] the court upheld the validity of the July
14, 1993 Letter-Agreement where the respondents were given an extension within
which to make payment. Consequently, respondents did not incur in delay, and
thus, the court concluded that the rescission of the contract was without basis and
contrary to law.[28]

On appeal, the CA affirmed the RTC decision and upheld Atty. Solutas authority to
represent the petitioner. It further ruled that petitioner had no right to unilaterally
rescind the contract; otherwise, it would give the bank officers license to
continuously review and eventually rescind contracts entered into by previous
officers. As to whether respondents were estopped from enforcing the July 14,
1993 Letter-Agreement, the appellate court ruled in the negative. It found, instead,
that petitioners were estopped from questioning the efficacy of the July 14
agreement because of its failure to repudiate the same for a period of one year.
[29] Thus, the court said in its decision:

1. The Appellant (Westmont Bank) is hereby ordered to execute a Deed of Absolute

Sale in favor of the Appellees over the property covered by Transfer Certificate of
Title No. 52593, including the improvement thereon, and secure, from the Register
of Deeds, a Torrens Title over the said property free from all liens, claims or
encumbrances upon the payment by the Appellees of the balance of the purchase
price of the property in the amount of P6,750,000.00;

2. The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No.
158082 under the names of the Spouses Eduardo [and Ma. Pilar] Vaca and to issue
another under the names of the Appellees as stated in the preceding paragraph;

70
3. The appellant is hereby ordered to pay to the appellee Rafael Pronstroller the
amount of P100,000.00 as and by way of moral damages and to pay to the
Appellees the amount of P30,000.00 as and by way of attorneys fees and the
amount of P20,000.00 for litigation expense.

4. The counterclaims of the Appellant are dismissed.

SO ORDERED.[30]

Petitioners motion for reconsideration was denied on May 31, 2001. Hence, the
present petition raising the following issues:

I.

THE NARRATION OR STATEMENT OF THE FACTS OF THE CASE BY THE HONORABLE

COURT OF APPEALS IS TOTALLY BEREFT OF EVIDENTIARY SUPPORT, CONTRARY TO
THE EVIDENCE ON RECORD AND PURELY BASED ON ERRONEOUS ASSUMPTIONS,
PRESUMPTIONS, SURMISES, AND CONJECTURES.

II.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN MERELY RELYING UPON

THE MANIFESTLY ERRONEOUS FINDING OF THE HONORABLE TRIAL COURT ON THE
ALLEGED APPARENT AUTHORITY OF ATTY. JOSE SOLUTA, JR. IN THAT THE LATTERS
FINDING IS CONTRARY TO THE UNDISPUTED FACTS AND THE EVIDENCE ON
RECORD.

III.

THE HONORABLE COURT OF APPEALS OWN FINDING THAT ATTY. JOSE SOLUTA, JR.
HAD AUTHORITY TO SELL THE SUBJECT PROPERTY ON HIS OWN (EVEN WITHOUT
THE COMMITTEES APPROVAL) IS LIKEWISE GROSSLY ERRONEOUS, FINDS NO
EVIDENTIARY SUPPORT AND IS EVEN CONTRARY TO THE EVIDENCE ON RECORD IN
THAT

A.) AT NO TIME DID PETITIONER ADMIT THAT ATTY. JOSE SOLUTA, JR. IS
AUTHORIZED TO SELL THE SUBJECT PROPERTY ON HIS OWN;

B.) THE AUTHORITY OF ATTY. JOSE SOLUTA, JR. CANNOT BE PRESUMED FROM HIS
DESIGNATIONS OR TITLES; AND

C.) RESPONDENTS FULLY KNEW OR HAD KNOWLEDGE OF THE LACK OF AUTHORITY

OF ATTY. JOSE SOLUTA, JR. TO SELL THE SUBJECT PROPERTY ON HIS OWN.

IV.

71
THE HONORABLE TRIAL COURT AND THE HONORABLE COURT OF APPEALS
GROSSLY MISAPPLIED THE DOCTRINE OF APPARENT AUTHORITY IN THE PRESENT
CASE.

V.

THE HONORABLE TRIAL COURT AND THE HONORABLE COURT OF APPEALS

GROSSLY ERRED IN NOT HOLDING THAT THE CONTRACT TO SELL CONTAINED IN
THE MARCH 18, 1993 LETTER WAS VALIDLY RESCINDED BY PETITIONER.

VI.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN NOT HOLDING

RESPONDENTS ESTOPPED FROM DENYING THE VALIDITY OF THE RESCISSION OF
THE CONTRACT TO SELL AS EMBODIED IN THE MARCH 18, 1993 LETTER AND THE
LACK OF AUTHORITY OF ATTY. SOLUTA, JR. TO GRANT THE EXTENSION AS
CONTAINED IN HIS LETTER OF JULY 14, 1993 AFTER THEY VOLUNTARILY SUBMITTED
WITH FULL KNOWLEDGE OF ITS IMPORT AND IMPLICATION A NEW OFFER TO
PURCHASE THE SUBJECT PROPERTY CONTAINED IN THEIR LETTER DATED JUNE 6,
1994.

VII.

IN ANY EVENT, THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
THE CONTRACT TO SELL UNDER THE LETTER OF MARCH 18, 1993 AND THE LETTER
OF JULY 14, 1993 HAD BEEN VACATED WHEN RESPONDENTS VOLUNTARILY
SUBMITTED WITH FULL KNOWLEDGE OF ITS IMPORT AND IMPLICATION THEIR NEW
OFFER CONTAINED IN THEIR LETTER OF JUNE 6, 1994 WITHOUT ANY CONDITION
OR RESERVATION WHATSOEVER.

VIII.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER ESTOPPED

FROM QUESTIONING THE VALIDITY OF THE JULY 14, 1993 LETTER SIGNED BY ATTY.
JOSE SOLUTA, JR.

IX.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN HOLDING THAT

PETITIONER ALLEGEDLY ACTED FRAUDULENTLY AND IN BAD FAITH IN ITS DEALINGS
WITH RESPONDENTS.

X.

THE ORDER OF THE HONORABLE COURT OF APPEALS TO CANCEL TCT NO. 158082
UNDER THE NAMES OF SPS. VACA IS A COLLATERAL ATTACK AGAINST THE SAID
CERTIFICATE OF TITLE WHICH IS PROSCRIBED BY SECTION 48 OF P.D. 1529.

72
XI.

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING MORAL DAMAGES,

ATTORNEYS FEES, AND EXPENSES OF LITIGATION IN FAVOR OF RESPONDENTS.[31]

Reduced to bare essentials, the decision on the instant petition hinges on the
resolution of the following specific questions: 1) Is the petitioner bound by the July
14, 1993 Letter-Agreement signed by Atty. Soluta under the doctrine of apparent
authority? 2) Was there a valid rescission of the March 18, 1993 and/or July 14,
1993 Letter-Agreement? 3) Are the respondents estopped from enforcing the July
14 Letter-Agreement because of their June 6, 1994 new proposal? 4) Is the
petitioner estopped from questioning the validity of the July 14 letter because of its
failure to repudiate the same and 5) Is the instant case a collateral attack on TCT
No. 158082 in the name of the spouses Vaca?

The petition is unmeritorious.

Well-settled is the rule that the findings of the RTC, as affirmed by the appellate
court, are binding on this Court. In a petition for review on certiorari under Rule 45
of the Rules of Court, as in this case, this Court may not review the findings of fact
all over again. It must be stressed that this Court is not a trier of facts, and it is not
its function to re-examine and weigh anew the respective evidence of the parties.
[32] The findings of the CA are conclusive on the parties and carry even more
weight when these coincide with the factual findings of the trial court, unless the
factual findings are not supported by the evidence on record.[33] Petitioner failed
to show why the above doctrine should not be applied to the instant case.

Contrary to petitioners contention that the CAs factual findings are not supported
by the evidence on record, the assailed decision clearly shows that the appellate
court not only relied on the RTCs findings but made its own analysis of the record
of the case. The CA decision contains specific details drawn from the contents of
the pleadings filed by both parties, from the testimonies of the witnesses and from
the documentary evidence submitted. It was from all these that the appellate court
drew its own conclusion using applicable legal principles and jurisprudential rules.
The Court notes that the March 18, 1993 Letter-Agreement was written on a paper
with petitioners letterhead. It was signed by Atty. Soluta with the conformity of
respondents. The authority of Atty. Soluta to act for and on behalf of petitioner was
not reflected in said letter or on a separate paper attached to it. Yet, petitioner
recognized Atty. Solutas authority to sign the same and, thus, acknowledged its
binding effect. On the other hand, the July 14, 1993 letter was written on the same
type of paper with the same letterhead and of the same form as the earlier letter.
It was also signed by the same person with the conformity of the same
respondents. Again, nowhere in said letter did petitioner specifically authorize Atty.
Soluta to sign it for and on its behalf. This time, however, petitioner questioned the

73
validity and binding effect of the agreement, arguing that Atty. Soluta was not
authorized to modify the earlier terms of the contract and could not in any way
bind the petitioner.

We beg to differ.

