MERCANTILE LAW

J. BERSAMIN

INSURANCE CODE

CAPITAL INSURANCE and SURETY CO., INC. v. DEL MONTE MOTOR WORKS, INC.*
G.R. No. 159979, DECEMBER 9, 2015, BERSAMIN, J., FIRST DIVISION

The law expressly and clearly states that the security deposit shall be (1) answerable for all
obligations of the depositing insurer under its insurance contracts; (2) at all times free from any
liens or encumbrance; and (3) exempt from levy by any claimant.

Insurance Law; Denying the exemption would potentially pave the way for a single
claimant, like the respondent, to short-circuit the procedure normally undertaken in
adjudicating the claims against an insolvent company under the rules on concurrence and
preference of credits in order to ensure that none could obtain an advantage or preference over
another by virtue of an attachment or execution.—The simplistic interpretation of Section 203
of the Insurance Code by the CA ostensibly ran counter to the intention of the statute and the
Court’s pronouncement on the matter. We cannot uphold the CA’s interpretation, therefore,
because the holders or beneficiaries of the policies of an insolvent company would thereby
likely end up becoming unpaid claimants. Besides, denying the exemption would potentially
pave the way for a single claimant, like the respondent, to short-circuit the procedure normally
undertaken in adjudicating the claims against an insolvent company under the rules on
concurrence and preference of credits in order to ensure that none could obtain an advantage
or preference over another by virtue of an attachment or execution. To allow the respondent to
proceed independently against the security deposit of the petitioner would not only prejudice
the policy holders and their beneficiaries, but would also annul the very reason for which the
law required the security deposit.

FACTS

Del Monte Motor Works, Inc. (the respondent) sued Vilfran Liner, Inc., Hilaria F.
Villegas and Maura F. Villegas in the RTC in Quezon City to recover the unpaid billings related
to the fabrication and construction of 35 passenger bus bodies. It applied for the issuance of a
writ of preliminary attachment. The RTC issued the writ of preliminary attachment, which the
sheriff served on the defendants, resulting in the levy of 10 buses and three parcels of land
belonging to the defendants. The sheriff also sent notices of garnishment of the defendant’s
funds in various banks. The levy and garnishment prompted defendant Maura F. Villegas to file
an Extremely Urgent Motion to discharge Upon Filing of a Counterbond, attaching thereto
CISCO Bond. The RTC approved the counterbond and discharged the writ of preliminary
attachment.

The RTC rendered its decision in favor of the respondent. To enforce the decision against
the counterbond, the respondent moved for execution. The RTC granted the motion. Serving
the writ of execution, the sheriff levied against the petitioner’s personal properties, and later
issued the notice of auction sale. The sheriff also served a notice of garnishment against the
security deposit of the petitioner in the Insurance Commission.

The respondent moved to direct the release by the depositary banks of funds subject to
the notice of garnishment from the accounts of the petitioner, and to transfer or release the
amount of P14,864,219.37 from the petitioner’s security deposit in the Insurance Commission.
The petitioner opposed the respondent’s motion.

The RTC granted the respondent’s motion. Accordingly said Office of the Insurance
Commission is ordered to withdraw from security deposit of Capital Insurance & Surety

Page 1 of 45
 MERCANTILE LAW
J. BERSAMIN

Company, Inc. the amount of P11,835,375.50 to be paid to the sheriff in satisfaction of the notice
of garnishment served. However, the insurance commissioner turned down the request to
release, citing 203 of the Insurance Code, which expressly provided that the security deposit
was exempt from execution.

The RTC, finding no lawful justification for the Insurance Commissioner’s refusal to
comply with the order of the RTC, declared him guilty of indirect contempt of court. The CA
opined that the security deposit could answer for the depositor’s liability, and be subject of levy
in accordance with Section 203 of the Insurance Code.

ISSUE

WON the securities deposited by the petitioner insurance company may be the subject
of levy in contravention of Section 2013 of the Insurance Code.

RULING

NO. The security deposit was immune from levy or execution. Anent the security
deposit, Section 203 of the Insurance Code provides, “...Except as otherwise provided in this
Code, no judgment creditor or other claimant shall have the right to levy upon any
securities of the insurer held on deposit under this section or held on deposit pursuant
to the requirement of the Commissioner.”

The forthright text of the provision indicates that the security deposit is exempt from
levy by a judgment creditor or any other claimant. x x x As worded, the law expressly and clearly
states that the security deposit shall be (1) answerable for all obligations of the depositing
insurer under its insurance contracts; (2) at all times free from any liens or encumbrance; and
(3) exempt from levy by any claimant.

To be sure, CISCO, though presently under conservatorship, has valid outstanding

policies. Its policy holders have a right under the law to be equally protected by its security
deposit. To allow the garnishment of the deposit would impair the fund by decreasing it to less
than the percentage of paid-up capital that the law requires to be maintained. Further, this
move would create, in favor of respondent, a preference of credit over the other policy holders
and beneficiaries.

Basic is the statutory construction rule that provisions of a statute should be construed
in accordance with the purpose for which it was enacted. That is, the securities are held as
contingency fund to answer for the claims against the insurance company by all its
policy holders and their beneficiaries. This step is taken in the event that the company
becomes insolvent or otherwise unable to satisfy the claims against it. Thus, a single
claimant may not lay stake on the securities to the exclusion of all others. The other
parties may have their own claims against the insurance company under other
insurance contracts it has entered into.

What right, if any, did the respondent have in the petitioner’s security deposit?

The right to claim against the security deposit is dependent on the solvency of the
insurance company, and is subject to all other obligations of the insurance company arising
from its insurance contracts. Accordingly, the respondent’s interest in the security deposit
could only be inchoate or a mere expectancy, and thus had no attribute as property.

The Insurance Commissioner’s refusal to release was legally justified. Under Section 191
and Section 203 of the Insurance Code, the Insurance Commissioner had the specific legal duty
Page 2 of 45
 MERCANTILE LAW
J. BERSAMIN

to hold the security deposits for the benefit of all policy holders.

Under the circumstances, the Insurance Commissioner properly refused the request to
release issued by the sheriff under the notice of garnishment, and was not guilty of contempt
of court for disobedience to the assailed order of the RTC.

TRANSPORTATION LAWS

SULPICIO LINES, INC. vs. NAPOLEON SESANTE, NOW SUBSTITUTED BY MARIBEL

ATILANO, KRISTEN MARIE, CHRISTIAN IONE, KENNETH KERRN AND KARISNA
KATE, ALL SURNAMED SESANTE
G.R. NO. 172682, July 27, 2016, BERSAMIN, J.

Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the
death of a party, namely: (1) recovery of real or personal property, or an interest from the estate;
(2) enforcement of liens on the estate; and (3) recovery of damages for an injury to person or
property. Sesante's claim against the petitioner involved his personal injury caused by the breach
of the contract of carriage and hence, the complaint survived his death, and could be continued
by his heirs following the rule on substitution.

Clearly, the trial court is not required to make an express finding of the common carrier's
fault or negligence. The presumption of negligence applies so long as there is evidence showing
that: (a) a contract exists between the passenger and the common carrier; and (b) the injury or
death took place during the existence of such contract. In such event, the burden shifts to the
common carrier to prove its observance of extraordinary diligence, and that an unforeseen event
or force majeure had caused the injury. However, for a common carrier to be absolved from
liability in case of force majeure, it is not enough that the accident was caused by a fortuitous
event. The common carrier must still prove that it did not contribute to the occurrence of the
incident due to its own or its employees' negligence.

FACTS:

On September 18, 1998, at around 12:55 p.m., the M/V Princess of the Orient, a passenger vessel
owned and operated by the petitioner, sank near Fortune Island in Batangas. Of the 388
recorded passengers, 150 were lost. Napoleon Sesante, then a member of the Philippine
National Police (PNP) and a lawyer, was one of the passengers who survived the sinking. He
sued the petitioner for breach of contract and damages alleging that Sulpicio Lines committed
bad faith in allowing the vessel to sail despite the storm signal. In its defense, the petitioner
insisted on the seaworthiness of the M/V Princess of the Orient due to its having been cleared
to sail from the Port of Manila by the proper authorities; that the sinking had been due to force
majeure.

RTC rendered its judgment against defendant Sulpicio Lines ordering it to pay Temperate
damages in the amount of P400,000.00 and Moral damages in the amount of P1,000,000.00. CA
promulgated its assailed decision. It lowered the temperate damages to P120,000.00, which
approximated the cost of Sesante's lost personal belongings; and held that despite the
seaworthiness of the vessel, the petitioner remained civilly liable because its officers and crew
had been negligent in performing their duties.

During the pendency of the case, herein petitioner died and was substituted by his heirs.

ISSUES:

Page 3 of 45
 MERCANTILE LAW
J. BERSAMIN

1. Is the complaint for breach of contract and damages a personal action that does not survive
the death of the plaintiff?
2. Is the petitioner liable for damages under Article 1759 of the Civil Code?; and
3. Is there sufficient basis for awarding moral, temperate and exemplary damages?

RULING:

1. An action for breach of contract of carriage survives the death of the plaintiff.

The petitioner urges that Sesante's complaint for damages was purely personal and cannot be
transferred to his heirs upon his death. Hence, the complaint should be dismissed because the
death of the plaintiff abates a personal action.

Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the death
of a party, namely: (1) recovery of real or personal property, or an interest from the estate; (2)
enforcement of liens on the estate; and (3) recovery of damages for an injury to person or
property. Sesante's claim against the petitioner involved his personal injury caused by the
breach of the contract of carriage and hence, the complaint survived his death, and could be
continued by his heirs following the rule on substitution.

2. The petitioner is liable for breach of contract of carriage.

Article 1759 of the Civil Code does not establish a presumption of negligence because it explicitly
makes the common carrier liable in the event of death or injury to passengers due to the
negligence or fault of the common carrier's employees.

Clearly, the trial court is not required to make an express finding of the common carrier's fault
or negligence. The presumption of negligence applies so long as there is evidence showing that:
(a) a contract exists between the passenger and the common carrier; and (b) the injury or death
took place during the existence of such contract. In such event, the burden shifts to the
common carrier to prove its observance of extraordinary diligence, and that an unforeseen
event or force majeure had caused the injury. However, for a common carrier to be absolved
from liability in case of force majeure, it is not enough that the accident was caused by a
fortuitous event. The common carrier must still prove that it did not contribute to the
occurrence of the incident due to its own or its employees' negligence.

The petitioner has attributed the sinking of the vessel to the storm notwithstanding its position
on the seaworthiness of M/V Princess of the Orient. Yet, the findings of the Board of Marine
Inquiry (BMI) directly contradicted the petitioner's attribution. The BMI found that the
"erroneous maneuvers" during the ill-fated voyage by the captain of the petitioner's vessel had
caused the sinking. After the vessel had cleared Limbones Point while navigating towards the
direction of Fortune Island, the captain already noticed the listing of the vessel by three degrees
to the portside of the vessel, but, according to the BMI, he did not exercise prudence as required
by the situation in which his vessel was suffering the battering on the starboard side by big
waves of seven to eight meters high and strong southwesterly winds of 25 knots. The BMI
pointed out that he should have considerably reduced the speed of the vessel based on his
experience about the vessel - a close-type ship of seven decks, and of a wide and high
superstructure - being vulnerable if exposed to strong winds and high waves. He ought to have
also known that maintaining a high speed under such circumstances would have shifted the
solid and liquid cargo of the vessel to port, worsening the tilted position of the vessel. It was
only after a few minutes thereafter that he finally ordered the speed to go down to 14 knots, and
to put ballast water to the starboardheeling tank to arrest the continuous listing at portside. By
then, his moves became an exercise in futility because, according to the BMI, the vessel was
already listing to her portside between 15 to 20 degrees, which was almost the maximum angle
Page 4 of 45
 MERCANTILE LAW
J. BERSAMIN

of the vessel's loll. It then became inevitable for the vessel to lose her stability.

As borne out by the aforequoted findings of the BMI, the immediate and proximate cause of
the sinking of the vessel had been the gross negligence of its captain in maneuvering the vessel.

3. The award of moral damages and temperate damages is proper.

Moral damages may be recovered in an action upon breach of contract of carriage only when:
(a) death of a passenger results, or ( b) it is proved that the carrier was guilty of fraud and bad
faith, even if death does not result. The totality of the negligence by the officers and crew of
M/V Princess of the Orient warranted the award of moral damages.

With regard to the temperate damages, the petitioner contends that its liability for the loss of
Sesante' s personal belongings should conform with Art. 1754. The petitioner denies liability
because Sesante' s belongings had remained in his custody all throughout the voyage until the
sinking, and he had not notified the petitioner or its employees about such belongings. Hence,
absent such notice, liability did not attach to the petitioner.

Accordingly, actual notification was not necessary to render the petitioner as the common
carrier liable for the lost personal belongings of Sesante. By allowing him to board the vessel
with his belongings without any protest, the petitioner became sufficiently notified of such
belongings. So long as the belongings were brought inside the premises of the vessel, the
petitioner was thereby effectively notified and consequently duty-bound to observe the
required diligence in ensuring the safety of the belongings during the voyage. Applying Article
2000 of the Civil Code, the petitioner assumed the liability for loss of the belongings caused by
the negligence of its officers or crew. In view of the Court’s finding that the negligence of the
officers and crew of the petitioner was the immediate and proximate cause of the sinking of the
M/V Princess of the Orient, its liability for Sesante's lost personal belongings was beyond
question.