The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. The power and
responsibility to decide whether the corporation should enter into a contract that
will bind the corporation is lodged in the board of directors. However, just as a
natural person may authorize another to do certain acts for and on his behalf, the
board may validly delegate some of its functions and powers to officers,
committees and agents. The authority of such individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly, by habit, custom, or acquiescence, in the general
course of business.[34]

The authority of a corporate officer or agent in dealing with third persons may be
actual or apparent. The doctrine of apparent authority, with special reference to
banks, had long been recognized in this jurisdiction.[35] Apparent authority is
derived not merely from practice. Its existence may be ascertained through 1) the
general manner in which the corporation holds out an officer or agent as having
the power to act, or in other words, the apparent authority to act in general, with
which it clothes him; or 2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his
ordinary powers.[36]

Accordingly, the authority to act for and to bind a corporation may be presumed
from acts of recognition in other instances, wherein the power was exercised
without any objection from its board or shareholders. Undoubtedly, petitioner had
previously allowed Atty. Soluta to enter into the first agreement without a board
resolution expressly authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement. It is not the quantity
of similar acts which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation.[37]

Naturally, the third person has little or no information as to what occurs in

corporate meetings; and he must necessarily rely upon the external manifestations
of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fixed upon it by its
agents in accordance with law.[38] What transpires in the corporate board room is
entirely an internal matter. Hence, petitioner may not impute negligence on the
part of the respondents in failing to find out the scope of Atty. Solutas authority.
Indeed, the public has the right to rely on the trustworthiness of bank officers and
their acts.[39]

74
As early as June 1993, or prior to the 90-day period within which to make the full
payment, respondents already requested a modification of the earlier agreement
such that the full payment should be made upon receipt of this Courts decision
confirming petitioners right to the subject property. The matter was brought to the
petitioners attention and was in fact discussed by the members of the Board.
Instead of acting on said request (considering that the 90-day period was about to
expire), the board deferred action on the request. It was only after one year and
after the banks reorganization that the board rejected respondents request. We
cannot therefore blame the respondents in relying on the July 14, 1993 Letter-
Agreement. Petitioners inaction, coupled with the apparent authority of Atty. Soluta
to act on behalf of the corporation, validates the July 14 agreement and thus binds
the corporation. All these taken together, lead to no other conclusion than that the
petitioner attempted to defraud the respondents. This is bolstered by the fact that
it forged another contract involving the same property, with another buyer, the
spouses Vaca, notwithstanding the pendency of the instant case.
We would like to emphasize that if a corporation knowingly permits its officer, or
any other agent, to perform acts within the scope of an apparent authority, holding
him out to the public as possessing power to do those acts, the corporation will, as
against any person who has dealt in good faith with the corporation through such
agent, be estopped from denying such authority.[40]
Petitioner further insists that specific performance is not available to respondents
because the Letter-Agreements had already been rescinded --- the March 18
agreement because of the breach committed by the respondents; and the July 14
letter because of the new offer of the respondents which was not approved by
petitioner.
Again, the argument is misplaced.

Basic is the rule that a contract constitutes the law between the parties.
Concededly, parties may validly stipulate the unilateral rescission of a contract.
[41] This is usually in the form of a stipulation granting the seller the right to forfeit
installments or deposits made by the buyer in case of the latters failure to make
full payment on the stipulated date. While the petitioner in the instant case may
have the right, under the March 18 agreement, to unilaterally rescind the contract
in case of respondents failure to comply with the terms of the contract,[42] the
execution of the July 14 Agreement prevented petitioner from exercising the right
to rescind. This is so because there was in the first place, no breach of contract, as
the date of full payment had already been modified by the later agreement.

Neither can the July 14, 1993 agreement be considered abandoned by respondents
act of making a new offer, which was unfortunately rejected by petitioner. A careful
reading of the June 6, 1994 letter of respondents impels this Court to believe that
such offer was made only to demonstrate their capacity to purchase the subject
property.[43] Besides, even if it was a valid new offer, they did so only due to the
fraudulent misrepresentation made by petitioner that their earlier contracts had
already been rescinded. Considering respondents capacity to pay and their
continuing interest in the subject property,[44] to abandon their right to the

75
contract and to the property, absent any form of protection, is contrary to human
nature. The presumption that a person takes ordinary care of his concerns applies
and remains unrebutted.[45] Obviously therefore, respondents made the new offer
without abandoning the previous contract. Since there was never a perfected new
contract, the July 14, 1993 agreement was still in effect and there was no
abandonment to speak of.

In its final attempt to prevent respondents from attaining a favorable result,

petitioner argues that the instant case should not prosper because the cancellation
of TCT No. 158082 is a collateral attack on the title which is proscribed by law.

Such contention is baseless.

Admittedly, during the pendency of the case, respondents timely registered a

notice of lis pendens to warn the whole world that the property was the subject of
a pending litigation.

Lis pendens, which literally means pending suit, refers to the jurisdiction, power or
control which a court acquires over property involved in a suit, pending the
continuance of the action, and until final judgment. Founded upon public policy and
necessity, lis pendens is intended to keep the properties in litigation within the
power of the court until the litigation is terminated, and to prevent the defeat of
the judgment or decree by subsequent alienation. Its notice is an announcement to
the whole world that a particular property is in litigation and serves as a warning
that one who acquires an interest over said property does so at his own risk or that
he gambles on the result of the litigation over said property.[46]

The filing of a notice of lis pendens has a twofold effect: (1) to keep the subject
matter of the litigation within the power of the court until the entry of the final
judgment to prevent the defeat of the final judgment by successive alienations;
and (2) to bind a purchaser, bona fide or not, of the land subject of the litigation to
the judgment or decree that the court will promulgate subsequently.[47]

This registration, therefore, gives the court clear authority to cancel the title of the
spouses Vaca, since the sale of the subject property was made after the notice of
lis pendens. Settled is the rule that the notice is not considered a collateral attack
on the title,[48] for the indefeasibility of the title shall not be used to defraud
another especially if the latter performs acts to protect his rights such as the
timely registration of a notice of lis pendens.

As to the liability for moral damages, attorneys fees and expenses of litigation, we
affirm in toto the appellate courts conclusion. Article 2220[49] of the New Civil
Code allows the recovery of moral damages in breaches of contract where the
party acted fraudulently and in bad faith. As found by the CA, petitioner
undoubtedly acted fraudulently and in bad faith in breaching the letter-
agreements. Despite the pendency of the case in the RTC, it sold the subject

76
property to the spouses Vaca and allowed the demolition of the house even if there
was already a writ of preliminary injunction lawfully issued by the court. This is
apart from its act of unilaterally rescinding the subject contract. Clearly, petitioners
acts are brazen attempts to frustrate the decision that the court may render in
favor of respondents.[50] It is, likewise, apparent that because of petitioners acts,
respondents were compelled to litigate justifying the award of attorneys fees and
expenses of litigation.

WHEREFORE, premises considered, the petition is DENIED. The Decision of the

Court of Appeals dated February 27, 2001 and its Resolution dated May 31, 2001 in
CA-G.R. CV No. 60315 are AFFIRMED.

SO ORDERED.

SECOND DIVISION
[G.R. No. 131394. March 28, 2005]

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, petitioners,
vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES
ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M.
ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL, INC., respondents.
DECISION
TINGA, J.:

Presented in the case at bar is the apparently straight-forward but complicated

question: What should be the basis of quorum for a stockholders meetingthe
outstanding capital stock as indicated in the articles of incorporation or that
contained in the companys stock and transfer book?

Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 41473[1]
promulgated on 18 August 1997, affirming the SEC Order dated 20 June 1996, and
the Resolution[2] of the Court of Appeals dated 31 October 1997 which denied
petitioners motion for reconsideration.

The antecedents are not disputed.

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated,
with seven hundred (700) founders shares and seventy-six (76) common shares as
its initial capital stock subscription reflected in the articles of incorporation.
However, private respondents and their predecessors who were in control of PMMSI
registered the companys stock and transfer book for the first time in 1978,
recording thirty-three (33) common shares as the only issued and outstanding
shares of PMMSI. Sometime in 1979, a special stockholders meeting was called and
held on the basis of what was considered as a quorum of twenty-seven (27)
common shares, representing more than two-thirds (2/3) of the common shares
issued and outstanding.

77
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition
with the Securities and Exchange Commission (SEC) for the registration of their
property rights over one hundred (120) founders shares and twelve (12) common
shares owned by their father. The SEC hearing officer held that the heirs of Acayan
were entitled to the claimed shares and called for a special stockholders meeting
to elect a new set of officers.[3] The SEC En Banc affirmed the decision. As a result,
the shares of Acayan were recorded in the stock and transfer book.

On 06 May 1992, a special stockholders meeting was held to elect a new set of
directors. Private respondents thereafter filed a petition with the SEC questioning
the validity of the 06 May 1992 stockholders meeting, alleging that the quorum for
the said meeting should not be based on the 165 issued and outstanding shares as
per the stock and transfer book, but on the initial subscribed capital stock of seven
hundred seventy-six (776) shares, as reflected in the 1952 Articles of
Incorporation. The petition was dismissed.[4] Appeal was made to the SEC En
Banc, which granted said appeal, holding that the shares of the deceased
incorporators should be duly represented by their respective administrators or
heirs concerned. The SEC directed the parties to call for a stockholders meeting on
the basis of the stockholdings reflected in the articles of incorporation for the
purpose of electing a new set of officers for the corporation.[5]

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court
of Appeals.[6] Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato
Cervantes, stockholders and directors of PMMSI, earlier filed another petition for
review of the same SEC En Bancs orders. The petitions were thereafter
consolidated.[7] The consolidated petitions essentially raised the following issues,
viz: (a) whether the basis the outstanding capital stock and accordingly also for
determining the quorum at stockholders meetings it should be the 1978 stock and
transfer book or if it should be the 1952 articles of incorporation; and (b) whether
the Court of Appeals gravely erred in applying the Espejo Decision to the benefit of
respondents.[8] The Espejo Decision is the decision of the SEC en banc in SEC Case
No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and
transfer book.

The Court of Appeals held that for purposes of transacting business, the quorum
should be based on the outstanding capital stock as found in the articles of
incorporation.[9] As to the second issue, the Court of Appeals held that the ruling
in the Acayan case would ipso facto benefit the private respondents, since to
require a separate judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense. Besides, the Court of
Appeals added, the incorporators have already proved their stockholdings through
the provisions of the articles of incorporation.[10]

In the instant petition, petitioners claim that the 1992 stockholders meeting was
valid and legal. They submit that reliance on the 1952 articles of incorporation for

78
determining the quorum negates the existence and validity of the stock and
transfer book which private respondents themselves prepared. In addition, they
posit that private respondents cannot avail of the benefits secured by the heirs of
Acayan, as private respondents must show and prove entitlement to the founders
and common shares in a separate and independent action/proceeding.

In private respondents Memorandum[11] dated 08 March 2000, they point out that
the instant petition raises the same facts and issues as those raised in G.R. No.
131315[12], which was denied by the First Division of this Court on 18 January
1999 for failure to show that the Court of Appeals committed any reversible error.
They add that as a logical consequence, the instant petition should be dismissed
on the ground of res judicata. Furthermore, private respondents claim that in view
of the applicability of the rule on res judicata, petitioners counsel should be cited
for contempt for violating the rule against forum-shopping.[13]

For their part, petitioners claim that the principle of res judicata does not apply to
the instant case. They argue that the instant petition is separate and distinct from
G.R. No. 131315, there being no identity of parties, and more importantly, the
parties in the two petitions have their own distinct rights and interests in relation
to the subject matter in litigation. For the same reasons, they claim that counsel
for petitioners cannot be found guilty of forum-shopping.[14]

In their Manifestation and Motion[15] dated 22 September 2004, private

respondents moved for the dismissal of the instant petition in view of the dismissal
of G.R. No. 131315. Attached to the said manifestation is a copy of the Entry of
Judgment[16] issued by the First Division dated 01 December 1999.

The petition must be denied, not on res judicata, but on the ground that like the
petition in G.R. No. 131315 it fails to impute reversible error to the challenged
Court of Appeals Decision.

Res judicata does not apply in

the case at bar.

Res judicata means a matter adjudged, a thing judicially acted upon or decided; a
thing or matter settled by judgment.[17] The doctrine of res judicata provides that
a final judgment, on the merits rendered by a court of competent jurisdiction is
conclusive as to the rights of the parties and their privies and constitutes an
absolute bar to subsequent actions involving the same claim, demand, or cause of
action.[18] The elements of res judicata are (a) identity of parties or at least such
as representing the same interest in both actions; (b) identity of rights asserted
and relief prayed for, the relief being founded on the same facts; and (c) the
identity in the two (2) particulars is such that any judgment which may be
rendered in the other action will, regardless of which party is successful, amount to
res judicata in the action under consideration.[19]

79
There is no dispute as to the identity of subject matter since the crucial point in
both cases is the propriety of including the still unproven shares of respondents for
purposes of determining the quorum. Petitioners, however, deny that there is
identity of parties and causes of actions between the two petitions.

The test often used in determining whether causes of action are identical is to
ascertain whether the same facts or evidence would support and establish the
former and present causes of action.[20] More significantly, there is identity of
causes of action when the judgment sought will be inconsistent with the prior
judgment.[21] In both petitions, petitioners assert that the Court of Appeals
Decision effectively negates the existence and validity of the stock and transfer
book, as well as automatically grants private respondents shares of stocks which
they do not own, or the ownership of which remains to be unproved. Petitioners in
the two petitions rely on the entries in the stock and transfer book as the proper
basis for computing the quorum, and consequently determine the degree of control
one has over the company. Essentially, the affirmance of the SEC Order had the
effect of diminishing their control and interests in the company, as it allowed the
participation of the individual private respondents in the election of officers of the
corporation.

Absolute identity of parties is not a condition sine qua non for res judicata to
applya shared identity of interest is sufficient to invoke the coverage of the
principle.[22] However, there is no identity of parties between the two cases. The
parties in the two petitions have their own rights and interests in relation to the
subject matter in litigation. As stated by petitioners in their Reply to Respondents
Memorandum,[23] there are no two separate actions filed, but rather, two separate
petitions for review on certiorari filed by two distinct parties with the Court and
represented by their own counsels, arising from an adverse consolidated decision
promulgated by the Court of Appeals in one action or proceeding.[24] As such, res
judicata is not present in the instant case.

Likewise, there is no basis for declaring petitioners or their counsel guilty of

violating the rules against forum-shopping. In the Verification/Certification[25]
portion of the petition, petitioners clearly stated that there was then a pending
motion for reconsideration of the 18 August 1997 Decision of the Court of Appeals
in the consolidated cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed
by the Abuids, as well as a motion for clarification. Moreover, the records indicate
that petitioners filed their Manifestation[26] dated 20 January 1998, informing the
Court of their receipt of the petition in G.R. No. 131315 in compliance with their
duty to inform the Court of the pendency of another similar petition. The Court
finds that petitioners substantially complied with the rules against forum-shopping.

The Decision of the Court of

Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues
and arguments as those in G.R. No. 131315 which the First Division has long

80
denied with finality. The First Division found the petition before it inadequate in
failing to raise any reversible error on the part of the Court of Appeals. We reach a
similar conclusion as regards the present petition.

The crucial issue in this case is whether it is the companys stock and transfer book,
or its 1952 Articles of Incorporation, which determines stockholders shareholdings,
and provides the basis for computing the quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of
the corporation and the contractual relationships between the State and the
corporation, the stockholders and the State, and between the corporation and its
stockholders.[27] When PMMSI was incorporated, the prevailing law was Act No.
1459, otherwise known as The Corporation Law. Section 6 thereof states:

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are
residents of the Philippines, may form a private corporation for any lawful purpose
or purposes by filing with the Securities and Exchange Commission articles of
incorporation duly executed and acknowledged before a notary public, setting
forth:

....

(7) If it be a stock corporation, the amount of its capital stock, in lawful money of
the Philippines, and the number of shares into which it is divided, and if such stock
be in whole or in part without par value then such fact shall be stated; Provided,
however, That as to stock without par value the articles of incorporation need only
state the number of shares into which said capital stock is divided.

(8) If it be a stock corporation, the amount of capital stock or number of shares of

no-par stock actually subscribed, the amount or number of shares of no-par stock
subscribed by each and the sum paid by each on his subscription. . . .[28]

A review of PMMSIs articles of incorporation[29] shows that the corporation

complied with the requirements laid down by Act No. 1459. It provides in part:

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS
(P90,000.00) divided into two classes, namely:

FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00

....

81
8. That the amount of the entire capital stock which has been actually subscribed
is TWENTY ONE THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following
persons have subscribed for the number of shares and amount of capital stock set
out after their respective names:

SUBSCRIBER

SUBSCRIBED

AMOUNT SUBSCRIBED

No. of Shares

Par Value

Crispulo J. Onrubia

120 Founders

P 2,400.00

Juan H. Acayan

120 "

2, 400.00

Martin P. Sagarbarria

100 "

2, 000.00

Mauricio G. Gallaga

50 "

1, 000.00

Luis Renteria

50 "

82
1, 000.00

Faustina M. de Onrubia

140 "

2, 800.00

Mrs. Ramon Araneta

40 "

800.00

Carlos M. Onrubia

80 "

1,600.00

700

P 14,000.00

SUBSCRIBER

SUBSCRIBED

No. of Shares

AMOUNT SUBSCRIBED

Par Value

Crispulo J. Onrubia

12 Common

P 1,200.00

83
Juan H. Acayan

12 "

1,200.00

Martin P. Sagarbarria

8"

800.00

Mauricio G. Gallaga

8"

800.00

Luis Renteria

8"

800.00

Faustina M. de Onrubia

12 "

1,200.00

Mrs. Ramon Araneta

8"

800.00

Carlos M. Onrubia

8"

800.00

76

84
P 7,600.00[30]

There is no gainsaying that the contents of the articles of incorporation are

binding, not only on the corporation, but also on its shareholders. In the instant
case, the articles of incorporation indicate that at the time of incorporation, the
incorporators were bona fide stockholders of seven hundred (700) founders shares
and seventy-six (76) common shares. Hence, at that time, the corporation had 776
issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names
and addresses of all stockholders arranged alphabetically, the installments paid
and unpaid on all stock for which subscription has been made, and the date of
payment thereof; a statement of every alienation, sale or transfer of stock made,
the date thereof and by and to whom made; and such other entries as may be
prescribed by law.[31] A stock and transfer book is necessary as a measure of
precaution, expediency and convenience since it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of
showing the ownership of stock and like matters.[32] However, a stock and
transfer book, like other corporate books and records, is not in any sense a public
record, and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein.[33] In fact, it is generally held that the
records and minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only,[34] and may be impeached or even
contradicted by other competent evidence.[35] Thus, parol evidence may be
admitted to supply omissions in the records or explain ambiguities, or to contradict
such records.[36]

In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the
Philippines supplanted Act No. 1459. BP Blg. 68 provides:

Sec. 24. Election of directors or trustees.At all elections of directors or trustees,

there must be present, either in person or by representative authorized to act by
written proxy, the owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote. . . .

Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or majority of the members in the case of non-stock
corporation.

Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined. The term outstanding capital stock as
used in this code, means the total shares of stock issued to subscribers or
stockholders whether or not fully or partially paid (as long as there is binding
subscription agreement) except treasury shares.

85
Thus, quorum is based on the totality of the shares which have been subscribed
and issued, whether it be founders shares or common shares.[37] In the instant
case, two figures are being pitted against each other those contained in the
articles of incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not

inaccurate stock and transfer book, and completely disregarding the issued and
outstanding shares as indicated in the articles of incorporation would work injustice
to the owners and/or successors in interest of the said shares. This case is one
instance where resort to documents other than the stock and transfer books is
necessary. The stock and transfer book of PMMSI cannot be used as the sole basis
for determining the quorum as it does not reflect the totality of shares which have
been subscribed, more so when the articles of incorporation show a significantly
larger amount of shares issued and outstanding as compared to that listed in the
stock and transfer book. As aptly stated by the SEC in its Order dated 15 July 1996:
[38]

It is to be explained, that if at the onset of incorporation a corporation has 771

shares subscribed, the Stock and Transfer Book should likewise reflect 771 shares.
Any sale, disposition or even reacquisition of the company of its own shares, in
which it becomes treasury shares, would not affect the total number of shares in
the Stock and Transfer Book. All that will change are the entries as to the owners of
the shares but not as to the amount of shares already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given
probative value. Did the shares, which were not recorded in the Stock and Transfer
Book, but were recorded in the Articles of Iincorporation just vanish into thin air? . .
. .[39]

As shown above, at the time the corporation was set-up, there were already seven
hundred seventy-six (776) issued and outstanding shares as reflected in the
articles of incorporation. No proof was adduced as to any transaction effected on
these shares from the time PMMSI was incorporated up to the time the instant
petition was filed, except for the thirty-three (33) shares which were recorded in
the stock and transfer book in 1978, and the additional one hundred thirty-two
(132) in 1982. But obviously, the shares so ordered recorded in the stock and
transfer book are among the shares reflected in the articles of incorporation as the
shares subscribed to by the incorporators named therein.