The Court also awarded exemplary damages even if the same was not specifically prayed for in
the complaint. The Court has the discretion to award exemplary damages if the defendant acted
in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Accordingly, the Court fix
the sum of Pl,000,000.00 in order to serve fully the objective of exemplarity among those
engaged in the business of transporting passengers and cargo by sea.

______________________________________________________________________________

METRO MANILA TRANSIT CORPORATION v. REYNALDO CUEVAS and JUNNEL

CUEVAS, represented by REYNALDO CUEVAS
G.R. No. 167797, 15 June 2015, FIRST DIVISION (Bersamin, J.)

The registered owner of a motor vehicle whose operation causes injury to another is legally
liable to the latter. But it is error not to allow the registered owner to recover reimbursement from
the actual and present owner by way of its cross-claim.

FACTS:

Metro Manila Transit Corporation (MMTC) and Mina's Transit Corporation (Mina's
Transit) entered into an agreement to sell whereby the latter bought several bus units from the
former at a stipulated price. They agreed that MMTC would retain the ownership of the buses
until certain conditions were met, but in the meantime Mina's Transit could operate the buses
within Metro Manila.

Page 5 of 45
 MERCANTILE LAW
J. BERSAMIN

In 1994, one of the buses subject of the agreement to sell hit and damaged a motorcycle
owned by respondent Reynaldo Cuevas and driven by Junnel Cuevas. Reynaldo and Junnel sued
MMTC and Mina's Transit for damages in the Regional Trial Court (RTC). In its cross-claim,
MMTC denied liability and averred that although it retained ownership of the bus, the actual
operator and employer of the bus driver was Mina’s Transit. Moreover, a provision in the
agreement to sell mandated Mina's Transport to hold MMTC free from liability arising from
the use and operation of the bus units.

Mina's Transit denied liability, contending that it exercised due diligence in the selection
and supervision of its employees; its bus driver exercised due diligence; and Junnel's negligence
was the cause of the accident. The RTC ruled in favor of the respondents, which was affirmed
by the Court of Appeals.

ISSUE:

Whether MMTC was liable for the injuries sustained by the respondents despite the
provision in the agreement to sell that shielded it from liability

RULING:

Petition PARTLY GRANTED. In view of MMTC's admission in its pleadings that it had
remained the registered owner of the bus at the time of the incident, it could not escape liability
for the personal injuries and property damage suffered by the Cuevases. This is because of the
registered-owner rule, whereby the registered owner of the motor vehicle involved in a
vehicular accident could be held liable for the consequences. The registered-owner rule has
remained good law in this jurisdiction considering its impeccable and timeless rationale, as
enunciated in the 1957 ruling in Erezo, et al. v. Jepte, where the Court pronounced:

Registration is required not to make said registration the operative act by

which ownership in vehicles is transferred, as in land registration cases,
because the administrative proceeding of registration does not bear any
essential relation to the contract of sale between the parties (Chinchilla vs.
Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of the
vehicle upon any public highway (section 5 [a], Act No. 3992, as amended.) The
main aim of motor vehicle registration is to identify the owner so that if any
accident happens, or that any damage or injury is caused by the vehicle on the
public highways, responsibility therefor can be fixed on a definite individual,
the registered owner. Instances are numerous where vehicles running on
public highways caused accidents or injuries to pedestrians or other vehicles
without positive identification of the owner or drivers, or with very scant
means of identification. It is to forestall these circumstances, so inconvenient
or prejudicial to the public, that the motor vehicle registration is primarily
ordained, in the interest of the determination of persons responsible for
damages or injuries caused on public highways.

The Court has reiterated the registered-owner rule in other rulings, like in Filcar
Transport Services v. Espinas, to wit:

x x x It is well settled that in case of motor vehicle mishaps, the registered

owner of the motor vehicle is considered as the employer of the tortfeasor-
driver, and is made primarily liable for the tort committed by the latter under
Article 2176, in relation with Article 2180, of the Civil Code.

In Equitable Leasing Corporation v. Suyom, we ruled that in so far as third persons are
Page 6 of 45
 MERCANTILE LAW
J. BERSAMIN

concerned, the registered owner of the motor vehicle is the employer of the negligent driver,
and the actual employer is considered merely as an agent of such owner.

Indeed, MMTC could not evade liability by passing the buck to Mina's Transit. The
stipulation in the agreement to sell did not bind third parties like the Cuevases, who were
expected to simply rely on the data contained in the registration certificate of the erring bus.

Although the registered-owner rule might seem to be unjust towards MMTC, the law
did not leave it without any remedy or recourse. According to Filcar Transport Services v.
Espinas, MMTC could recover from Mina's Transit, the actual employer of the negligent driver,
under the principle of unjust enrichment, by means of a cross-claim seeking reimbursement of
all the amounts that it could be required to pay as damages arising from the driver's negligence.
A cross-claim is a claim by one party against a co-party arising out of the transaction or
occurrence that is the subject matter either of the original action or of a counterclaim therein,
and may include a claim that the party against whom it is asserted is or may be liable to the
cross-claimant for all or part of a claim asserted in the action against the cross-claimant.

MMTC set up its cross-claim against Mina's Transit precisely to ensure that Mina's
Transit would reimburse whatever liability would be adjudged against MMTC. Yet, it is a cause
of concern for the Court that the RTC ignored to rule on the propriety of MMTC's cross-claim.
Such omission was unwarranted, inasmuch as Mina's Transit did not dispute the cross-claim,
or did not specifically deny the agreement to sell with MMTC, the actionable document on
which the cross-claim was based. Even more telling was the fact that Mina's Transit did not
present controverting evidence to disprove the cross-claim as a matter of course if it was
warranted for it to do so. Under the circumstances, the RTC should have granted the cross-
claim to prevent the possibility of a multiplicity of suits, and to spare not only the MMTC but
also the other parties in the case from further expense and bother. Compounding the RTC's
uncharacteristic omission was the CA's oversight in similarly ignoring the cross-claim. The trial
and the appellate courts should not forget that a cross-claim is like the complaint and the
counterclaim that the court must rule upon.

SPOUSES TEODOROand NANETTE PERENA vs SPOUSES TERESITA

PHILIPPINE NICOLAS and L. ZARATE, NATIONAL RAILWAYS, and the COURT
OF APPEALS G.R. No. 157917 August 29, 2012, J. Bersamin

Despite catering to a limited clientèle, the Pereñas operated as a common carrier because
they held themselves out as a ready transportation indiscriminately to the students of a particular
school living within or near where they operated the service and for a fee.

FACTS:

Spouses Zarate were the legitimate parents of Aaron John L. Zarate. Spouses Zarate
engaged the services of spouses Pereña for the adequate and safe transportation carriage of the
former spouses' son from their residence in Parañaque to his school at the Don Bosco Technical
Institute in Makati City. During the effectivity of the contract of carriage and in the
implementation thereof, Aaron, the minor son of spouses Zarate died in connection with a
vehicular/train collision which occurred while Aaron was riding the contracted carrier Kia
Ceres van of spouses Pereña.

At the time of the vehicular/train collision, the subject site of the vehicular/train
collision was a railroad crossing used by motorists for crossing the railroad tracks. During the
said time of the vehicular/train collision, there were no appropriate and safety warning signs
and railings at the site.

Page 7 of 45
 MERCANTILE LAW
J. BERSAMIN

ISSUE:

Whether or not the operator of the school bus service is a common carrier.

RULING:

Yes. A carrier is a person or corporation who undertakes to transport or convey goods

or persons from one place to another, gratuitously or for hire. The carrier is classified either as
a private/special carrier or as a common/public carrier. A private carrier is one who, without
making the activity a vocation, or without holding himself or itself out to the public as ready to
act for all who may desire his or its services, undertakes, by special agreement in a particular
instance only, to transport goods or persons from one place to another either gratuitously or
for hire. The provisions on ordinary contracts of the Civil Code govern the contract of private
carriage. The diligence required of a private carrier is only ordinary, that is, the diligence of a
good father of the family. In contrast, a common carrier is a person, corporation, firm or
association engaged in the business of carrying or transporting passengers or goods or both, by
land, water, or air, for compensation, offering such services to the public. Contracts of common
carriage are governed by the provisions on common carriers of the Civil Code, the Public Service
Act, and other special laws relating to transportation. A common carrier is required to observe
extraordinary diligence, and is presumed to be at fault or to have acted negligently in case of
the loss of the effects of passengers, or the death or injuries to passengers.

Applying these considerations to the case before us, there is no question that the Pereñas
as the operators of a school bus service were: (a) engaged in transporting passengers generally
as a business, not just as a casual occupation; (b) undertaking to carry passengers over
established roads by the method by which the business was conducted; and (c) transporting
students for a fee. Despite catering to a limited clientèle, the Pereñas operated as a common
carrier because they held themselves out as a ready transportation indiscriminately to the
students of a particular school living within or near where they operated the service and for a
fee.

CORPORATION CODE

ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET
BAY, JESUS R. GALANG and RANDY HAGOS vs. FRANCISCO R. CO, JR.
G.R. No. 156759, June 5, 2013
J. Bersamin

Corporation by estoppel results when a corporation represented itself to the reading public
as such despite its not being incorporated. It is founded on principles of equity and is designed to
prevent injustice and unfairness.

Facts:

On July 3, 2000, respondent, a retired police officer sued AbanteTonite, a daily tabloid of
general circulation; its Publisher Allen A. Macasaet; and the other officers of such tabloid (other
petitioners). The suit was raffled to Branch 51 of the RTC, which in due course issued summons
to be served on each defendant, including AbanteTonite, at their business address.

The Sheriff proceeded to the stated address to effect the personal service of the summons. But
his efforts to personally serve each defendant in the address were futile because the defendants
were then out of the office and unavailable. He returned in the afternoon of that day to make
a second attempt but still failed to serve the summons. He decided to resort to substituted

Page 8 of 45
 MERCANTILE LAW
J. BERSAMIN

service.

The petitioners moved for the dismissal of the complaint alleging lack of jurisdiction over their
persons because of the invalid and ineffectual substituted service of summons. They contended
that the sheriff had made no prior attempt to serve the summons personally on each of them
in accordance with Section 6 and Section 7, Rule 14 of the Rules of Court. They further moved
to drop AbanteTonite as a defendant by virtue of its being neither a natural nor a juridical
person that could be impleaded as a party in a civil action.

The RTC denied the motion to dismiss, and directed petitioners to file their answers. Regarding
the impleading of AbanteTonite as defendant, it held that assuming arguendo that
AbanteTonite is not registered with the Securities and Exchange Commission, it is deemed a
corporation by estoppels considering that it possesses attributes of a juridical person,
otherwise it cannot be held liable for damages and injuries it may inflict to other persons. The
CA affirmed the RTC decision in all respects.

Issue:

Whether or not the Court of Appeals committed reversible error in sustaining the inclusion of
Abanate Tonite as a party in the case

Ruling:

The petition for review lacks merit.

The Court held that they cannot sustain petitioner's contention that AbanteTonite could not
be sued as a defendant due to its not being either a natural or a juridical person. In rejecting
their contention, the CA categorized AbanteTonite as a corporation by estoppel as the result of
its having represented itself to the reading public as a corporation despite its not being
incorporated. Thereby, the CA concluded that the RTC did not gravely abuse its discretion in
holding that the non-incorporation of AbanteTonite with the Securities and Exchange
Commission was of no consequence for, otherwise, whoever of the public would suffer any
damage from the publication of the articles in the pages of its tabloids would be left without
recourse. The Court also elucidated that considering that the editorial box of the daily tabloid
disclosed that although Monica Publishing Corporation had published the tabloid on a daily
basis, nothing in the box indicated that Monica Publishing Corporation owned AbanteTonite.

_________________________________________________________________________________

INTERPORT RESOURCES CORPORATION vs. SECURITIES SPECIALIST,

INC., and R.C. LEE SECURITIES INC.
G .R. No. 154069, June 6, 2016, BERSAMIN, J.

Novation extinguished an obligation between two parties. Clearly, the effect of the
assignment of the subscription agreements to SSI was to extinguish the obligation of R.C. Lee to
Oceanic, now Interport, to settle the unpaid balance on the subscription. As a result of the
assignment, Interport was no longer obliged to accept any payment from R.C. Lee because the
latter had ceased to be privy to Subscription Agreements. On the other hand, Interport was legally
bound to accept SSI's tender of payment for the 75% balance on the subscription price because
SSI had become the new debtor under Subscription Agreements. As such, the issuance of the stock
certificates in the name of R.C. Lee had no legal basis in the absence of a contractual agreement
between R. C. Lee and Interport.

Page 9 of 45
 MERCANTILE LAW
J. BERSAMIN

FACTS:

In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription
agreement with R.C. Lee, a domestic corporation engaged in the trading of stocks and other
securities, covering 5,000,000 of its shares. Thereupon, R.C. Lee paid 25% of the subscription,
leaving 75% unpaid. Oceanic issued Subscription Agreements Nos. 1805, 1808, 1809, 1810, and
1811 to R.C. Lee.