One who is actually a stockholder cannot be denied his right to vote by the
corporation merely because the corporate officers failed to keep its records
accurately.[40] A corporations records are not the only evidence of the ownership
of stock in a corporation.[41] In an American case,[42] persons claiming
shareholders status in a professional corporation were listed as stockholders in the
amendment to the articles of incorporation. On that basis, they were in all respects

86
treated as shareholders. In fact, the acts and conduct of the parties may even
constitute sufficient evidence of ones status as a shareholder or member.[43] In
the instant case, no less than the articles of incorporation declare the incorporators
to have in their name the founders and several common shares. Thus, to disregard
the contents of the articles of incorporation would be to pretend that the basic
document which legally triggered the creation of the corporation does not exist
and accordingly to allow great injustice to be caused to the incorporators and their
heirs.

Petitioners argue that the Court of Appeals gravely erred in applying the Espejo
decision to the benefit of respondents. The Court believes that the more precise
statement of the issue is whether in its assailed Decision, the Court of Appeals can
declare private respondents as the heirs of the incorporators, and consequently
register the founders shares in their name. However, this issue as recast is not
actually determinative of the present controversy as explained below.

Petitioners claim that the Decision of the Court of Appeals unilaterally divested
them of their shares in PMMSI as recorded in the stock and transfer book and
instantly created inexistent shares in favor of private respondents. We do not
agree.

The assailed Decision merely declared that a separate judicial declaration to

recognize the shares of the original incorporators would entail unnecessary delay
and expense on the part of the litigants, considering that the incorporators had
already proved ownership of such shares as shown in the articles of incorporation.
[44] There was no declaration of who the individual owners of these shares were
on the date of the promulgation of the Decision. As properly stated by the SEC in
its Order dated 20 June 1996, to which the appellate courts Decision should be
related, if at all, the ownership of these shares should only be subjected to the
proper judicial (probate) or extrajudicial proceedings in order to determine the
respective shares of the legal heirs of the deceased incorporators.[45]

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs
against petitioners.

SO ORDERED.

Today is Wednesday, February 15, 2017

search

Republic of the Philippines

SUPREME COURT
Manila

87
SECOND DIVISION

G.R. No.176897 December 11, 2013

ADVANCE PAPER CORPORATION and GEORGE HAW, in his capacity as President of

Advance Paper Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI and BENJAMIN NG,
Respondents.

x-------------------------------------------------x

ANTONIO TAN and UY SENG KEE WILLY, Respondents.

DECISION

BRION, J.:

Before us is a Petition for Review1 seeking to set aside the Decision of the Court of
Appeals (CA) in CA-G.R. CV No. 71499 dated March 31, 2006 and the Resolution
dated March 7, 2007.2 The Decision reversed and set aside the ruling of the
Regional Trial Court (RTC) of Manila, Branch 18 in Civil Case No. 94-72526 which
ordered Arma Traders Corporation (Arma Traders) to pay Advance Paper
Corporation (Advance Paper) the sum of P15,321,798.25 with interest, and
P1,500,000.00 for attorneys fees, plus the cost of the suit.3

Factual Antecedents

Petitioner Advance Paper is a domestic corporation engaged in the business of

producing, printing, manufacturing, distributing and selling of various paper
products.4 Petitioner George Haw (Haw) is the President while his wife, Connie
Haw, is the General Manager.5

Respondent Arma Traders is also a domestic corporation engaged in the wholesale

and distribution of school and office supplies, and novelty products.6 Respondent
Antonio Tan (Tan) was formerly the President while respondent Uy Seng Kee Willy
(Uy) is the Treasurer of Arma Traders.7 They represented Arma Traders when
dealing with its supplier, Advance Paper, for about 14 years.8

On the other hand, respondents Manuel Ting, Cheng Gui and Benjamin Ng worked
for Arma Traders as Vice-President, General Manager and Corporate Secretary,
respectively.9

88
On various dates from September to December 1994, Arma Traders purchased on
credit notebooks and other paper products amounting to P7,533,001.49 from
Advance Paper. 10

Upon the representation of Tan and Uy, Arma Traders also obtained three loans
from Advance Paper in November 1994 in the amounts of P3,380,171.82,
P1,000,000.00, and P3,408,623.94 or a total of P7,788,796.76.11 Arma Traders
needed the loan to settle its obligations to other suppliers because its own
collectibles did not arrive on time.12 Because of its good business relations with
Arma Traders, Advance Paper extended the loans.13

As payment for the purchases on credit and the loan transactions, Arma Traders
issued 82 postdated checks14 payable to cash or to Advance Paper. Tan and Uy
were Arma Traders authorized bank signatories who signed and issued these
checks which had the aggregate amount of P15,130,636.87.15

Advance Paper presented the checks to the drawee bank but these were
dishonored either for "insufficiency of funds" or "account closed." Despite repeated
demands, however, Arma Traders failed to settle its account with Advance Paper.16

On December 29, 1994, the petitioners filed a complaint17 for collection of sum of
money with application for preliminary attachment against Arma Traders, Tan, Uy,
Ting, Gui, and Ng.

Claims of the petitioners

The petitioners claimed that the respondents fraudulently issued the postdated
checks as payment for the purchases and loan transactions knowing that they did
not have sufficient funds with the drawee banks.18

To prove the purchases on credit, the petitioners presented the summary of the
transactions and their corresponding sales invoices as their documentary
evidence.19

During the trial, Haw also testified that within one or two weeks upon delivery of
the paper products, Arma Traders paid the purchases in the form of postdated
checks. Thus, he personally collected these checks on Saturdays and upon
receiving the checks, he surrendered to Arma Traders the original of the sales
invoices while he retained the duplicate of the invoices.20

To prove the loan transactions, the petitioners presented the copies of the
checks21 which Advance Paper issued in favor of Arma Traders. The petitioners
also filed a manifestation22 dated June 14, 1995, submitting a bank statement
from Metrobank EDSA Kalookan Branch. This was to show that Advance Papers
credit line with Metrobank has been transferred to the account of Arma Traders as
payee from October 1994 to December 1994.

89
Moreover, Haw testified to prove the loan transactions. When asked why he
considered extending the loans without any collateral and loan agreement or
promissory note, and only on the basis of the issuance of the postdated checks, he
answered that it was because he trusted Arma Traders since it had been their
customer for a long time and that none of the previous checks ever bounced.23

Claims of the respondents

The respondents argued that the purchases on credit were spurious, simulated and
fraudulent since there was no delivery of the P7,000,000.00 worth of notebooks
and other paper products.24

During the trial, Ng testified that Arma Traders did not purchase notebooks and
other paper products from September to December 1994. He claimed that during
this period, Arma Traders concentrated on Christmas items, not school and office
supplies. He also narrated that upon learning about the complaint filed by the
petitioners, he immediately looked for Arma Traders records and found no receipts
involving the purchases of notebooks and other paper products from Advance
Paper.25

As to the loan transactions, the respondents countered that these were the
personal obligations of Tan and Uy to Advance Paper. These loans were never
intended to benefit the respondents.

The respondents also claimed that the loan transactions were ultra vires because
the board of directors of Arma Traders did not issue a board resolution authorizing
Tan and Uy to obtain the loans from Advance Paper. They claimed that the
borrowing of money must be done only with the prior approval of the board of
directors because without the approval, the corporate officers are acting in excess
of their authority or ultra vires. When the acts of the corporate officers are ultra
vires, the corporation is not liable for whatever acts that these officers committed
in excess of their authority. Further, the respondents claimed that Advance Paper
failed to verify Tan and Uys authority to transact business with them. Hence,
Advance Paper should suffer the consequences.26

The respondents accused Tan and Uy for conspiring with the petitioners to defraud
Arma Traders through a series of transactions known as rediscounting of postdated
checks. In rediscounting, the respondents explained that Tan and Uy would issue
Arma Traders postdated checks to the petitioners in exchange for cash, discounted
by as much as 7% to 10% depending on how long were the terms of repayment.
The rediscounted percentage represented the interest or profit earned by the
petitioners in these transactions.27

Tan did not file his Answer and was eventually declared in default.

90
On the other hand, Uy filed his Answer28 dated January 20, 1995 but was
subsequently declared in default upon his failure to appear during the pre-trial. In
his Answer, he admitted that Arma Traders together with its corporate officers have
been transacting business with Advance Paper.29 He claimed that he and Tan have
been authorized by the board of directors for the past 13 years to issue checks in
behalf of Arma Traders to pay its obligations with Advance Paper.30 Furthermore,
he admitted that Arma Traders checks were issued to pay its contractual
obligations with Advance Paper.31 However, according to him, Advance Paper was
informed beforehand that Arma Traders checks were funded out of the
P20,000,000.00 worth of collectibles coming from the provinces. Unfortunately, the
expected collectibles did not materialize for unknown reasons.32

Ng filed his Answer33 and claimed that the management of Arma Traders was left
entirely to Tan and Uy. Thus, he never participated in the companys daily
transactions.34

Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders Vice-President for Legal Affairs and
Credit and Collection, testified that he investigated the transactions involving Tan
and Uy and discovered that they were financing their own business using Arma
Traders resources. He also accused Haw for conniving with Tan and Uy in
fraudulently making Arma Traders liable for their personal debts. He based this
conclusion from the following: First, basic human experience and common sense
tell us that a lender will not agree to extend additional loan to another person who
already owes a substantial sum from the lender in this case, petitioner Advance
Paper. Second, there was no other document proving the existence of the loan
other than the postdated checks. Third, the total of the purchase and loan
transactions vis--vis the total amount of the postdated checks did not tally.
Fourth, he found out that the certified true copy of Advance Papers report with the
Securities and Exchange Commission (SEC report) did not reflect the
P15,000,000.00 collectibles it had with Arma Traders.35

Atty. Ang also testified that he already filed several cases of estafa and qualified
theft36 against Tan and Uy and that several warrants of arrest had been issued
against them.

In their pre-trial brief,37 the respondents named Sharow Ong, the secretary of Tan
and Uy, to testify on how Tan and Uy conspired with the petitioners to defraud
Arma Traders. However, the respondents did not present her on the witness stand.

The RTC Ruling

On June 18, 2001, the RTC ruled that the purchases on credit and loans were
sufficiently proven by the petitioners. Hence, the RTC ordered Arma Traders to pay
Advance Paper the sum of P15,321,798.25 with interest, and P1,500,000.00 for
attorneys fees, plus the cost of the suit.

91
The RTC held that the respondents failed to present hard, admissible and credible
evidence to prove that the sale invoices were forged or fictitious, and that the loan
transactions were personal obligations of Tan and Uy. Nonetheless, the RTC
dismissed the complaint against Tan, Uy, Ting, Gui and Ng due to the lack of
evidence showing that they bound themselves, either jointly or solidarily, with
Arma Traders for the payment of its account.38

Arma Traders appealed the RTC decision to the CA.

The CA Ruling

The CA held that the petitioners failed to prove by preponderance of evidence the
existence of the purchases on credit and loans based on the following grounds:

First, Arma Traders was not liable for the loan in the absence of a board resolution
authorizing Tan and Uy to obtain the loan from Advance Paper.39 The CA
acknowledged that Tan and Uy were Arma Traders authorized bank signatories.
However, the CA explained that this is not sufficient because the authority to sign
the checks is different from the required authority to contract a loan.40

Second, the CA also held that the petitioners presented incompetent and
inadmissible evidence to prove the purchases on credit since the sales invoices
were hearsay.41 The CA pointed out that Haws testimony as to the identification
of the sales invoices was not an exception to the hearsay rule because there was
no showing that the secretaries who prepared the sales invoices are already dead
or unable to testify as required by the Rules of Court.42 Further, the CA noted that
the secretaries were not identified or presented in court.43

Third, the CA ruling heavily relied on Ngs Appellants Brief44 which made the
detailed description of the "badges of fraud." The CA averred that the petitioners
failed to satisfactorily rebut the badges of fraud45 which include the
inconsistencies in:

(1) "Exhibit E-26," a postdated check, which was allegedly issued in favor of
Advance Paper but turned out to be a check payable to Top Line, Advance Papers
sister company;46

(2) "Sale Invoice No. 8946," an evidence to prove the existence of the purchases
on credit, whose photocopy failed to reflect the amount stated in the duplicate
copy,47 and;

(3) The SEC report of Advance Paper for the year ended 1994 reflected its account
receivables amounting to P219,705.19 only an amount far from the claimed
P15,321,798.25 receivables from Arma Traders.48

92
Hence, the CA set aside the RTCs order for Arma Traders to pay Advance Paper the
sum of P15,321,798.25, P1,500,000.00 for attorneys fees, plus cost of suit.49 It
affirmed the RTC decision dismissing the complaint against respondents Tan, Uy,
Ting, Gui and Ng.50 The CA also directed the petitioners to solidarily pay each of
the respondents their counterclaims of P250,000.00 as moral damages,
P250,000.00 as exemplary damages, and P250,000.00 as attorneys fees.51

The Petition

The petitioners raise the following arguments.

First, Arma Traders led the petitioners to believe that Tan and Uy had the authority
to obtain loans since the respondents left the active and sole management of the
company to Tan and Uy since 1984. In fact, Ng testified that Arma Traders
stockholders and board of directors never conducted a meeting from 1984 to 1995.
Therefore, if the respondents position will be sustained, they will have the absurd
power to question all the business transactions of Arma Traders.52 Citing Lipat v.
Pacific Banking Corporation,53 the petitioners said that if a corporation knowingly
permits one of its officers or any other agent to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts;
thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agents authority.

Second, the petitioners argue that Haws testimony is not hearsay. They emphasize
that Haw has personal knowledge of the assailed purchases and loan transactions
because he dealt with the customers, and supervised and directed the preparation
of the sales invoices and the deliveries of the goods.54 Moreover, the petitioners
stress that the respondents never objected to the admissibility of the sales invoices
on the ground that they were hearsay.55

Third, the petitioners dispute the CAs findings on the existence of the badges of
fraud. The petitioners countered:

(1) The discrepancies between the figures in the 15 out of the 96 photocopies and
duplicate originals of the sales invoices amounting to P4,624.80 an insignificant
amount compared to the total purchases of P7,533,001.49 may have been
caused by the failure to put the carbon paper.56 Besides, the remaining 81 sales
invoices are uncontroverted. The petitioners also raise the point that this
discrepancy is a nonissue because the duplicate originals were surrendered in the
RTC.57

(2) The respondents misled Haw during the cross-examination and took his answer
out of context.58 The petitioners argue that this maneuver is insufficient to
discredit Haws entire testimony.59

93
(3) Arma Traders should be faulted for indicating Top Line as the payee in Exhibit E-
26 or PBC check no. 091014. Moreover, Exhibit E-26 does not refer to PBC check
no. 091014 but to PBC check no. 091032 payable to the order of cash.60

(4) The discrepancy in the total amount of the checks which is P15,130,363.87 as
against the total obligation of P15,321,798.25 does not necessarily prove that the
transactions are spurious.61

(5) The difference in Advance Papers accounts receivables in the SEC report and in
Arma Traders obligation with Advance Paper was based on non-existent evidence
because Exhibit 294-NG does not pertain to any balance sheet.62 Moreover, the
term "accounts receivable" is not synonymous with "cause of action." The
respondents cannot escape their liability by simply pointing the SEC report
because the petitioners have established their cause of action that the purchases
on credit and loan transactions took place, the respondents issued the dishonored
checks to cover their debts, and they refused to settle their obligation with
Advance Paper.63

The Case for the Respondents

The respondents argue that the Petition for Review should be dismissed summarily
because of the following procedural grounds: first, for failure to comply with A.M.
No. 02-8-13-SC;64 and second, the CA decision is already final and executory since
the petitioners filed their Motion for Reconsideration out of time. They explain that
under the rules of the CA, if the last day for filing of any pleading falls on a
Saturday not a holiday, the same must be filed on said Saturday, as the Docket
and Receiving Section of the CA is open on a Saturday.65

The respondents argue that while as a general rule, a corporation is estopped from
denying the authority of its agents which it allowed to deal with the general public;
this is only true if the person dealing with the agent dealt in good faith.66 In the
present case, the respondents claim that the petitioners are in bad faith because
the petitioners connived with Tan and Uy to make Arma Traders liable for the non-
existent deliveries of notebooks and other paper products.67 They also insist that
the sales invoices are manufactured evidence.68

As to the loans, the respondents aver that these were Tan and Uys personal
obligations with Advance Paper.69 Moreover, while the three cashiers checks were
deposited in the account of Arma Traders, it is likewise true that Tan and Uy issued
Arma Traders checks in favor of Advance Paper. All these checks are evidence of
Tan, Uy and Haws systematic conspiracy to siphon Arma Traders corporate
funds.70

The respondents also seek to discredit Haws testimony on the basis of the
following. First, his testimony as regards the sales invoices is hearsay because he
did not personally prepare these documentary evidence.71 Second, Haw

94
suspiciously never had any written authority from his own Board of Directors to
lend money. Third, the respondents also questioned why Advance Paper granted
the P7,000,000.00 loan without requiring Arma Traders to present any collateral or
guarantees.72

The Issues

The main procedural and substantive issues are:

I. Whether the petition for review should be dismissed for failure to comply with
A.M. No. 02-8-13-SC.

II. Whether the petition for review should be dismissed on the ground of failure to
file the motion for reconsideration with the CA on time.

III. Whether Arma Traders is liable to pay the loans applying the doctrine of
apparent authority.

IV. Whether the petitioners proved Arma Traders liability on the purchases on
credit by preponderance of evidence.

The Court's Ruling

We grant the petition.

The procedural issues.

First, the respondents correctly cited A.M. No. 02-8-13-SC dated February 19, 2008
which refer to the amendment of the 2004 Rules on Notarial Practice. It deleted the
Community Tax Certificate among the accepted proof of identity of the affiant
because of its inherent unreliability. The petitioners violated this when they used
Community Tax Certificate No. 05730869 in their Petition for Review.73
Nevertheless, the defective jurat in the Verification/Certification of Non-Forum
Shopping is not a fatal defect because it is only a formal, not a jurisdictional,
requirement that the Court may waive.74 Furthermore, we cannot simply ignore
the millions of pesos at stake in this case. To do so might cause grave injustice to a
party, a situation that this Court intends to avoid.

Second, no less than the CA itself waived the rules on the period to file the motion
for reconsideration. A review of the CA Resolution75 dated March 7, 2007, reveals
that the petitioners Motion for Reconsideration was denied because the
allegations were a mere rehash of what the petitioners earlier argued not
because the motion for reconsideration was filed out of time.

The substantive issues.

95
Arma Traders is liable to pay the
loans on the basis of the doctrine of
apparent authority.

The doctrine of apparent authority provides that a corporation will be estopped

from denying the agents authority if it knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority, and it holds him out
to the public as possessing the power to do those acts.76 The doctrine of apparent
authority does not apply if the principal did not commit any acts or conduct which
a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agents acts or conduct must have produced a
change of position to the third partys detriment.77

In Inter-Asia Investment Industries v. Court of Appeals,78 we explained:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and
responsibility to decide whether the corporation should enter into a contract that
will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, just as a natural
person who may authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from
the board, either expressly or impliedly by habit, custom or acquiescence in the
general course of business, viz.:

A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred
upon him, and this includes powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has
caused person dealing with the officer or agent to believe that it has conferred.

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, within or
beyond the scope of his ordinary powers. It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of other parties. It is not the
quantity of similar acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation. [emphases and
underscores ours]

96
In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals,79 we ruled that
the doctrine of apparent authority is applied when the petitioner, through its
president Antonio Punsalan Jr., entered into the First Contract without first securing
board approval. Despite such lack of board approval, petitioner did not object to or
repudiate said contract, thus "clothing" its president with the power to bind the
corporation.