Oceanic merged with Interport, with the latter as the surviving corporation. Interport was a
publicly-listed domestic corporation whose shares of stocks were traded in the stock exchange.
Under the terms of the merger, each share of Oceanic was exchanged for a share of Interport.

SSI, a domestic corporation registered as a dealer in securities, received in the ordinary course
of business Oceanic Subscription Agreements Nos. 1805, 1808 to 1811, all outstanding in the
name of R.C. Lee, and Oceanic official receipts showing that 25% of the subscriptions had been
paid. The Oceanic subscription agreements were duly delivered to SSI through stock
assignments indorsed in blank by R.C. Lee.

Later on, R.C. Lee requested Interport for a list of subscription agreements and stock certificates
issued in the name of R.C. Lee and other individuals named in the request. In response,
Interport's Corporate Secretary, provided the requested list of all subscription agreements of
Interport and Oceanic, as well as the requested stock certificates of Interport. Upon finding no
record showing any transfer or assignment of the Oceanic subscription agreements and stock
certificates of Interport as contained in the list, R.C. Lee paid its unpaid subscriptions and was
accordingly issued stock certificates corresponding thereto.

On February 8, 1989, Interport issued a call for the full payment of subscription receivables,
setting March 15, 1989 as the deadline. SSI tendered payment prior to the deadline. However,
the stockbrokers reported to SSI that Interport refused to honor the Oceanic subscriptions.

SSI learned that Interport had issued the 5,000,000 shares to R.C. Lee, relying on the latter's
registration as the owner of the subscription agreements in the books of the former, and on the
affidavit executed by the President of R.C. Lee stating that no transfers or encumbrances of the
shares had ever been made.

SSI made demands upon Interport and R.C. Lee for the cancellation of the shares issued to R.C.
Lee and for the delivery of the shares to SSI. On October 6, 1989, after its demands were not
met, SSI commenced this case in the SEC to compel the respondents to deliver the 5,000,000
shares and to pay damages. It alleged fraud and collusion between Interport and R.C. Lee in
rejecting the tendered payment and the transfer of the shares covered by the subscription
agreements.

SEC ordered the respondent Interport to deliver the corresponding shares previously covered
by Oceanic Oil Mineral Resources Inc. subscription agreements Nos. 1805-1811 to petitioner SSI,
to the extent only of 25% thereof, as duly paid by petitioner SSI; and if the same will not be
possible, to deliver the value thereof at the market price as of the date of judgment. CA affirmed
the SEC.

ISSUE:

Whether or not Interport was liable to deliver to SSI the Oceanic shares of stock, or the value
thereof, under Subscriptions Agreement.
Page 10 of 45
 MERCANTILE LAW
J. BERSAMIN

RULING:

YES, Interport is liable to deliver to SSI the Oceanic shares of stock, or the value thereof, under
Subscriptions Agreement.

The SEC correctly categorized the assignment of the subscription agreements as a form of
novation by substitution of a new debtor and which required the consent of or notice to the
creditor.Under the Civil Code, obligations may be modified by: (l) changing their object or
principal conditions; or (2) substituting the person of the debtor; or (3) subrogating a third
person in the rights of the creditor.

In this case, the change of debtor took place when R.C. Lee assigned the Oceanic shares under
Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI so that the latter became obliged to
settle the 75% unpaid balance on the subscription. Interport was duly notified of the
assignment when SSI tendered its payment for the 75% unpaid balance, and it could not
anymore refuse to recognize the transfer of the subscription that SSI sufficiently established by
documentary evidence.

It should be stressed that novation extinguished an obligation between two parties. Clearly, the
effect of the assignment of the subscription agreements to SSI was to extinguish the obligation
of R.C. Lee to Oceanic, now Interport, to settle the unpaid balance on the subscription. As a
result of the assignment, Interport was no longer obliged to accept any payment from R.C. Lee
because the latter had ceased to be privy to Subscription Agreements Nos. 1805, and 1808 to 1811
for having been extinguished insofar as it was concerned. On the other hand, Interport was
legally bound to accept SSI's tender of payment for the 75% balance on the subscription price
because SSI had become the new debtor under Subscription Agreements Nos. 1805, and 1808 to
1811. As such, the issuance of the stock certificates in the name of R.C. Lee had no legal basis in
the absence of a contractual agreement between R. C. Lee and Interport.

Interport issued the shares without respondent R.C. Lee having anything to show for the same.
On the other hand, respondent Interport refused to recognize complainant SS I's claim to five
(5) millions (sic) shares inspite of the fact that its claim was fully supported by duly issued
subscription agreements, stock assignment and receipts of payment of the initial subscription.

Subscription Agreements Nos. 1805, and 1808 to 1811 were now binding between Interport and
SSI only, and only such parties were expected to comply with the terms thereof. Hence, the
Court modify the decision of SEC and ordered Interport Resources Corporation: (a) To accept
the tender of payment of Securities Specialist, Inc. corresponding to the 75% unpaid balance of
the total subscription price under Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811;
(b) To deliver 5,000,000 shares of stock and to issue the corresponding stock certificates to
Securities Specialist, Inc. upon receipt of the payment of the latter; (c) In the alternative, if the
foregoing is no longer possible, Interport Resources Corporation shall pay Securities Specialist,
Inc. the market value of the 5,000,000 shares of stock at the time of promulgation of this
decision.

_________________________________________________________________________________

ZUELLIG FREIGHT AND CARGO SYSTEMS vs. NATIONAL LABOR RELATIONS

COMMISSION, et al.
G.R. No. 157900. July 22, 2013
J. Bersamin

Page 11 of 45
 MERCANTILE LAW
J. BERSAMIN

The mere change in the corporate name is not considered under the law as the creation of a new
corporation; hence, the renamed corporation remains liable for the illegal dismissal of its
employee separated under that guise.

Verily, the amendments of the articles of incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such
modes.

Facts:

Private respondent San Miguel brought a complaint for unfair labor practice, illegal dismissal,
non-payment of salaries and moral damages against petitioner, formerly known as Zeta
Brokerage Corporation (Zeta). He alleged that he and the other employees were informed that
Zeta would cease operations, and that all affected employees, including him, would be
separated.

On its part, petitioner countered that San Miguel’s termination from Zeta had been for a cause
authorized by the Labor Code; that its non- acceptance of him had not been by any means
irregular or discriminatory; that its predecessor-in-interest had complied with the
requirements for termination due to the cessation of business operations; that it had no
obligation to employ San Miguel in the exercise of its valid management prerogative.

San Miguel however contended that the amendments of the articles of incorporation of Zeta
were for the purpose of changing the corporate name, broadening the primary functions, and
increasing the capital stock; and that such amendments could not mean that Zeta had been
thereby dissolved.

The Labor Arbiter rendered a decision in favor of San Miguel. It held that contrary to herein
petitioner's claim that Zeta ceased operations and closed its business, there was merely a
change of business name and primary purpose and upgrading of stocks of the corporation.
Zuellig and Zeta are therefore legally the same person and entity and this was admitted by
Zuellig’s counsel in its letter to the VAT Department of the Bureau of Internal Revenue. As
such, the termination of complainant’s services allegedly due to cessation of business
operations of Zeta is deemed illegal. Notwithstanding his receipt of separation benefits from
respondents, complainant is not estopped from questioning the legality of his dismissal. The
petitioner filed a motion for reconsideration with the NLRC but was dismissed. The petition for
certiorari filed with the CA was also not given credence.

Issue:

Whether the change of corporate name resulted in the dissolution of the corporation

Ruling:

The petition is denied.

The amendments of the articles of incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such
modes. The effect of the change of name was not a change of the corporate being, for, as well
stated in Philippine First Insurance Co., Inc. v. Hartigan: "The changing of the name of a
Page 12 of 45
 MERCANTILE LAW
J. BERSAMIN

corporation is no more the creation of a corporation than the changing of the name of a natural
person is begetting of a natural person. The act, in both cases, would seem to be what the
language which we use to designate it imports – a change of name, and not a change of being.”

The consequences, legal and otherwise, of the change of name were similarly dealt with in P.C.
Javier & Sons, Inc. v. Court of Appeals, the Court holding thusly:

A change in the corporate name does not make a new corporation, whether effected by a special
act or under a general law. It has no effect on the identity of the corporation, or on its property,
rights, or liabilities. The corporation upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same corporation with a
different name, and its character is in no respect changed.

In short, Zeta and petitioner remained one and the same corporation. The change of name did
not give petitioner the license to terminate employees of Zeta like San Miguel without just or
authorized cause. The situation was not similar to that of an enterprise buying the business of
another company where the purchasing company had no obligation to rehire terminated
employees of the latter. Petitioner, despite its new name, was the mere continuation of Zeta's
corporate being, and still held the obligation to honor all of Zeta's obligations, one of which
was to respect San Miguel's security of tenure. The dismissal of San Miguel from employment
on the pretext that petitioner, being a different corporation, had no obligation to accept him
as its employee, was illegal and ineffectual.

_________________________________________________________________________________

TERELAY INVESTMENT AND DEVELOPMENT CORPORATION v.

CECILIA TERESITA J. YULO
G.R. No. 160924, AUGUST 5, 2015, BERSAMIN, J., FIRST DIVISION

Mercantile Law; Corporations; The Corporation Code has granted to all stockholders the
right to inspect the corporate books and records, and in so doing has not required any specific
amount of interest for the exercise of the right to inspect.—The petitioner’s submission that the
respondent’s “insignificant holding” of only .001% of the petitioner’s stockholding did not
justify the granting of her application for inspection of the corporate books and records is
unwarranted. The Corporation Code has granted to all stockholders the right to inspect the
corporate books and records, and in so doing has not required any specific amount of interest
for the exercise of the right to inspect. Ubi lex non distinguit nec nos distinguere debemos. When
the law has made no distinction, we ought not to recognize any distinction. Neither could the
petitioner arbitrarily deny the respondent’s right to inspect the corporate books and records on
the basis that her inspection would be used for a doubtful or dubious reason. Under Section 74,
third paragraph, of the Corporation Code, the only time when the demand to examine and copy
the corporation’s records and minutes could be refused is when the corporation puts up as a
defense to any action that “the person demanding” had “improperly used any information
secured through any prior examination of the records or minutes of such corporation or of any
other corporation, or was not acting in good faith or for a legitimate purpose in making his
demand.” The right of the shareholder to inspect the books and records of the petitioner should
not be made subject to the condition of a showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination proper, but if the right is to be
denied, the burden of proof is upon the corporation to show that the purpose of the shareholder
is improper, by way of defense.

FACTS

Cecilia Teresita Yulo requested Terelay Investment and Development Corporation

Page 13 of 45
 MERCANTILE LAW
J. BERSAMIN

(TERELAY) that she be allowed to examine its books and records. TERELAY denied the request
for inspection and instead demanded that she show proof that she was a bona fide stockholder.

Cecilia Yulo clarified that her request for examination of the corporate records was for
the purpose of inquiring into the financial condition of TERELAY and the conduct of its affairs
by the principal officers.

Cecilia Yulo filed with the SEC a petition for issuance of writ of mandamus with prayer
for damages against TERELAY. Following the enactment of R.A. No. 8799 (The Securities
Regulation Code), the case was transferred from the SEC to the RTC. The RTC granted the
application for inspection of corporate records. CA affirmed the RTC.

ISSUE

WON the application for inspection of corporate records should be granted.

RULING

YES. The petitioner’s submission that the respondent’s “insignificant holding” of only
.001% of the petitioner’s stockholding did not justify the granting of her application for
inspection of the corporate books and records is unwarranted. The Corporation Code has
granted to all stockholders the right to inspect the corporate books and records, and in so doing
has not required any specific amount of interest for the exercise of the right to inspect. Ubi lex
non distinguit nec nos distinguere debemos. When the law has made no distinction, we ought
not to recognize any distinction.

Neither could the petitioner arbitrarily deny the respondent’s right to inspect the
corporate books and records on the basis that her inspection would be used for a doubtful or
dubious reason. Under Section 74, third paragraph, of the Corporation Code, the only time
when the demand to examine and copy the corporation’s records and minutes could be refused
is when the corporation puts up as a defense to any action that “the person demanding” had
“improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.”

The right of the shareholder to inspect the books and records of the petitioner should
not be made subject to the condition of a showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination proper, but if the right is to be
denied, the burden of proof is upon the corporation to show that the purpose of the shareholder
is improper, by way of defense.

GRACE BORGONA INSIGNE, ET AL. v. ABRA VALLEY COLLEGES, INC. and FRANCIS
BORGONA
G.R. No. 204089, JULY 29, 2015, BERSAMIN, J., FIRST DIVISION

Mercantile Law; Corporations; Stock Certificates; The certificate is not stock in the
corporation but is merely evidence of the holder’s interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the equivalent of such ownership.—
A stock certificate is prima facie evidence that the holder is a shareholder of the corporation,
but the possession of the certificate is not the sole determining factor of one’s stock ownership.
A certificate of stock is merely: x x x the paper representative or tangible evidence of the stock
itself and of the various interests therein. The certificate is not stock in the corporation but
is merely evidence of the holder’s interest and status in the corporation, his ownership
Page 14 of 45
 MERCANTILE LAW
J. BERSAMIN

of the share represented thereby, but is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the stockholder, but it is not essential to
the existence of a share in stock or the creation of the relation of shareholder to the corporation.