"Inasmuch as a corporate president is often given general supervision and control

over corporate operations, the strict rule that said officer has no inherent power to
act for the corporation is slowly giving way to the realization that such officer has
certain limited powers in the transaction of the usual and ordinary business of the
corporation."80 "In the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the domain of the
general objectives of its business and within the scope of his or her usual
duties."81

In the present petition, we do not agree with the CAs findings that Arma Traders is
not liable to pay the loans due to the lack of board resolution authorizing Tan and
Uy to obtain the loans. To begin with, Arma Traders Articles of Incorporation82
provides that the corporation may borrow or raise money to meet the financial
requirements of its business by the issuance of bonds, promissory notes and other
evidence of indebtedness. Likewise, it states that Tan and Uy are not just ordinary
corporate officers and authorized bank signatories because they are also Arma
Traders incorporators along with respondents Ng and Ting, and Pedro Chao.
Furthermore, the respondents, through Ng who is Arma Traders corporate
secretary, incorporator, stockholder and director, testified that the sole
management of Arma Traders was left to Tan and Uy and that he and the other
officers never dealt with the business and management of Arma Traders for 14
years. He also confirmed that since 1984 up to the filing of the complaint against
Arma Traders, its stockholders and board of directors never had its meeting.83

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to
transact with third persons without the necessary written authority from its non-
performing board of directors. Arma Traders failed to take precautions to prevent
its own corporate officers from abusing their powers. Because of its own laxity in
its business dealings, Arma Traders is now estopped from denying Tan and Uys
authority to obtain loan from Advance Paper.

We also reject the respondents claim that Advance Paper, through Haw, connived
with Tan and Uy. The records do not contain any evidence to prove that the loan
transactions were personal to Tan and Uy. A different conclusion might have been
inferred had the cashiers checks been issued in favor of Tan and Uy, and had the
postdated checks in favor of Advance Paper been either Tan and/or Uys, or had the
respondents presented convincing evidence to show how Tan and Uy conspired
with the petitioners to defraud Arma Traders.84 We note that the respondents
initially intended to present Sharow Ong, the secretary of Tan and Uy, to testify on

97
how Advance Paper connived with Tan and Uy. As mentioned, the respondents
failed to present her on the witness stand.

The respondents failed to object to

the admissibility of the sales invoices
on the ground that they are hearsay

The rule is that failure to object to the offered evidence renders it admissible, and
the court cannot, on its own, disregard such evidence.85 When a party desires the
court to reject the evidence offered, it must so state in the form of a timely
objection and it cannot raise the objection to the evidence for the first time on
appeal. Because of a partys failure to timely object, the evidence becomes part of
the evidence in the case. Thereafter, all the parties are considered bound by any
outcome arising from the offer of evidence properly presented.86

In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M. Ureta,87 however, we

held:

[H]earsay evidence whether objected to or not cannot be given credence for

having no probative value.1wphi1 This principle, however, has been relaxed in
cases where, in addition to the failure to object to the admissibility of the subject
evidence, there were other pieces of evidence presented or there were other
circumstances prevailing to support the fact in issue. (emphasis and underscore
ours; citation omitted)

We agree with the respondents that with respect to the identification of the sales
invoices, Haws testimony was hearsay because he was not present during its
preparation88 and the secretaries who prepared them were not presented to
identify them in court. Further, these sales invoices do not fall within the
exceptions to the hearsay rule even under the "entries in the course of business"
because the petitioners failed to show that the entrant was deceased or was
unable to testify.89

But even though the sales invoices are hearsay, nonetheless, they form part of the
records of the case for the respondents failure to object as to the admissibility of
the sales invoices on the ground that they are hearsay.90 Based on the records,
the respondents through Ng objected to the offer "for the purpose [to] which they
are being offered" only not on the ground that they were hearsay.91

The petitioners have proven their

claims for the unpaid purchases on
credit by preponderance of evidence.

We are not convinced by the respondents argument that the purchases are
spurious because no less than Uy admitted that all the checks issued were in
payments of the contractual obligations of the Arma Traders with Advance Paper.92

98
Moreover, there are other pieces of evidence to prove the existence of the
purchases other than the sales invoices themselves. For one, Arma Traders
postdated checks evince the existence of the purchases on credit. Moreover, Haw
testified that within one or two weeks, Arma Traders paid the purchases in the form
of postdated checks. He personally collected these checks on Saturdays and upon
receiving the checks, he surrendered to Arma Traders the original of the sales
invoices while he retained the duplicate of the invoices.93

The respondents attempted to impugn the credibility of Haw by pointing to the

inconsistencies they can find from the transcript of stenographic notes. However,
we are not persuaded that these inconsistencies are sufficiently pervasive to affect
the totality of evidence showing the general relationship between Advance Paper
and Arma Traders.

Additionally, the issue of credibility of witnesses is to be resolved primarily by the

trial court because it is in the better position to assess the credibility of witnesses
as it heard the testimonies and observed the deportment and manner of testifying
of the witnesses. Accordingly, its findings are entitled to great respect and will not
be disturbed on appeal in the absence of any showing that the trial court
overlooked, misunderstood, or misapplied some facts or circumstances of weight
and substance which would have affected the result of the case.94

In the present case, the RTC judge took into consideration the substance and the
manner by which Haw answered each propounded questions to him in the witness
stand. Hence, the minor inconsistencies in Haws testimony notwithstanding, the
RTC held that the respondents claim that the purchase and loan transactions were
spurious is "not worthy of serious consideration." Besides, the respondents failed
to convince us that the RTC judge overlooked, misunderstood, or misapplied some
facts or circumstances of weight and substance which would have affected the
result of the case.

On the other hand, we agree with the petitioners that the discrepancies in the
photocopy of the sales invoices and its duplicate copy have been sufficiently
explained. Besides, this is already a non-issue since the duplicate copies were
surrendered in the RTC.95 Furthermore, the fact that the value of Arma Traders'
checks does not tally with the total amount of their obligation with Advance Paper
is not inconsistent with the existence of the purchases and loan transactions.

As against the case and the evidence Advance Paper presented, the respondents
relied on the core theory of an alleged conspiracy between Tan, Uy and Haw to
defraud Arma Traders. However, the records are bereft of supporting evidence to
prove the alleged conspiracy. Instead, the respondents simply dwelled on the
minor inconsistencies from the petitioners' evidence that the respondents appear
to have magnified. From these perspectives, the preponderance of evidence thus
lies heavily in the petitioners' favor as the RTC found. For this reason, we find the
petition meritorious.

99
WHEREFORE, premises considered, we GRANT the petition. The decision dated
March 31, 2006 and the resolution dated March 7, 2007 of the Court of Appeals in
CA-G.R. CV No. 71499 are REVERSED and SET ASIDE. The Regional Trial Court
decision in Civil Case No. 94-72526 dated June 18, 2001 is REINSTATED. No costs.

SO ORDERED.

Today is Wednesday, February 15, 2017

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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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.

100
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 1951 P9,599.07
Surcharge therein2,399.77
As fixed tax for the years 1946 to 1952 70.00
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

101
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 profit or 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

102
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.

Today is Wednesday, February 15, 2017

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Search

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 191109 July 18, 2012

REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE RECLAMATION

AUTHORITY (PRA), Petitioner,
vs.
CITY OF PARANAQUE, Respondent.

103
DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, on pure questions of law, assailing the January 8, 2010 Order1 of the
Regional Trial Court, Branch 195, Parafiaque City (RTC), which ruled that petitioner
Philippine Reclamation Authority (PRA) is a government-owned and controlled
corporation (GOCC), a taxable entity, and, therefore, . not exempt from payment of
real property taxes. The pertinent portion of the said order reads:

In view of the finding of this court that petitioner is not exempt from payment of
real property taxes, respondent Paraaque City Treasurer Liberato M. Carabeo did
not act xxx without or in excess of jurisdiction, or with grave abuse of discretion
amounting to lack or in excess of jurisdiction in issuing the warrants of levy on the
subject properties.

WHEREFORE, the instant petition is dismissed. The Motion for Leave to File and
Admit Attached Supplemental Petition is denied and the supplemental petition
attached thereto is not admitted.

The Public Estates Authority (PEA) is a government corporation created by virtue of

Presidential Decree (P.D.) No. 1084 (Creating the Public Estates Authority, Defining
its Powers and Functions, Providing Funds Therefor and For Other Purposes) which
took effect on February 4,

1977 to provide a coordinated, economical and efficient reclamation of lands, and

the administration and operation of lands belonging to, managed and/or operated
by, the government with the object of maximizing their utilization and hastening
their development consistent with public interest.

On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued by then
President Ferdinand Marcos, PEA was designated as the agency primarily
responsible for integrating, directing and coordinating all reclamation projects for
and on behalf of the National Government.

On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O. No. 380
transforming PEA into PRA, which shall perform all the powers and functions of the
PEA relating to reclamation activities.

By virtue of its mandate, PRA reclaimed several portions of the foreshore and
offshore areas of Manila Bay, including those located in Paraaque City, and was
issued Original Certificates of Title (OCT Nos. 180, 202, 206, 207, 289, 557, and
559) and Transfer Certificates of Title (TCT Nos. 104628, 7312, 7309, 7311, 9685,
and 9686) over the reclaimed lands.

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On February 19, 2003, then Paraaque City Treasurer Liberato M. Carabeo
(Carabeo) issued Warrants of Levy on PRAs reclaimed properties (Central Business
Park and Barangay San Dionisio) located in Paraaque City based on the
assessment for delinquent real property taxes made by then Paraaque City
Assessor Soledad Medina Cue for tax years 2001 and 2002.

On March 26, 2003, PRA filed a petition for prohibition with prayer for temporary
restraining order (TRO) and/or writ of preliminary injunction against Carabeo before
the RTC.

On April 3, 2003, after due hearing, the RTC issued an order denying PRAs petition
for the issuance of a temporary restraining order.

On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to proceed
with the public auction of the subject reclaimed properties on April 7, 2003. In
response, Carabeo sent a letter stating that the public auction could not be
deferred because the RTC had already denied PRAs TRO application.

On April 25, 2003, the RTC denied PRAs prayer for the issuance of a writ of
preliminary injunction for being moot and academic considering that the auction
sale of the subject properties on April 7, 2003 had already been consummated.

On August 3, 2009, after an exchange of several pleadings and the failure of both
parties to arrive at a compromise agreement, PRA filed a Motion for Leave to File
and Admit Attached Supplemental Petition which sought to declare as null and void
the assessment for real property taxes, the levy based on the said assessment, the
public auction sale conducted on April 7, 2003, and the Certificates of Sale issued
pursuant to the auction sale.

On January 8, 2010, the RTC rendered its decision dismissing PRAs petition. In
ruling that PRA was not exempt from payment of real property taxes, the RTC
reasoned out that it was a GOCC under Section 3 of P.D. No. 1084. It was organized
as a stock corporation because it had an authorized capital stock divided into no
par value shares. In fact, PRA admitted its corporate personality and that said
properties were registered in its name as shown by the certificates of title.
Therefore, as a GOCC, local tax exemption is withdrawn by virtue of Section 193 of
Republic Act (R.A.) No. 7160 Local Government Code (LGC) which was the
prevailing law in 2001 and 2002 with respect to real property taxation. The RTC
also ruled that the tax exemption claimed by PRA under E.O. No. 654 had already
been expressly repealed by R.A. No. 7160 and that PRA failed to comply with the
procedural requirements in Section 206 thereof.

Not in conformity, PRA filed this petition for certiorari assailing the January 8, 2010
RTC Order based on the following GROUNDS

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THE TRIAL COURT GRAVELY ERRED IN FINDING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAX ON THE SUBJECT RECLAIMED LANDS CONSIDERING

THAT PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF THE NATIONAL

GOVERNMENT AND IS, THEREFORE, EXEMPT FROM PAYMENT OF REAL PROPERTY
TAX UNDER SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS--VIS MANILA INTERNATIONAL AIRPORT AUTHORITY V.
COURT OF APPEALS.

II

THE TRIAL COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT RECLAIMED

LANDS ARE PART OF THE PUBLIC DOMAIN AND, HENCE, EXEMPT FROM REAL
PROPERTY TAX.

PRA asserts that it is not a GOCC under Section 2(13) of the Introductory Provisions
of the Administrative Code. Neither is it a GOCC under Section 16, Article XII of the
1987 Constitution because it is not required to meet the test of economic viability.
Instead, PRA is a government instrumentality vested with corporate powers and
performing an essential public service pursuant to Section 2(10) of the Introductory
Provisions of the Administrative Code. Although it has a capital stock divided into
shares, it is not authorized to distribute dividends and allotment of surplus and
profits to its stockholders. Therefore, it may not be classified as a stock corporation
because it lacks the second requisite of a stock corporation which is the
distribution of dividends and allotment of surplus and profits to the stockholders.

It insists that it may not be classified as a non-stock corporation because it has no

members and it is not organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and like chambers as provided in Section
88 of the Corporation Code.

Moreover, PRA points out that it was not created to compete in the market place as
there was no competing reclamation company operated by the private sector. Also,
while PRA is vested with corporate powers under P.D. No. 1084, such circumstance
does not make it a corporation but merely an incorporated instrumentality and that
the mere fact that an incorporated instrumentality of the National Government
holds title to real property does not make said instrumentality a GOCC. Section 48,
Chapter 12, Book I of the Administrative Code of 1987 recognizes a scenario where
a piece of land owned by the Republic is titled in the name of a department,
agency or instrumentality.

Thus, PRA insists that, as an incorporated instrumentality of the National

Government, it is exempt from payment of real property tax except when the
beneficial use of the real property is granted to a taxable person. PRA claims that

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based on Section 133(o) of the LGC, local governments cannot tax the national
government which delegate to local governments the power to tax.

It explains that reclaimed lands are part of the public domain, owned by the State,
thus, exempt from the payment of real estate taxes. Reclaimed lands retain their
inherent potential as areas for public use or public service. While the subject
reclaimed lands are still in its hands, these lands remain public lands and form part
of the public domain. Hence, the assessment of real property taxes made on said
lands, as well as the levy thereon, and the public sale thereof on April 7, 2003,
including the issuance of the certificates of sale in favor of the respondent
Paraaque City, are invalid and of no force and effect.

On the other hand, the City of Paraaque (respondent) argues that PRA since its
creation consistently represented itself to be a GOCC. PRAs very own charter (P.D.
No. 1084) declared it to be a GOCC and that it has entered into several thousands
of contracts where it represented itself to be a GOCC. In fact, PRA admitted in its
original and amended petitions and pre-trial brief filed with the RTC of Paraaque
City that it was a GOCC.

Respondent further argues that PRA is a stock corporation with an authorized

capital stock divided into 3 million no par value shares, out of which 2 million
shares have been subscribed and fully paid up. Section 193 of the LGC of 1991 has
withdrawn tax exemption privileges granted to or presently enjoyed by all persons,
whether natural or juridical, including GOCCs.

Hence, since PRA is a GOCC, it is not exempt from the payment of real property
tax.

THE COURTS RULING

The Court finds merit in the petition.

Section 2(13) of the Introductory Provisions of the Administrative Code of 1987

defines a GOCC as follows:

SEC. 2. General Terms Defined. x x x x

(13) Government-owned or controlled corporation refers to any agency organized

as a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the
case of stock corporations, to the extent of at least fifty-one

(51) percent of its capital stock: x x x.

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On the other hand, Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not

integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. x x x

From the above definitions, it is clear that a GOCC must be "organized as a stock or
non-stock corporation" while an instrumentality is vested by law with corporate
powers. Likewise, when the law makes a government instrumentality operationally
autonomous, the instrumentality remains part of the National Government
machinery although not integrated with the department framework.

When the law vests in a government instrumentality corporate powers, the

instrumentality does not necessarily become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate
powers.

Many government instrumentalities are vested with corporate powers but they do
not become stock or non-stock corporations, which is a necessary condition before
an agency or instrumentality is deemed a GOCC. Examples are the Mactan
International Airport Authority, the Philippine Ports Authority, the University of the
Philippines, and Bangko Sentral ng Pilipinas. All these government
instrumentalities exercise corporate powers but they are not organized as stock or
non-stock corporations as required by Section 2(13) of the Introductory Provisions
of the Administrative Code. These government instrumentalities are sometimes
loosely called government corporate entities. They are not, however, GOCCs in the
strict sense as understood under the Administrative Code, which is the governing
law defining the legal relationship and status of government entities.2

Correlatively, Section 3 of the Corporation Code defines a stock corporation as one

whose "capital stock is divided into shares and x x x authorized to distribute to the
holders of such shares dividends x x x." Section 87 thereof defines a non-stock
corporation as "one where no part of its income is distributable as dividends to its
members, trustees or officers." Further, Section 88 provides that non-stock
corporations are "organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and like chambers."

Two requisites must concur before one may be classified as a stock corporation,
namely: (1) that it has capital stock divided into shares; and (2) that it is authorized
to distribute dividends and allotments of surplus and profits to its stockholders. If

108
only one requisite is present, it cannot be properly classified as a stock
corporation. As for non-stock corporations, they must have members and must not
distribute any part of their income to said members.3

In the case at bench, PRA is not a GOCC because it is neither a stock nor a non-
stock corporation. It cannot be considered as a stock corporation because although
it has a capital stock divided into no par value shares as provided in Section 74 of
P.D. No. 1084, it is not authorized to distribute dividends, surplus allotments or
profits to stockholders. There is no provision whatsoever in P.D. No. 1084 or in any
of the subsequent executive issuances pertaining to PRA, particularly, E.O. No.
525,5 E.O. No. 6546 and EO No. 7987 that authorizes PRA to distribute dividends,
surplus allotments or profits to its stockholders.

PRA cannot be considered a non-stock corporation either because it does not have
members. A non-stock corporation must have members.8 Moreover, it was not
organized for any of the purposes mentioned in Section 88 of the Corporation
Code. Specifically, it was created to manage all government reclamation projects.

Furthermore, there is another reason why the PRA cannot be classified as a GOCC.
Section 16, Article XII of the 1987 Constitution provides as follows:

Section 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 fundamental provision above authorizes Congress to create GOCCs through

special charters on two conditions: 1) the GOCC must be established for the
common good; and 2) the GOCC must meet the test of economic viability. In this
case, PRA may have passed the first condition of common good but failed the
second one - economic viability. Undoubtedly, the purpose behind the creation of
PRA was not for economic or commercial activities. Neither was it created to
compete in the market place considering that there were no other competing
reclamation companies being operated by the private sector. As mentioned earlier,
PRA was created essentially to perform a public service considering that it was
primarily responsible for a coordinated, economical and efficient reclamation,
administration and operation of lands belonging to the government with the object
of maximizing their utilization and hastening their development consistent with the
public interest. Sections 2 and 4 of P.D. No. 1084 reads, as follows:

Section 2. Declaration of policy. It is the declared policy of the State to provide for
a coordinated, economical and efficient reclamation of lands, and the
administration and operation of lands belonging to, managed and/or operated by
the government, with the object of maximizing their utilization and hastening their
development consistent with the public interest.

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Section 4. Purposes. The Authority is hereby created for the following purposes:

(a) To reclaim land, including foreshore and submerged areas, by dredging, filling
or other means, or to acquire reclaimed land;

(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and
sell any and all kinds of lands, buildings, estates and other forms of real property,
owned, managed, controlled and/or operated by the government.

(c) To provide for, operate or administer such services as may be necessary for the
efficient, economical and beneficial utilization of the above properties.

The twin requirement of common good and economic viability was lengthily
discussed in the case of Manila International Airport Authority v. Court of Appeals,9
the pertinent portion of which reads:

Third, the government-owned or controlled corporations created through special

charters are those that meet the two conditions prescribed in Section 16, Article XII
of the Constitution.