Same; Same; Board of Directors; Estoppel; Considering that Section 23 of the Corporation
Code requires every director to be the holder of at least one (1) share of capital stock of the
corporation of which he is a director, the respondents would not have then allowed any of the
petitioners to be elected to sit in the Board of Directors as members unless they believed that the
petitioners so elected were not disqualified for lack of stock ownership.—Considering that
Section 23 of the Corporation Code requires every director to be the holder of at least one share
of capital stock of the corporation of which he is a director, the respondents would not have
then allowed any of the petitioners to be elected to sit in the Board of Directors as members
unless they believed that the petitioners so elected were not disqualified for lack of stock
ownership. Neither did the respondents thereafter assail their acts as Board Directors.
Conformably with the doctrine of estoppel, the respondents could no longer deny the
petitioners’ status as stockholders of Abra Valley. The application of the doctrine of estoppel,
which is based on public policy, fair dealing, good faith and justice, is only appropriate because
the purpose of the doctrine is to forbid one from speaking against his own act, representations,
or commitments to the injury of another to whom he directed such act, representations, or
commitments, and who reasonably relied thereon. The doctrine springs from equitable
principles and the equities in the case, and is designed to aid the law in the administration of
justice where without its aid injustice might result. The Court has applied the doctrine wherever
and whenever special circumstances of the case so demanded.

Actions; Dismissal of Actions; Dismissal of the action can be grossly oppressive if it is

based on noncompliance with the most trivial order of the court considering that the dismissal
equates to “an adjudication upon the merits, unless otherwise declared by the court.”—The
dismissal of Special Civil Action Case No. 2070 on June 28, 2010 on the basis that “the
documents presented are not Stock Certificates as boldly announced by the plaintiff’s counsel,
hence, plaintiffs failed to comply with the order of the Court dated March 8, 2010” was
unwarranted and unreasonable. Although Section 3, Rule 17 of the Rules of Court expressly
empowers the trial court to dismiss the complaint motu proprio or upon motion of the
defendant if, for no justifiable cause, the plaintiff fails to comply with any order of the court,
the power to dismiss is not to wield indiscriminately, but only when the noncompliance
constitutes a willful violation of an order of consequence to the action. Dismissal of the action
can be grossly oppressive if it is based on noncompliance with the most trivial order of the court
considering that the dismissal equates to “an adjudication upon the merits, unless otherwise
declared by the court.” A line of demarcation must be drawn between an order whose
noncompliance impacts on the case, and an order whose noncompliance causes little effect on
the case. For example, the noncompliance of an order to the plaintiff to amend his complaint
to implead an indispensable party as defendant should be sanctioned with dismissal with
prejudice unless the noncompliance was upon justifiable cause, like such party not within the
jurisdiction of the court.

Mercantile Law; Corporations; Stockholders; A person becomes a stockholder of a

corporation by acquiring a share through either purchase or subscription.—A person becomes a
stockholder of a corporation by acquiring a share through either purchase or subscription.
Here, the petitioners acquired their shares in Abra Valley: (1) by subscribing to 36 shares each
from Abra Valley’s authorized and unissued capital stock; and (2) by purchasing the
shareholdings of existing stockholders, as borne out by the latter’s indorsement on the stock
certificates.

Page 15 of 45
 MERCANTILE LAW
J. BERSAMIN

FACTS

Petitioners Grace Borgoña Insigne, Diosdado Borgoña, Osbourne Borgoña, Imelda

Borgoña Rivera, Aristotle Borgoña are siblings of the full blood. Francis Borgona is their half-
blood brother. The petitioners are the children of the late Pedro Borgona by his second wife,
Teresita Valeros, while Francis was Pedro’s son by his first wife. In his lifetime, Pedro was the
founder, president and majority stockholder of Abra Valley Colleges, Inc. (Abra Valley), a stock
corporation. After Pedro’s death, Francis succeeded him as the president of Abra Valley.

The petitioners, along with their brother Romulo Borgoña and Elmer Reyes, filed a
complaint (with application for preliminary injunction) and damages in the RTC against Abra
Valley praying, among others, that the RTC direct Abra Valley to allow them to inspect its
corporate books and records, and the minutes of meetings, and to provide them with its
financial statements.

The RTC rendered judgment in favor of the petitioners.Abra Valley appealed to the CA,
which promulgated its decision ordering the RTC to admit Abra Valley’s answer despite its
belated filing; and remanding the case for further proceedings. The RTC ordered the petitioners
to present the stock certificates issued by Abra Valley under their names. The petitioners
submitted their Compliance and Manifestation. The petitioners filed a motion for
production/inspection of documents, asking that the RTC direct the respondents to produce
Abra Valley’s Stock and Transfer Book (STB); and that petitioners be allowed to inspect the
same. The RTC dismissed the action pursuant to Section 3, Rule 17 of the Rules of Court holding
that the documents presented are not Stock Certificates, hence, plaintiffs failed to comply with
the order of the Court. The CA affirmed the decision of the RTC.

ISSUE

WON the presentation of a stock certificate is a condition sine qua non for proving one’s
shareholding in a corporation.

RULING

NO. A stock certificate is prima facie evidence that the holder is a shareholder of the
corporation, but the possession of the certificate is not the sole determining factor of one’s
stock ownership. A certificate of stock is merely: x x x the paper representative or tangible
evidence of the stock itself and of the various interests therein. The certificate is not stock in
the corporation but is merely evidence of the holder’s interest and status in the corporation,
his ownership of the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but it is not
essential to the existence of a share in stock or the creation of the relation of shareholder to the
corporation.

Considering that Section 23 of the Corporation Code requires every director to be the
holder of at least one share of capital stock of the corporation of which he is a director, the
respondents would not have then allowed any of the petitioners to be elected to sit in the Board
of Directors as members unless they believed that the petitioners so elected were not
disqualified for lack of stock ownership. Neither did the respondents thereafter assail their acts
as Board Directors. Conformably with the doctrine of estoppel, the respondents could no longer
deny the petitioners’ status as stockholders of Abra Valley. The application of the doctrine of
estoppel, which is based on public policy, fair dealing, good faith and justice, is only appropriate
because the purpose of the doctrine is to forbid one from speaking against his own act,
representations, or commitments to the injury of another to whom he directed such act,
representations, or commitments, and who reasonably relied thereon. The doctrine springs
Page 16 of 45
 MERCANTILE LAW
J. BERSAMIN

from equitable principles and the equities in the case, and is designed to aid the law in the
administration of justice where without its aid injustice might result. The Court has applied the
doctrine wherever and whenever special circumstances of the case so demanded.

The dismissal of Special Civil Action Case No. 2070 on June 28, 2010 on the basis that
“the documents presented are not Stock Certificates as boldly announced by the plaintiff’s
counsel, hence, plaintiffs failed to comply with the order of the Court dated March 8, 2010” was
unwarranted and unreasonable. Although Section 3, Rule 17 of the Rules of Court expressly
empowers the trial court to dismiss the complaint motu proprio or upon motion of the
defendant if, for no justifiable cause, the plaintiff fails to comply with any order of the court,
the power to dismiss is not to wield indiscriminately, but only when the noncompliance
constitutes a willful violation of an order of consequence to the action. Dismissal of the action
can be grossly oppressive if it is based on noncompliance with the most trivial order of the court
considering that the dismissal equates to “an adjudication upon the merits, unless otherwise
declared by the court.” A line of demarcation must be drawn between an order whose
noncompliance impacts on the case, and an order whose noncompliance causes little effect on
the case. For example, the noncompliance of an order to the plaintiff to amend his complaint
to implead an indispensable party as defendant should be sanctioned with dismissal with
prejudice unless the noncompliance was upon justifiable cause, like such party not within the
jurisdiction of the court.

A person becomes a stockholder of a corporation by acquiring a share through either

purchase or subscription. Here, the petitioners acquired their shares in Abra Valley: (1) by
subscribing to 36 shares each from Abra Valley’s authorized and unissued capital stock; and (2)
by purchasing the shareholdings of existing stockholders, as borne out by the latter’s
indorsement on the stock certificates.

The rules of discovery, including Section 1, Rule 27 of the Rules of Court governing the
production or inspection of any designated documents, papers, books, accounts, letters,
photographs, objects or tangible things not privileged, which contain or constitute evidence
material to any matter involved in the action and which are in the other party’s possession,
custody or control, are to be accorded broad and liberal interpretation.

COMMISSIONER OF CUSTOMS vs. OILINK INTERNATIONAL CORPORATION

G.R. No. 161759, 02 July 2014, Bersamin J. (FIRST DIVISION)

In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with
reality, not form, and with how the corporation operated and the individual defendant’s
relationship to the operation. Consequently, the absence of any one of the foregoing elements
disauthorizes the piercing of the corporate veil.

Indeed, the doctrine of piercing the corporate veil has no application here because the
Commissioner of Customs did not establish that Oilink had been set up to avoid the payment of
taxes or duties, or for purposes that would defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law. It is also noteworthy that from the outset the Commissioner of Customs
sought to collect the deficiency taxes and duties from URC, and that it was only on July 2, 1999
when the Commissioner of Customs sent the demand letter to both URC and Oilink. That was
revealing, because the failure of the Commissioner of Customs to pursue the remedies against
Oilink from the outset manifested that its belated pursuit of Oilink was only an afterthought.

Page 17 of 45
 MERCANTILE LAW
J. BERSAMIN

FACTS:

On September 15, 1966, Union Refinery Corporation (URC) was established under
the Corporation Code of the Philippines. On January 11, 1996, Oilink was incorporated for the
primary purpose of manufacturing, importing, exporting, buying, selling or dealing in oil and
gas, and their refinements and by-products at wholesale and retail of petroleum. URC and
Oilink had interlocking directors when Oilink started its business.

In applying for and in expediting the transfer of the operator’s name for the Customs
Bonded Warehouse then operated by URC, Esther Magleo, the Vice-President and General
Manager of URC, sent a letter dated January 15, 1996 to manifest that URC and Oilink had the
same Board of Directors and that Oilink was 100% owned by URC.

On March 4, 1998, Oscar Brillo, the District Collector of the Port of Manila, formally
demanded that URC pay the taxes and duties on its oil imports that had arrived between
January 6, 1991 and November 7, 1995 at the Port of Lucanin in Mariveles, Bataan.

On April 23, 1998, URC, through its counsel, responded to the demands by seeking the
landed computations of the assessments, and challenged the inconsistencies of the demands.

On November 25, 1998, then Customs Commissioner Pedro C. Mendoza formally

directed that URC pay the taxes that it had failed to pay at the time of the release of its 17 oil
shipments that had arrived in the Sub-port of Mariveles.

On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson
Tan transmitted a demand letter to URC affirming the assessment of P99,216,580.10 by
Commissioner Mendoza. On January 18, 1999, Magleo, in behalf of URC, replied by letter to
Commissioner Tan’s affirmance by denying liability, insisting instead that only P28,933,079.20
should be paid by way of compromise.

On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s proposal, and
directed URC to pay P99,216,580.10. On May 24, 1999, Manuel Co, URC’s President, conveyed
to Commissioner Tan URC’s willingness to pay only P94,216,580.10, of which the initial amount
of P28,264,974.00 would be taken from the collectibles of Oilink from the National Power
Corporation, and the balance to be paid in monthly installments over a period of three years to
be secured with corresponding post-dated checks and its future available tax credits.

On July 2, 1999, Commissioner Tan made a final demand for the total liability of
P138,060,200.49 upon URC and Oilink. On July 8, 1999, Oilink formally protested the
assessment on the ground that it was not the party liable for the assessed deficiency taxes.

On July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the assessment
for having been issued without authority and with grave abuse of discretion tantamount to lack
of jurisdiction because the Government was thereby shifting the imposition from URC to
Oilink. The CTA ruled in favor of Oilink which was affirmed by the Court of Appeals. Hence,
the instant petition.

ISSUE:

Whether or not the CTA can pierce the veil of corporate fiction so as to make Oilink
liable for the tax deficiencies of URC

Page 18 of 45
 MERCANTILE LAW
J. BERSAMIN

HELD:

A corporation, upon coming into existence, is invested by law with a personality separate
and distinct from those of the persons composing it as well as from any other legal entity to
which it may be related. For this reason, a stockholder is generally not made to answer for the
acts or liabilities of the corporation, and vice versa. The separate and distinct personality of the
corporation is, however, a mere fiction established by law for convenience and to promote the
ends of justice. It may not be used or invoked for ends that subvert the policy and purpose
behind its establishment, or intended by law to which the corporation owes its being. This is
true particularly when the fiction is used to defeat public convenience, to justify wrong, to
protect fraud, to defend crime, to confuse legitimate legal or judicial issues, to perpetrate
deception or otherwise to circumvent the law. This is likewise true where the corporate entity
is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders
or of another corporate entity. In such instances, the veil of corporate entity will be pierced or
disregarded with reference to the particular transaction involved.

In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined the following
circumstances that are useful in the determination of whether a subsidiary is a mere
instrumentality of the parent-corporation, viz:

1. Control, not mere majority or complete control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiff's legal rights; and

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

In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with
reality, not form, and with how the corporation operated and the individual defendant’s
relationship to the operation. Consequently, the absence of any one of the foregoing elements
disauthorizes the piercing of the corporate veil.

Indeed, the doctrine of piercing the corporate veil has no application here because the
Commissioner of Customs did not establish that Oilink had been set up to avoid the payment
of taxes or duties, or for purposes that would defeat public convenience, justify wrong, protect
fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception or
otherwise circumvent the law. It is also noteworthy that from the outset the Commissioner of
Customs sought to collect the deficiency taxes and duties from URC, and that it was only on
July 2, 1999 when the Commissioner of Customs sent the demand letter to both URC and Oilink.
That was revealing, because the failure of the Commissioner of Customs to pursue the remedies
against Oilink from the outset manifested that its belated pursuit of Oilink was only an
afterthought.

Page 19 of 45
 MERCANTILE LAW
J. BERSAMIN

STRONGHOLD INSURANCE COMPANY, INC. V. TOMAS CUENCA, MARCELINA

CUENCA, MILAGROS CUENCA, BRAMIE T. TAYACTAC,
AND MANUEL D. MARANON, JR.
G.R. No. 173297, March 6, 2013, Justice Bersamin

There is no question that a litigation should be disallowed immediately if it involves a

person without any interest at stake, for it would be futile and meaningless to still proceed and
render a judgment where there is no actual controversy to be thereby determined. Courts of law
in our judicial system are not allowed to delve on academic issues or to render advisory opinions.
They only resolve actual controversies, for that is what they are authorized to do by the
Fundamental Law itself, which forthrightly ordains that the judicial power is wielded only to settle
actual controversies involving rights that are legally demandable and enforceable.

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to claim and
recover compensation for the damages arising from the wrongful attachment of its assets. Only
the corporation is the real party in interest for that purpose.

FACTS:

On January 19, 1998, Marañon filed a complaint in the RTC against the Cuencas for the
collection of a sum of money and damages. His complaint, docketed as Civil Case No. 98-023,
included an application for the issuance of a writ of preliminary attachment. On January 26,
1998, the RTC granted the application for the issuance of the writ of preliminary attachment
conditioned upon the posting of a bond of P1,000,000.00 executed in favor of the Cuencas. Less
than a month later, Marañon amended the complaint to implead Tayactac as a defendant.

On February 11, 1998, Marañon posted SICI Bond No. 68427 JCL (4) No. 02370 in the
amount of P1,000,000.00 issued by Stronghold Insurance. Two days later, the RTC issued the
writ of preliminary attachment. The sheriff served the writ, the summons and a copy of the
complaint on the Cuencas on the same day. The service of the writ, summons and copy of the
complaint were made on Tayactac on February 16, 1998. Enforcing the writ of preliminary
attachment on February 16 and February 17, 1998, the sheriff levied upon the equipment,
supplies, materials and various other personal property belonging to Arc Cuisine, Inc. that were
found in the leased corporate office-cum-commissary or kitchen of the corporation. On
February 19, 1998, the sheriff submitted a report on his proceedings, and filed an ex parte
motion seeking the transfer of the levied properties to a safe place. The RTC granted the ex
parte motion on February 23, 1998.

On February 25, 1998, the Cuencas and Tayactac presented in the RTC a Motion to
Dismiss and to Quash Writ of Preliminary Attachment on the grounds that: (1) the action
involved intra-corporate matters that were within the original and exclusive jurisdiction of the
Securities and Exchange Commission (SEC); and (2) there was another action pending in the
SEC as well as a criminal complaint in the Office of the City Prosecutor of Parañaque City. On
August 10, 1998, the RTC denied the Motion to Dismiss and to Quash Writ of Preliminary
Attachment, stating that the action, being one for the recovery of a sum of money and damages,
was within its jurisdiction.

Thus, on October 14, 1998, the Cuencas and Tayactac went to the CA on certiorari and
prohibition to challenge the August 10, 1998 and September 16, 1998 orders of the RTC on the
basis of being issued with grave abuse of discretion amounting to lack or excess of jurisdiction
(C.A.-G.R. SP No. 49288). On June 16, 1999, the CA promulgated its assailed decision in C.A.-
G.R. SP No. 49288, granting the petition. It annulled and set aside the challenged orders, and
dismissed the amended complaint in Civil Case No. 98-023 for lack of jurisdiction. On
Page 20 of 45
 MERCANTILE LAW
J. BERSAMIN

December 27, 1999, the CA remanded to the RTC for hearing and resolution of the Cuencas and
Tayactac’s claim for the damages sustained from the enforcement of the writ of preliminary
attachment.

On April 6, 2000, the Cuencas and Tayactac filed a Motion to Require Sheriff to Deliver
Attached Properties and to Set Case for Hearing, praying that: (1) the Branch Sheriff be ordered
to immediately deliver the attached properties to them; (2) Stronghold Insurance be directed
to pay them the damages being sought in accordance with its undertaking under the surety
bond for P1,000,0000.00; (3) Marañon be held personally liable to them considering the
insufficiency of the amount of the surety bond; (4) they be paid the total of P1,721,557.20 as
actual damages representing the value of the lost attached properties because they, being
accountable for the properties, would be turning that amount over to Arc Cuisine, Inc.; and (5)
Marañon be made to pay P200,000.00 as moral damages, P100,000.00 as exemplary damages,
and P100,000.00 as attorney’s fees.

After trial, the RTC rendered its judgment on April 28, 2003, holding Marañon and
Stronghold Insurance jointly and solidarily liable for damages to the Cuencas and Tayactac.

RULING:

The Supreme Court granted the Petition. There is no dispute that the properties subject
to the levy on attachment belonged to Arc Cuisine, Inc. alone, not to the Cuencas and Tayactac
in their own right. They were only stockholders of Arc Cuisine, Inc., which had a personality
distinct and separate from that of any or all of them. The damages occasioned to the properties
by the levy on attachment, wrongful or not, prejudiced Arc Cuisine, Inc., not them. As such,
only Arc Cuisine, Inc. had the right under the substantive law to claim and recover such
damages. This right could not also be asserted by the Cuencas and Tayactac unless they did so
in the name of the corporation itself. But that did not happen herein, because Arc Cuisine, Inc.
was not even joined in the action either as an original party or as an intervenor.

The Cuencas and Tayactac were clearly not vested with any direct interest in the
personal properties coming under the levy on attachment by virtue alone of their being
stockholders in Arc Cuisine, Inc. Their stockholdings represented only their proportionate or
aliquot interest in the properties of the corporation, but did not vest in them any legal right or
title to any specific properties of the corporation. Without doubt, Arc Cuisine, Inc. remained
the owner as a distinct legal person. Given the separate and distinct legal personality of Arc
Cuisine, Inc., the Cuencas and Tayactac lacked the legal personality to claim the damages
sustained from the levy of the former’s properties.

PHILIPPINE OVERSEAS TELECOMMUNICATIONS CORPORATION (POTC), et al. vs.

VICTOR V. AFRICA/ POTC, et al. vs. VICTOR V. AFRICA, PURPORTEDLY
REPRESENTING PHILCOMSAT, et al./ PHILCOMSAT HOLDINGS CORPORATION,
REPRESENTED BY CONCEPCION POBLADOR vs. PHILCOMSTAT, REPRESENTED BY
VICTOR V. AFRICA/ HILCOMSAT HOLDINGS CORPORATION, REPRESENTED BY
ERLINDA T. BILDNER vs. HILCOMSTAT HOLDINGS CORPORATION, REPRESENTED
BY ENRIQUE L. LOCSIN
G.R. Nos. 184622/184712-14/186066/186590. July 3, 2013
J. Bersamin

An intra-corporate dispute involving a corporation under sequestration of the Presidential

Commission on Good Government (PCGG) falls under the jurisdiction of the Regional Trial Court
(RTC), not the Sandiganbayan. Hence, RTC (Branch 138) had jurisdiction over the election

Page 21 of 45
 MERCANTILE LAW
J. BERSAMIN

contest between the Ilusorio-Africa Groups and Nieto-Locsin Groups.

Facts:

The case involves a dispute between two groups battling over to control three domestic
corporations namely the POTC, PHILCOMSAT and PHC. The ownership structure of these
corporations implies that whoever had control of POTC necessarily held 100% control of
PHILCOMSAT, and in turn whoever controlled PHILCOMSAT wielded 81% majority control of
PHC.

As prelude, the EDSA People Power Revolution deposed President Marcos from power and led
to the issuance by newly-installed President Corazon C. Aquino of Executive Order No. 1 to
create the PCGG whose task was to assist the President in the recovery of all ill-gotten wealth
amassed by President Marcos and his subordinates. Subsequently among the corporations
surrendered were IRC (which, in the books of POTC, held 3,644 POTC shares) and Mid-Pasig
(which, in the books of POTC, owned 1,755 POTC shares). Also turned over was one POTC
share in the name of Ferdinand Marcos, Jr. Hence the above mentioned corporations were now
under sequestration of the PCGG.

Two groups were formed in the corporations, the Ilusorio-Africa group and the Nieto-Locsin
group. In separate dates as revealed by the records, both groups held a Stockholder's Meeting
and elected the set of directors for each corporations. This incident led to the filing of many
petitions in court including writs of preliminary injunction and TRO. The petitioners postulate
that the Sandiganbayan had original and exclusive jurisdiction over sequestered corporations,
sequestration-related cases, and any and over all incidents arising therefrom; that it was error
on the part of the CA to conclude that the Sandiganbayan was automatically ousted of
jurisdiction over the sequestered assets once the complaint alleged an intra-corporate dispute
due to the sequestered assets being in custodia legis. Respondent on the other hand counters
the argument of the petitioner by asserting that that the RTC had ample authority to rule upon
the intra-corporate dispute.

Issue:

Did RTC (Branch 138) have jurisdiction over the intra-corporate controversy (election contest)

Ruling:

The petition is denied.

RTC (Branch 138) had jurisdiction over the election contest between the Ilusorio-Africa
Groups and Nieto-Locsin Groups

It is settled that there is an intra-corporate controversy when the dispute involves any of the
following relationships, to wit: (a) between the corporation, partnership or association and the
public; (b) between the corporation, partnership or association and the State in so far as its
franchise, permit or license to operate is concerned; (c) between the corporation, partnership
or association and its stockholders, partners, members or officers; and (d) among the
stockholders, partners or associates themselves.

Originally, Section 5 of Presidential Decree (P.D.) No. 902-A vested the original and exclusive
jurisdiction over intracorporate dispute with the SEC. However, upon the enactment of
Republic Act No. 8799 (The Securities Regulation Code), effective on August 8, 2000, the
jurisdiction of the SEC over intra-corporate controversies was transferred to the Regional Trial.
To implement Republic Act No. 8799, the Court promulgated its resolution of November 21,
Page 22 of 45
 MERCANTILE LAW
J. BERSAMIN

2000 in A.M. No. 00-11-03-SC designating certain branches of the RTC to try and decide the
cases enumerated in Section 5 of P.D. No. 902-A. Among the RTCs designated as special
commercial courts was the RTC (Branch 138) in Makati City, the trial court for Civil Case No.
04-1049.

In the cases now before the Court, what are sought to be determined are the propriety of the
election of a party as a Director, and his authority to act in that capacity. Such issues should be
exclusively determined only by the RTC pursuant to the pertinent law on jurisdiction because
they did not concern the recovery of ill-gotten wealth.

Proper mode of appeal in intra-corporate cases is by petition for review under Rule 43

The rule providing that a petition for review under Rule 43 of the Rules of Court is the proper
mode of appeal in intra-corporate controversies, as embodied in A. M. No. 04-9-07-SC, has been
in effect since October 15, 2004. Hence, the filing by POTC and PHC (Nieto Group) of the
petition for certiorari on March 21, 2007 (C.A.-G.R. SP No. 98399) was inexcusably improper
and ineffectual. By virtue of its being an extraordinary remedy, certiorari could neither replace
nor substitute an adequate remedy in the ordinary course of law, like appeal in due course.
Indeed, the appeal under Rule 43 of the Rules of Court would have been adequate to review and
correct even the grave abuse of discretion imputed to the RTC. As a consequence of the
impropriety and ineffectuality of the remedy chosen by POTC and PHC (Nieto Group), the TRO
and the WPI initially issued by the CA in C.A.-G.R. SP No. 98399 did not prevent the
immediately executory character of the decision in Civil Case No. 04-1049.

_________________________________________________________________________________

GOLD LINE TOURS, INC. vs. HEIRS OF MARIA CONCEPCION LACSA

G.R. No. 159108, FIRST DIVISION, June 18, 2012, BERSAMIN, J.

The veil of corporate existence of a corporation is a fiction of law that should not defeat
the ends of justice.