The first condition is that the government-owned or controlled corporation must be

established for the common good. The second condition is that the government-
owned or controlled corporation must meet the test of economic viability. Section
16, Article XII of the 1987 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 expressly authorizes the legislature to create "government-owned

or controlled corporations" through special charters only if these entities are
required to meet the twin conditions of common good and economic viability. In
other words, Congress has no power to create government-owned or controlled
corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform
economic or commercial activities and need to compete in the market place. Being
essentially economic vehicles of the State for the common good meaning for
economic development purposes these government-owned or controlled
corporations with special charters are usually organized as stock corporations just
like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and

performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common

110
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-
owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.

Thus, the Constitution imposes no limitation when the legislature creates

government instrumentalities vested with corporate powers but performing
essential governmental or public functions. Congress has plenary authority to
create government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services.
However, when the legislature creates through special charters corporations that
perform economic or commercial activities, such entities known as
"government-owned or controlled corporations" must meet the test of economic
viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank
of the Philippines and similar government-owned or controlled corporations, which
derive their incometo meet operating expenses solely from commercial
transactions in competition with the private sector. The intent of the Constitution is
to prevent the creation of government-owned or controlled corporations that
cannot survive on their own in the market place and thus merely drain the public
coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained

to the Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation
becomes exempt from the test of economic performance. We know what happened
in the past. If a government corporation loses, then it makes its claim upon the
taxpayers' money through new equity infusions from the government and what is
always invoked is the common good. That is the reason why this year, out of a
budget of P115 billion for the entire government, about P28 billion of this will go
into equity infusions to support a few government financial institutions. And this is
all taxpayers' money which could have been relocated to agrarian reform, to social
services like health and education, to augment the salaries of grossly underpaid
public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism
to excuse themselves from the responsibility of meeting the market test so that
they become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.1wphi1

111
Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the Philippines: A
Commentary:

The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase "in the interest of the common good
and subject to the test of economic viability." The addition includes the ideas that
they must show capacity to function efficiently in business and that they should
not go into activities which the private sector can do better. Moreover, economic
viability is more than financial viability but also includes capability to make profit
and generate benefits not quantifiable in financial terms.

Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential
public service does not excuse the State from withholding such essential services
from the public.

However, government-owned or controlled corporations with special charters,

organized essentially for economic or commercial objectives, must meet the test of
economic viability. These are the government-owned or controlled corporations
that are usually organized under their special charters as stock corporations, like
the Land Bank of the Philippines and the Development Bank of the Philippines.
These are the government-owned or controlled corporations, along with
government-owned or controlled corporations organized under the Corporation
Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code. [Emphases supplied]

This Court is convinced that PRA is not a GOCC either under Section 2(3) of the
Introductory Provisions of the Administrative Code or under Section 16, Article XII
of the 1987 Constitution. The facts, the evidence on record and jurisprudence on
the issue support the position that PRA was not organized either as a stock or a
non-stock corporation. Neither was it created by Congress to operate commercially
and compete in the private market. Instead, PRA is a government instrumentality
vested with corporate powers and performing an essential public service pursuant
to Section 2(10) of the Introductory Provisions of the Administrative Code. Being an
incorporated government instrumentality, it is exempt from payment of real
property tax.

Clearly, respondent has no valid or legal basis in taxing the subject reclaimed lands
managed by PRA. On the other hand, Section 234(a) of the LGC, in relation to its
Section 133(o), exempts PRA from paying realty taxes and protects it from the
taxing powers of local government units.

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Sections 234(a) and 133(o) of the LGC provide, as follows:

SEC. 234. Exemptions from Real Property Tax The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

xxxx

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies
and instrumentalities, and local government units. [Emphasis supplied]

It is clear from Section 234 that real property owned by the Republic of the
Philippines (the Republic) is exempt from real property tax unless the beneficial
use thereof has been granted to a taxable person. In this case, there is no proof
that PRA granted the beneficial use of the subject reclaimed lands to a taxable
entity. There is no showing on record either that PRA leased the subject reclaimed
properties to a private taxable entity.

This exemption should be read in relation to Section 133(o) of the same Code,
which prohibits local governments from imposing "taxes, fees or charges of any
kind on the National Government, its agencies and instrumentalities x x x." The
Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from real
estate tax.

Indeed, the Republic grants the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when the title of the real
property is transferred to an agency or instrumentality even as the Republic
remains the owner of the real property. Such arrangement does not result in the
loss of the tax exemption, unless "the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person."10

The rationale behind Section 133(o) has also been explained in the case of the
Manila International Airport Authority,11 to wit:

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Section 133(o) recognizes the basic principle that local governments cannot tax
the national government, which historically merely delegated to local governments
the power to tax. While the 1987 Constitution now includes taxation as one of the
powers of local governments, local governments may only exercise such power
"subject to such guidelines and limitations as the Congress may provide."

When local governments invoke the power to tax on national government

instrumentalities, such power is construed strictly against local governments. The
rule is that a tax is never presumed and there must be clear language in the law
imposing the tax. Any doubt whether a person, article or activity is taxable is
resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer
claiming the exemption. However, when Congress grants an exemption to a
national government instrumentality from local taxation, such exemption is
construed liberally in favor of the national government instrumentality. As this
Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect of
an exemption is merely to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in favor of non
tax-liability of such agencies.

There is, moreover, no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from
one government pocket to another.

There is also no reason for local governments to tax national government

instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound
and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any
doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise
provided" in the Code, local governments cannot tax national government
instrumentalities. As this Court held in Basco v. Philippine Amusements and
Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to

114
carry into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over
local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities or
enterprise using the power to tax as "a tool for regulation." (U.S. v. Sanchez, 340
US 42)

The power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. [Emphases
supplied]

The Court agrees with PRA that the subject reclaimed lands are still part of the
public domain, owned by the State and, therefore, exempt from payment of real
estate taxes.

Section 2, Article XII of the 1987 Constitution reads in part, as follows:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, fisheries, forests or timber,
wildlife, flora and fauna, and other natural resources are owned by the State. With
the exception of agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural resources shall
be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture, or
production-sharing agreements with Filipino citizens, or corporations or
associations at least 60 per centum of whose capital is owned by such citizens.
Such agreements may be for a period not exceeding twenty-five years, renewable
for not more than twenty-five years, and under such terms and conditions as may
provided by law. In cases of water rights for irrigation, water supply, fisheries, or
industrial uses other than the development of waterpower, beneficial use may be
the measure and limit of the grant.

115
Similarly, Article 420 of the Civil Code enumerates properties belonging to the
State:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended
for some public service or for the development of the national wealth. [Emphases
supplied]

Here, the subject lands are reclaimed lands, specifically portions of the foreshore
and offshore areas of Manila Bay. As such, these lands remain public lands and
form part of the public domain. In the case of Chavez v. Public Estates Authority
and AMARI Coastal Development Corporation,12 the Court held that foreshore and
submerged areas irrefutably belonged to the public domain and were inalienable
unless reclaimed, classified as alienable lands open to disposition and further
declared no longer needed for public service. The fact that alienable lands of the
public domain were transferred to the PEA (now PRA) and issued land patents or
certificates of title in PEAs name did not automatically make such lands private.
This Court also held therein that reclaimed lands retained their inherent potential
as areas for public use or public service.

As the central implementing agency tasked to undertake reclamation projects

nationwide, with authority to sell reclaimed lands, PEA took the place of DENR as
the government agency charged with leasing or selling reclaimed lands of the
public domain. The reclaimed lands being leased or sold by PEA are not private
lands, in the same manner that DENR, when it disposes of other alienable lands,
does not dispose of private lands but alienable lands of the public domain. Only
when qualified private parties acquire these lands will the lands become private
lands. In the hands of the government agency tasked and authorized to dispose of
alienable of disposable lands of the public domain, these lands are still public, not
private lands.

Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public
domain" as well as "any and all kinds of lands." PEA can hold both lands of the
public domain and private lands. Thus, the mere fact that alienable lands of the
public domain like the Freedom Islands are transferred to PEA and issued land
patents or certificates of title in PEA's name does not automatically make such
lands private.13

Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, thus:

116
SEC 14. Power to Reserve Lands of the Public and Private Dominion of the
Government.-

(1)The President shall have the power to reserve for settlement or public use, and
for specific public purposes, any of the lands of the public domain, the use of which
is not otherwise directed by law. The reserved land shall thereafter remain subject
to the specific public purpose indicated until otherwise provided by law or
proclamation.

Reclaimed lands such as the subject lands in issue are reserved lands for public
use. They are properties of public dominion. The ownership of such lands remains
with the State unless they are withdrawn by law or presidential proclamation from
public use.

Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged
areas of Manila Bay are part of the "lands of the public domain, waters x x x and
other natural resources" and consequently "owned by the State." As such,
foreshore and submerged areas "shall not be alienated," unless they are classified
as "agricultural lands" of the public domain. The mere reclamation of these areas
by PEA does not convert these inalienable natural resources of the State into
alienable or disposable lands of the public domain. There must be a law or
presidential proclamation officially classifying these reclaimed lands as alienable or
disposable and open to disposition or concession. Moreover, these reclaimed lands
cannot be classified as alienable or disposable if the law has reserved them for
some public or quasi-public use.

As the Court has repeatedly ruled, properties of public dominion are not subject to
execution or foreclosure sale.14 Thus, the assessment, levy and foreclosure made
on the subject reclaimed lands by respondent, as well as the issuances of
certificates of title in favor of respondent, are without basis.

WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of the Regional
Trial Court, Branch 195, Paraaque City, is REVERSED and SET ASIDE. All reclaimed
properties owned by the Philippine Reclamation Authority are hereby declared
EXEMPT from real estate taxes. All real estate tax assessments, including the final
notices of real estate tax delinquencies, issued by the City of Paraaque on the
subject reclaimed properties; the assailed auction sale, dated April 7, 2003; and
the Certificates of Sale subsequently issued by the Paraaque City Treasurer in
favor of the City of Paraaque, are all declared VOID.

SO ORDERED.

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