FACTS:

On August 2, 1993, Ma. Concepcion Lacsa (Concepcion) and her sister, Miriam Lacsa
(Miriam), boarded a Goldline passenger bus owned and operated by Travel & Tours Advisers,
Inc. They were enroute from Sorsogon to Cubao, Quezon City. At the time, Concepcion, having
just obtained her degree of Bachelor of Science in Nursing at the Ago Medical and Educational
Center, was proceeding to Manila to take the nursing licensure board examination. Upon
reaching the highway at Barangay San Agustin in Pili, Camarines Sur, the Goldline bus, driven
by Rene Abania (Abania), collided with a passenger jeepney coming from the opposite direction
and driven by Alejandro Belbis. As a result, a metal part of the jeepney was detached and struck
Concepcion in the chest, causing her instant death.

On August 23, 1993, Concepcions heirs, represented by Teodoro Lacsa, instituted in the
RTC a suit against Travel & Tours Advisers Inc. and Abania to recover damages arising from
breach of contract of carriage.

Miriam testified that Abania had been occasionally looking up at the video monitor
installed in the front portion of the Goldline bus despite driving his bus at a fast speed; that in
Barangay San Agustin, the Goldline bus had collided with a service jeepney coming from the

Page 23 of 45
 MERCANTILE LAW
J. BERSAMIN

opposite direction while in the process of overtaking another bus; and that Concepcion was
pronounced dead upon arrival at the hospital.

To refute the plaintiffs allegations, Travel & Tours Advisers presented SPO1 Pedro
Corporal of the Philippine National Police Station in Pili, Camarines Sur, and William Cheng,
the operator of the Travel & Tours Advisers bus. SPO1 Corporal opined that based on his
investigation report, the driver of the jeepney had been at fault for failing to observe
precautionary measures to avoid the collision. On the other hand, Cheng attested that he had
exercised the required diligence in the selection and supervision of his employees.

Travel & Tours Advisers blamed the death of Concepcion to the recklessness of Bilbes as
the driver of the jeepney, and of its operator, Salvador Romano and t they had consequently
brought a third-party complaint against the latter.

The RTC ruled against Goldline for failure to disprove the presumption of negligence
and that a rigid selection of employees was not sufficient to exempt Goldline from the
obligation of exercising extraordinary diligence to ensure that its passenger was carried safely
to her destination. The CA dismissed the appeal filed by Goldline for failure to pay the docket
and other lawful fees. The RTC issued a writ of execution upon motion by the plaintiff. The writ
of execution had been personally served and a copy of it had been duly tendered to Travel &
Tours Advisers, Inc. or William Cheng, through his secretary, Grace Miranda, and that Cheng
had failed to settle the judgment amount despite promising to do so. Accordingly, a tourist bus
bearing Plate No. NWW-883 was levied pursuant to the writ of execution.

Goldline submitted a so-called verified third party claim, claiming that the
tourist bus bearing Plate No. NWW-883 be returned to them because it was the owner
and they had not been made a party to the case and it was a corporation entirely
different from Travel & Tours Advisers, Inc.

It is notable that Goldline Articles of Incorporation was amended shortly after the filing
of Civil Case against Travel & Tours Advisers, Inc.

The RTC dismissed Goldline verified third-party claim, observing that the identity of
Travel & Tours Adivsers, Inc. could not be divorced from that of Goldline considering that
Cheng had claimed to be the operator as well as the President/Manager/incorporator of both
entities; and that Travel & Tours Advisers, Inc. had been known in Sorsogon as Goldline.
This was affirmed by the CA.

ISSUE:

Whether the denial of the verified third-party claim by Goldline was proper.

RULING:

Yes. This Court is not persuaded by the proposition of the third party claimant that a
corporation has an existence separate and/or distinct from its members insofar as this case at
bar is concerned, for the reason that whenever necessary for the interest of the public or for the
protection of enforcement of their rights, the notion of legal entity should not and is not to be
used to defeat public convenience, justify wrong, protect fraud or defend crime.

Page 24 of 45
 MERCANTILE LAW
J. BERSAMIN

As we see it, the RTC had sufficient factual basis to find that petitioner and Travel and
Tours Advisers, Inc. were one and the same entity, specifically: (a) documents submitted by
petitioner in the RTC showing that William Cheng, who claimed to be the operator of Travel
and Tours Advisers, Inc., was also the President/Manager and an incorporator of the petitioner;
and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline.

The RTC thus rightly ruled that petitioner might not be shielded from liability under
the final judgment through the use of the doctrine of separate corporate identity. Truly, this
fiction of law could not be employed to defeat the ends of justice.

DONNINA C. HALLEY v. PRINTWELL, INC.

G.R. No. 157549, 30 May 2011 THIRD DIVISION (Bersamin, J.)

A corporation has a personality separate and distinct from those of its stockholders,
directors, or officers, such separate and distinct personality is merely a fiction created by law
for the sake of convenience and to promote the ends of justice.

Donnina Halley (Halley) was an incorporator and original director of Business Media
Philippines, Inc. (BMPI) while Printwell, Inc. (Printwell) was engaged in commercial and
industrial printing. BMPI commissioned Printwell for the printing of the magazine
Philippines, Inc. that BMPI published and sold. For that purpose, Printwell extended 30-
day credit accommodations to BMPI. BMPI placed with Printwell several orders on credit
totaling P316, 342.76. Considering that BMPI paid only P25,000, Printwell sued BMPI for the
collection of the unpaid balance in RTC and impleaded as defendants all the original
stockholders and incorporators to recover on their unpaid subscriptions. RTC rendered
decision in favor of Printwell, rejecting the allegation of payment in full of the
subscriptions in view of an irregularity in the issuance of the ORs and observing that Halley
and other defendants had used BMPI’s corporate personality to evade payment and create
injustice. CA affirmed the RTC decision. Only Halley has come to the Court to seek a further
review.

ISSUES:

1. Whether or not the piercing of the corporate veil has been applied correctly despite
the absence of cogent proof that Halley, as stockholder of BMPI, had any hand in
transacting with Printwell.
2. Whether or not trust fund doctrine was erroneously applied when the grounds therefor
have not been satisfied.

RULING:

1. YES. Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers, such separate and distinct personality is merely a fiction
created by law for the sake of convenience and to promote the ends of justice. The
corporate personality may be disregarded, and the individuals composing the corporation
will be treated as individuals, if the corporate entity is being used as a cloak or cover for
fraud or illegality; as a justification for a wrong; as an alter ego, an adjunct, or a business
conduit for the sole benefit of the stockholders. As a general rule, a corporation is looked
upon as a legal entity, unless and until sufficient reason to the contrary appears. Although
nowhere in Printwell’s amended complaint or in the testimonies Printwell offered can it be
read or inferred from that the petitioner was instrumental in persuading BMPI to renege on
Page 25 of 45
 MERCANTILE LAW
J. BERSAMIN

its obligation to pay; or that she induced Printwell to extend the credit accommodation by
misrepresenting the solvency of BMPI to Printwell, her personal liability, together with that
of her co-defendants, remained because the CA found her and the other defendant
stockholders to be in charge of the operations of BMPI at the time the unpaid obligation
was transacted and incurred.

2. YES. The Court clarify that the trust fund doctrine is not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate debts. All assets
and property belonging to the corporation held in trust for the benefit of creditors that
were distributed or in the possession of the stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in satisfaction of its claim. Under the trust
fund doctrine, a corporation has no legal capacity to release an original subscriber to its
capital stock from the obligation of paying for his shares, in whole or in part, without a
valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed
to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of
the corporation for the satisfaction of its debt. To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to contribute to the
payment of its debts by making good unpaid balances upon their subscriptions, it is only
necessary to establish that the stockholders have not in good faith paid the par value of
the stocks of the corporation.

The Court ruled that Halley was liable pursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as
BMPI’s creditor, had a right to reach her unpaid subscription in satisfaction of its claim.

FOREST HILLS GOLF AND COUNTRY CLUB, INC. vs. GARDPRO, INC.

G.R. No. 164686, FIRST DIVISION, October 22, 2014, BERSAMIN, J.

The articles of incorporation and the bylaws of a corporation define and regulate the
relations between the corporation and the stockholders. In interpreting them, the literal meaning
of their provisions shall control, and such provisions should be construed as a whole and not in
isolation.

Golf clubs usually sell shares to individuals and juridical entities in order to raise capital
for the construction of their recreational facilities. In that regard, golf clubs accept juridical
entities to become regular members, and allow such entities to designate corporate nominees
because only natural persons can enjoy the sports facilities.— In the context of this arrangement,
Gardpro’s two nominees held playing rights. But the articles of incorporation of Forest Hills
and Section 2.2.2 of its bylaws recognized the right of the corporate member to replace the
nominees, subject to the payment of the transfer fee in such amount as the Board of Directors
determined for every change. The replacement could take place for Forest Hills Golf and
Country Club, Inc. vs. Gardpro, Inc. any of the following reasons, namely: (a) if the nominee
should cease to be an officer of the corporate member; or (b) if the corporate member should
request the replacement. In case of a replacement, the playing rights would also be transferred
to the new nominees.

Page 26 of 45
 MERCANTILE LAW
J. BERSAMIN

FACTS:

Forest Hills Golf and Country Club, Inc. (interchangeably Forest Hills or Club), a non-
profit stock corporation, was established to promote social, recreational and athletic activities
among its members. It constructed and maintained golf courses, tennis courts, swimming
pools, and other indoor and outdoor sports and recreational facilities. It was an exclusive and
private club organized for the sole benefit of its members.

In 1995, the Club engaged Fil-Estate Marketing Associates Inc., (FEMAI) to market and
offer for sale the shares of stocks of Forest Hills. Leandro de Mesa, the President of FEMAI,
oriented the sales staff on the information that would usually be inquired about by prospective
buyers. He made it clear that membership in the Club was a privilege, such that purchasers of
shares of stock would not automatically become members of the Club, but must apply for and
comply with all the requirements in order to qualify them for membership, subject to the
approval of the Board of Directors.

In 1996, Gardpro, Inc. (Gardpro) bought class “C” common shares of stock, which were
special corporate shares that entitled the registered owner to designate two nominees or
representatives for membership in the Club.

In October 1997, Ramon Albert, the General Manager of the Club, notified the
shareholders that it was already accepting applications for membership. In that regard, Gardpro
designated Fernando R. Martin and Rolando N. Reyes to be its corporate nominees; hence, the
two applied for membership in the Club.

Forest Hills charged them membership fees of P50,000.00 each, prompting

Martin to immediately call up Albert and complain about being thus charged despite
having been assured that no such fees would be collected from them. With Albert
assuring that the fees were temporary, both nominees of Gardpro paid the fees.

Both nominees of Gardpro were then admitted as members upon approval of their
applications by the Board of Directors. Later, Gardpro decided to change its designated
nominees, and Forest Hills charged Gardpro new membership fees of P75,000.00 per
nominee. When Gardpro refused to pay, the replacement did not take place.

On July 7, 1999, Gardpro filed a complaint in the SEC, which Forest Hills duly answered.
Martin and Reyes testified that when the shares of stock were being marketed, nothing about
payment of membership fees was explained to them; that upon his inquiry, a certain Ms. Cacho,
an agent of FEMAI, had told Martin that if a corporation bought class “C” common shares, its
nominees would be automatically entitled to become members of the Club; that all that the
corporation would have to do thereafter was to pay the monthly dues; that Albert had assured
Martin that the membership fees he had paid would be refunded; and that Martin was not
furnished copies of the by-laws of Forest Hills.

The SEC Hearing Officer ruled in favor of Gardpro Inc., and ordered Forest Hills not to
collect membership fees for the two replacement members. It ruled that the membership fees
already paid shall be applied as membership fees for the two replacement members.

This decision was affirmed by the SEC en banc and the Court of Appeals.

Page 27 of 45
 MERCANTILE LAW
J. BERSAMIN

ISSUE:

Whether the replacement nominees of Gardpro, Inc., who were applying for
membership in Forest Hills, should pay the required membership fees.

RULING:

No. Forest Hills was not authorized under its articles of incorporation and bylaws to
collect new membership fees for the replacement nominees of Gardpro.

The membership in the Club was a privilege, it being clear that the mere purchase of a
share in the Club did not immediately qualify a juridical entity for membership. Admission for
membership was still upon the favorable action of the Board of Directors of the Club.

Under the Club’s by-laws, membership fees of P45,000.00 must be paid by the applicant
within 30 days from the approval of the application before the share could be registered in the
Stock and Transfer Books of the Club. Pursuant to the Club’s articles of incorporation and
by-laws, the membership fees should be paid by the corporate member. Based on the
procedure set forth in Section 2.2.7 of the by-laws, the applicant was the juridical entity,
not its nominee or nominees. Although the nominee or nominees also accomplished
their application forms for membership in the Club, it was the corporate member that
was obliged to pay the membership fees in its own capacity because the share was
registered in its name in the Stock and Transfer Book.

As correctly held by the Hearing Officer and the SEC, the applicable provision on the
matter is section 2.2.2 of the By-Laws, the relevant portion of which states:

“A juridical entity owning a Class “C” Common Share may, by resolution of its
board of directors or trustees, designate two (2) nominees for regular membership
to the club for each Class “C” Share registered in its name; provided, however, that
only one (1) nominee for each Class “C” Share, as designated in the aforesaid
resolution may vote and hold office as such. The said nominee(s) or
representative(s), upon approval of the Board of Directors, may be admitted as
Regular Member(s). A transfer fee in such amount as may be prescribed by
the Board of Directors, shall be charged for every change in the designated
nominee of juridical entity.”

In this case, there is no transfer of share of ownership to be effected in the Book of the
Club. As aptly ruled by the SEC, the transfer fee under the former provision (to be prescribed
by the BOD) refers to the one imposed on the change in the corporate member's designated
nominee only, while the transfer fee under the latter provision (fixed at 75,000, which was
only 50,000 before) refers to a transfer of the stock itself from one corporate member to
another which necessitates entry in the Club's Books.

The by-laws constituted a binding contract as between Forest Hills and its members,
and as between the members themselves. The by-laws were self-imposed private laws binding
on all members, directors and officers of Forest Hills. The prevailing rule is that the provisions
of the articles of incorporation and the by-laws must be strictly complied with and applied to
the letter.

Page 28 of 45
 MERCANTILE LAW
J. BERSAMIN

As held by the Court of Appeals, when respondent Gardpro decided to replace its
designated nominees, it should not be required to pay membership fees again as it has already
paid such fees for the original designated nominees. As the real Club members, Gardpro should
not be assessed membership fees every time it changes its nominees. Nowhere in the By-Laws
of the Forest Hills is it provided that it is authorized to collect membership fees every time a
nominee of a corporate shareholder is to be replaced.

PHILIP TURNER and ELNURNER v. LORENZO SHIPPING CORPORATION

G.R. No. 157479, 24 November 2010, THIRD DIVISION (Bersamin, J.)

In order to give rise to any obligation to pay on the part of the respondent, the
petitioners should first make a valid demand that the respondent refused to pay despite having
unrestricted retained earnings. Otherwise, the respondent could not be said to be guilty of any
actionable omission that could sustain their action to collect.

Philip Turner and Elnora Turner (the Turners) held 1,010,000 shares of stock of
Lorenzo Shipping Corp. (LSC). LSC decided to amend its articles of incorporation to remove
the stockholders pre-emptive rights to newly issued shares of stock. Feeling that the
corporate move would be prejudicial to their interest as stockholders, the Turners voted
against the amendment and demanded payment of their shares. LSC found the fair value
of the shares demanded by the Turners unacceptable. The disagreement on the valuation
of the shares led the parties to constitute an appraisal committee pursuant to Section 82 of
the Corporation Code. Subsequently, the Turners demanded payment based on the valuation
of the appraisal committee, plus 2%/month penalty from the date of their original demand
for payment, as well as the reimbursement of the amounts advanced as professional fees
to the appraisers. LSC however refused the Turners demand, explaining that pursuant to
the Corporation Code, the dissenting stockholders exercising their appraisal rights could
be paid only when the corporation had unrestricted retained earnings to cover the fair value
of the shares, but that it had no retained earnings at the time of the petitioners demand, as
borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of
P72,973,114.00 as of December 31, 1999.

Upon the LSC’s refusal to pay, the Turners sued the latter for collection and damages
(Civil Case No. 01-086) in the Regional Trial Court (RTC). Thereafter, the Turners filed their
motion for partial summary judgment which was opposed by LSC.

ISSUE:

Whether or not the Turners’ cause of action was premature.

RULING:

YES. That LSC had indisputably no unrestricted retained earnings in its books at the
time the Turners commenced Civil Case No. 01-086 on January 22, 2001 proved that LSC’s
legal obligation to pay the value of the Turners shares did not yet arise. Thus, the CA did
not err in holding that the petitioners had no cause of action, and in ruling that the RTC did
not validly render the partial summary judgment.

The RTC’s construal of the Corporation Code was unsustainable, because it did not take
into account the petitioners’ lack of a cause of action against the respondent. In order to give
rise to any obligation to pay on the part of the respondent, the petitioners should first make a
valid demand that the respondent refused to pay despite having unrestricted retained earnings.
Page 29 of 45
 MERCANTILE LAW
J. BERSAMIN

Otherwise, the respondent could not be said to be guilty of any actionable omission that could
sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing of
the complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of
action could only spring from an existing cause of action. Verily, a premature invocation of the
courts intervention renders the complaint without a cause of action and dismissible on such
ground. In short, Civil Case No. 01-086, being a groundless suit, should be dismissed.

Even the fact that the respondent already had unrestricted retained earnings more than
sufficient to cover the Turners claims on June 26, 2002 (when they filed their motion for partial
summary judgment) did not rectify the absence of the cause of action at the time of the
commencement of Civil Case No. 01-086. The motion for partial summary judgment, being a
mere application for relief other than by a pleading, was not the same as the complaint in Civil
Case No. 01-086. Thereby, the Turners did not meet the requirement of the Rules of Court that
a cause of action must exist at the commencement of an action, which is commenced by the
filing of the original complaint in court.

_________________________________________________________________________________

CARANDANG VS. DESIERTO

GR No. 148076, January 12, 2011, J Bersamin

A 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 through its
instrumentalities either wholly or where applicable as in the case of stock corporation to the
extent of at least 51% of its capital stock. When a stockholder ceded to the government shares
representing 72.4 % of the voting stock of the corporation but subsequently clarified that it
should be reduced to 32.4%, the corporation shall not be considered government owned and
controlled until the quantification of shares is resolved with finality.

Respondent was not a corporate officer of the corporation because his position as General
Manager was not specifically mentioned in the roster of corporate officers in its corporate by-
laws. The enabling clause in the corporation’s by-laws empowering its Board of Directors to
create additional officers, i.e., General Manager and the subsequent passage of a board
resolution to that effect can not make such position a corporate office. The Board of Directors
has no power to create other corporate offices without first amending the corporate by-laws so
as to include therein the newly created corporate office. Though the Board may create
appointive positions other than the positions of corporate officers, the persons occupying such
positions can not be viewed as corporate officers under Section 25 of the Corporation Code.
Therefore, the termination of the respondent was not an intra-corporate controversy but a
labor dispute falling within the jurisdiction of the labor arbiter. March II Marketing vs Joson,
GR No. 171993, December 12, 2011, J. Bersamin

BANKING LAWS

METROPOLITAN BANK & TRUST CO. (METROBANK), represented by ROSELLA A.

SANTIAGO, petitioner, vs. ANTONINO O. TOBIAS III, respondent.
G.R. No. 177780 January 25, 2012, FIRST DIVISION, BERSAMIN J.

Page 30 of 45
 MERCANTILE LAW
J. BERSAMIN

Banks and Banking; Negligence; Banks are expected to exercise greater care and prudence
than others in their dealings because their business is impressed with public interest.—We do not
lose sight of the fact that METROBANK, a commercial bank dealing in real property, had the
duty to observe due diligence to ascertain the existence and condition of the realty as well as
the validity and integrity of the documents bearing on the realty. Its duty included the
responsibility of dispatching its competent and experience representatives to the realty to
assess its actual location and condition, and of investigating who was its real owner. Yet, it is
evident that METROBANK did not diligently perform a thorough check on Tobias and the
circumstances surrounding the realty he had offered as collateral. As such, it had no one to
blame but itself. Verily, banks are expected to exercise greater care and prudence than others
in their dealings because their business is impressed with public interest. Their failure to do so
constitutes negligence on its part. Metropolitan Bank & Trust Co.

FACTS:

Tobias, herein respondent, opened a savings/current account for and in the name of
Adam Merchandising, his frozen meat business. Six months later, Tobias applied for a loan
from METROBANK, which in due course conducted trade and credit verification of Tobias that
resulted in negative findings. METROBANK next proceeded to appraise the property Tobias
offered as collateral by asking him for a photocopy of the title and other related documents.
The property consisted of four parcels of land located in Malabon City, Metro Manila covered
by Transfer Certificate of Title (TCT) No. M-16751. Based on the financial statements submitted
by Tobias, METROBANK approved a credit line for P40,000,000.00. METROBANK proceeded
to the Registry of Deeds of Malabon to cause the annotation of the deed of real estate mortgage
on TCT No. M-16751.

Tobias paid the interest on the loan for about a year before defaulting. His loan was
restructured to 5-years upon his request. Yet, after two months, he again defaulted. Thus, the
mortgage was foreclosed, and the property was sold to METROBANK as the lone bidder. When
the certificate of sale was presented for registration to the Registry of Deeds of Malabon, no
corresponding original copy of TCT No. M-16751 was found in the registry vault. Given such
findings, METROBANK requested the Presidential Anti-Organized Crime Task Force
(PAOCTF) to investigate. In its report, PAOCTF concluded that TCT No. M-16751 and the tax
declarations submitted by Tobias were fictitious.

Tobias averred that he had bought the property from one Leonardo Fajardo through real
estate brokers; that the actual inspection of the property as well as the verification made in the
Registry of Deeds of Malabon City had ascertained the veracity of TCT No. 106083 under the
name of Leonardo Fajardo; that he had applied for the loan from METROBANK to pay the
purchase price by offering the property as collateral; that he had executed a deed of absolute
sale with Fajardo covering the property, and that said instrument had been properly registered
in the Registry of Deeds; that the transfer of the title, being under the account of the seller, had
been processed by seller Fajardo and his brokers; that his title and the property had been
inspected and verified by METROBANK’s personnel; and that he did not have any intention to
defraud METROBANK.

Nonetheless, the Office of the City Prosecutor of Malabon ultimately charged Tobias
with estafa through falsification of public documents. However, Acting Secretary of Justice Ma.
Merceditas N. Gutierrez issued a resolution directing the withdrawal of the information filed
against Tobias. Acting Secretary of Justice Gutierrez opined that Tobias had sufficiently
established his good faith in purchasing the property and that he had even used part of the
proceeds of the loan to pay the seller.
CA dismiss the petition for certiorari filed by Metrobank to question the order of Secretary of
Justice to withdraw the information. On appeal to the Supreme Court, METROBANK submits
Page 31 of 45
 MERCANTILE LAW
J. BERSAMIN

that the presumption of authorship was sufficient to establish probable cause to hold Tobias
for trial; that the presumption applies when a person is found in possession of the forged
instrument, makes use of it, and benefits from it.

ISSUE:

Whether the dismissal of petition for certiorari by CA is proper.

RULING:

CA’s dismissal of the petition for certiorari filed by Metrobank to question the
order of Secretary of Justice to withdraw the information is proper.

METROBANK urges the application of the presumption of authorship against Tobias

based on his having offered the duplicate copy of the spurious title to secure the loan; and posits
that there is no requirement that the presumption shall apply only when there is absence of a
valid explanation from the person found to have possessed, used and benefited from the forged
document.

The presumption that whoever possesses or uses a spurious document is its forger
applies only in the absence of a satisfactory explanation. Accordingly, the Secretary of Justice
did not err in dismissing the information in the face of the controverting explanation by Tobias
showing how he came to possess the spurious document.

METROBANK, a commercial bank dealing in real property, had the duty to observe due
diligence to ascertain the existence and condition of the realty as well as the validity and
integrity of the documents bearing on the realty. Its duty included the responsibility of
dispatching its competent and experience representatives to the realty to assess its actual
location and condition, and of investigating who was its real owner. Yet, it is evident that
METROBANK did not diligently perform a thorough check on Tobias and the circumstances
surrounding the realty he had offered as collateral. As such, it had no one to blame but itself.
Verily, banks are expected to exercise greater care and prudence than others in their dealings
because their business is impressed with public interest. Their failure to do so constitutes
negligence on its part.

_________________________________________________________________________________

Development Bank of the Philippines v. Guariña Agricultural and Realty Dev’t Corp.
G.R. No. 160758; January 15, 2014
J. Bersamin

The lender who refuses to release the full amount of the loan cannot foreclose the mortgage
constituted thereon. Foreclosure prior to the mortgagor’s default is premature and unenforceable
and the mortgagee who has been given possession over the mortgaged property by virtue of a writ
of possession may be ordered to restore the possession of the same to the mortgagor and to pay
reasonable rent for its use during the intervening period

Facts:

In order to finance the development of a resort complex, Guariña Corporation applied for a
loan from DBP in the amount of P3,387,000. Guariña Corporation executed a real estate
mortgage over several real properties in favor of DBP as security for the repayment of the loan
and a chattel mortgage over the personal properties existing at the resort complex and those
yet to be acquired out of the proceeds of the loan.
Page 32 of 45
 MERCANTILE LAW
J. BERSAMIN

The loan was released in several instalments and the same was used by Guariña Corporation to
defray the cost of additional improvements in the resort complex. In all, the amount released
totalled P3,003,617.49. Subsequently, Guariña Corporation demanded the release of the balance
of the loan. DPB refused and directly paid some suppliers of Guariña Corporation instead. Later
on, upon inspection, DBP discovered that Guariña Corporation had not completed the
construction works. DBP thus demanded to expedite the completion of the project and warned
that it would initiate foreclosure proceedings shouldGuariña Corporation not do so.

With the non-action and objection of Guariña Corporation, DBP initiated extrajudicial
foreclosure proceedings. This resulted in Guariña Corporation suing DPB for specific
performance of the latter’s obligations under the loan agreement and to stop the foreclosure of
the mortgage. Due to the fact that DBP had already sold the mortgaged properties, Guariña
Corporation amended the complaint to seek the nullification of the foreclosure proceedings
and cancellation of the certificate of sale. Thereafter, a writ of possession was issued in favor of
DBP.

RTC rendered judgment declaring the extra-judicial sales of the mortgage properties null and
void and ordered DBP to return to Guariña Corporation the actuall possession and enjoyment
of all the properties foreclosed and possessed by it. On appeal, the CA affirmed the decision of
the trial court. DBP filed a motion for reconsideration, but the CA denied the same. Hence, the
appeal.

Issue:

Whether or not the foreclosure was valid.

Ruling:

By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact
on Guariña Corporation the latter's compliance with its own obligation under the loan. Indeed,
if a party in a reciprocal contract like a loan does not perform its obligation, the other party
cannot be obliged to perform what is expected of it while the other's obligation remains
unfulfilled. In other words, the latter party does not incur delay.

Still, DBP called upon Guariña Corporation to make good on the construction works pursuant
to the acceleration clause written in the mortgage contract or else it would foreclose the
mortgages.

DBP's actuations were legally unfounded. It is true that loans are often secured by a mortgage
constituted on real or personal property to protect the creditor's interest in case of the default
of the debtor. By its nature, however, a mortgage remains an accessory contract dependent on
the principal obligation, such that enforcement of the mortgage contract will depend on
whether or not there has been a violation of the principal obligation. While a creditor and a
debtor could regulate the order in which they should comply with their reciprocal obligations,
it is presupposed that in a loan the lender should perform its obligation - the release of the full
loan amount - before it could demand that the borrower repay the loaned amount. In other
words, Guariña Corporation would not incur in delay before DBP fully performed its reciprocal
obligation.

Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make
an effective demand for payment upon Guariña Corporation to perform its obligation under
the loan. According to Development Bank of the Philippines v. Licuanan, it would only be when
a demand to pay had been made and was subsequently refused that a borrower could be
Page 33 of 45
 MERCANTILE LAW
J. BERSAMIN

considered in default, and the lender could obtain the right to collect the debt or to foreclose
the mortgage. Hence, Guariña Corporation would not be in default without the demand.

Assuming that DBP could already exact from the latter its compliance with the loan agreement,
the letter dated February 27, 1978 that DBP sent would still not be regarded as a demand to
render Guariña Corporation in default under the principal contract because DBP was only
thereby requesting the latter "to put up the deficiency in the value of improvements."

Under the circumstances, DBP's foreclosure of the mortgage and the sale of the mortgaged
properties at its instance were premature, and, therefore, void and ineffectual. The Court
thereby affirms the order for the restoration of possession to Guariña Corporation and the
payment of reasonable rentals for the use of the resort.

TRUST RECEIPT

The sale of goods by a person in the business of selling goods, for profit, who at the outset of
the transaction, has as against the buyer, general property rights in such goods, or who sells
goods to the buyer on credit, retaining title or other interest as security for the payment of the
purchase price, does not constitute a trust receipt transaction. There is no trust receipt,
notwithstanding the label, if goods offered as security for a loan accommodation are goods sold
to the debtor under a supposed trust receipt transaction. Sps. Dela Cruz vs Dela Cruz, GR
No. 158649, February 18, 2013

INTELLECTUAL PROPERTY CODE

INTELLECTUAL PROPERTY ASSOCIATION OF THE PHILIPPINES vs. HON. PAQUITO

OCHOA, IN HIS CAP A CITY AS EXECUTIVE SECRETARY, HON. ALBERT DEL
ROSARIO, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FOREIGN
AFFAIRS, AND HON. RICARDO BLANCAFLOR, IN HIS CAPACITY AS THE DIRECTOR
GENERAL OF THE INTELLECTUAL PROPERTY OFFICE OF THE PHILIPPINES
G .R. No. 204605, July 19, 2016, BERSAMIN, J.

President's ratification is valid and constitutional because the Madrid Protocol, being an
executive agreement as determined by the Department of Foreign Affairs, does not require the
concurrence of the Senate.

There is no conflict between the Madrid Protocol and the IP Code. The IPOPHL actually
requires the designation of the resident agent when it refuses the registration of a mark. Local
representation is further required in the submission of the Declaration of Actual Use, as well as
in the submission of the license contract. The Madrid Protocol accords with the intent and spirit
of the IP Code, particularly on the subject of the registration of trademarks. The Madrid Protocol
does not amend or modify the IP Code on the acquisition of trademark rights considering that the
applications under the Madrid Protocol are still examined according to the relevant national law.
In that regard, the IPOPHL will only grant protection to a mark that meets the local registration
requirements.

FACTS:

The Madrid System for the International Registration of Marks (Madrid System), which
is the centralized system providing a one-stop solution for registering and managing marks
worldwide, allows the trademark owner to file one application in one language, and to pay one
set of fees to protect his mark in the territories of up to 97 member-states. The Madrid System
is governed by the Madrid Agreement, concluded in 1891, and the Madrid Protocol, concluded

Page 34 of 45
 MERCANTILE LAW
J. BERSAMIN

in 1989.

The Intellectual Property Office of the Philippines (IPOPHL) recommended to the

Department of Foreign Affairs (DFA) that the Philippines should accede to the Madrid Protocol.
After its own review, the DFA endorsed to the President the country's accession to the Madrid
Protocol. Conformably with its express authority under Section 9 of Executive Order No. 459
(Providing for the Guidelines in the Negotiation of International Agreements and its Ratification)
dated November 25, 1997, the DFA determined that the Madrid Protocol was an executive
agreement. President Benigno C. Aquino III ratified the Madrid Protocol through an instrument
of accession. The Madrid Protocol entered into force in the Philippines on July 25, 2012.

Petitioner IPAP has commenced this special civil action for certiorari and prohibition to
challenge the validity of the President's accession to the Madrid Protocol without the
concurrence of the Senate.

Furthermore, the IPAP has argued that the implementation of the Madrid Protocol in
the Philippines; specifically the processing of foreign trademark applications, conflicts with the
IP Code. The IPAP has insisted that Article 2 of the Madrid Protocol means that foreign
trademark applicants may file their applications through the International Bureau or the
WIPO, and their applications will be automatically granted trademark protection without the
need for designating their resident agents in the country.

ISSUES:

1. Whether or not the President's ratification of the Madrid Protocol is valid and
constitutional.
2. Whether or not the Madrid Protocol is in conflict with the IP Code.

RULING:

1. President's ratification is valid and constitutional because the Madrid Protocol, being an
executive agreement as determined by the Department of Foreign Affairs, does not require the
concurrence of the Senate.

The Court has highlighted the difference between treaties and executive agreements in
Commissioner of Customs v. Eastern Sea Trading,thusly:

International agreements involving political issues or changes of national policy

and those involving international arrangements of a permanent character usually
take the form of treaties. But international agreements embodying adjustments
of detail carrying out well-established national policies and traditions and those
involving arrangements of a more or less temporary nature usually take the form
of executive agreements.

The pronouncement in Commissioner of Customs v. Eastern Sea Trading indicates that

the registration of trademarks and copyrights have been the subject of executive agreements
entered into without the concurrence of the Senate.

2. There is no conflict between the Madrid Protocol and the IP Code.

The IPAP also rests its challenge on the supposed conflict between the Madrid Protocol
and the IP Code, contending that the Madrid Protocol does away with the requirement of a
resident agent under Section 125 of the IP Code; and that the Madrid Protocol is
unconstitutional for being in conflict with the local law, which it cannot modify.
Page 35 of 45
 MERCANTILE LAW
J. BERSAMIN

The IPAP's contentions stand on a faulty premise. The method of registration through
the IPOPHL, as laid down by the IP Code, is distinct and separate from the method of
registration through the WIPO, as set in the Madrid Protocol. Comparing the two methods of
registration despite their being governed by two separate systems of registration is thus
misplaced.

The IPAP misapprehends the procedure for examination under the Madrid Protocol, The
difficulty, which the IPAP illustrates, is minimal, if not altogether inexistent. The IPOPHL
actually requires the designation of the resident agent when it refuses the registration of a mark.
Local representation is further required in the submission of the Declaration of Actual Use, as
well as in the submission of the license contract. The Madrid Protocol accords with the intent
and spirit of the IP Code, particularly on the subject of the registration of trademarks. The
Madrid Protocol does not amend or modify the IP Code on the acquisition of trademark rights
considering that the applications under the Madrid Protocol are still examined according to the
relevant national law. In that regard, the IPOPHL will only grant protection to a mark that
meets the local registration requirements.

CATERPILLAR, INC., Petitioner, - versus - MANOLO P. SAMSON, Respondent.

G.R. No. 205972 and G.R. No. 164352, November 9, 2016, FIST DIVISION, BERSAMIN J,.

An action for the cancellation of trademark is a remedy available to a person who believes
that he is or will be damaged by the registration of a mark. On the other hand, the criminal actions
for unfair competition involved the determination of whether or not Samson had given his goods
the general appearance of the goods of Caterpillar, with the intent to deceive the public or defraud
Caterpillar as his competitor. In the suit for the cancellation of trademark, the issue of
lawful registration should necessarily be determined, but registration was not a
consideration necessary in unfair competition. Indeed, unfair competition is committed if
the effect of the act is "to pass off to the public the goods of one man as the goods of another; it is
independent of registration. As fittingly put in R.F. & Alexander & Co. v. Ang,"one may be declared
unfair competitor even if his competing trade-mark is registered."

FACTS:
Antecedents
Caterpillar is a foreign corporation engaged in the manufacture and distribution of footwear,
clothing and related items, among others. Its products are known for six core trademarks,
namely, "CATERPILLAR", "CAT" "CATERPILLAR & DESIGN" "CAT AND DESIGN" "WALKING
MACHINES" and "TRACK-TYPE TRACTOR & DESIGN (Core Marks), all of which are alleged
as internationally known. On the other hand, Samson, doing business under the names and
styles of Itti Shoes Corporation, Kolm's Manufacturing Corporation and Caterpillar Boutique
and General Merchandise, is the proprietor of various retail outlets in the Philippines selling
footwear, bags, clothing, and related items under the trademark "CATERPILLAR", registered in
1997 under Trademark Registration No. 64705 issued by the Intellectual Property Office (IPO).

G.R. No. 164352

Caterpillar alleged that Samson and his affiliate companies allegedly sell and distribute
products clothed with the general appearance of its own products.

On July 31, 2000, Caterpillar commenced a civil action against Samson and his business entities,
with the IPO as a nominal party - for Unfair Competition, Damages and Cancellation of
Trademark with Application for Temporary Restraining Order (TRO) and/or Writ of Preliminary
Injunction - docketed as Civil Case No. Q-00-41446 of the RTC in Quezon City. In said civil
Page 36 of 45
 MERCANTILE LAW
J. BERSAMIN

action, the RTC denied Caterpillar's application for the issuance of the TRO. Subsequently, six
criminal complaints for unfair competition under Section 168.3(a), in relation to Section 123 .1,
Section 131.1 and Section 170 of the IP Code, were filed in the RTC, Branch 256, in Muntinlupa
City, presided by Judge Alberto L. Lerma, docketed as Criminal Cases Nos. 02-238 to 02-243.

Upon motion filed by Samson, Presiding Judge Lerma found that there exist a prejudicial
question and suspended the arraignment and all other proceedings in Criminal Cases Nos. 02-
240 to 02-243 until Civil Case No. Q-00-41446 was finally resolved. The CA found no grave abuse
of discretion on the part of RTC in suspending the proceeding in the criminal case.

G.R. No. 205972

In the meanwhile, in August 2002, upon receiving the information that Samson and his affiliate
entities continuously sold and distributed products bearing Caterpillar's Core Marks without
Caterpillar's consent, the latter requested the assistance of the Regional Intelligence and
Investigation Division of the National Region Public Police (RIID-NCRPO) for the conduct of
an investigation. Subsequently, after the investigation, the RIIDNCRPO applied for and was
granted 16 search warrants against various outlets owned or operated by Samson. The warrants
were served on August 27, 2002, and as the result products bearing Caterpillar's Core Marks
were seized and confiscated. Consequently, on the basis of the search warrants issued by the
various courts, Caterpillar again instituted criminal complaints in the DOJ for violation of
Section 168.3(a), in relation to Sections 131.3, 123.l (e) and 170 of the IP Code against Samson.
(Note: the criminal complaints describe here is distinct and separate from the criminal complaints
in G.R. No. 164352)

After the conduct of the preliminary investigation, the DOJ, through State Prosecutor Melvin
J. Abad, issued a joint resolution dated August 21, 2003 dismissing the complaint upon finding
that there was no probable cause to charge Samson with unfair competition. The Secretary of
Justice affirmed the dismissal. Caterpillar appealed to the CA through a petition for review
under Rule 43, Rules of Court however, the CA denied due course to Caterpillar's petition for
review.

ISSUES:

1. In G.R. No. 164352 - whether or not the CA committed a reversible error in ruling that the
trial court a quo did not commit grave abuse of discretion in suspending the criminal
proceedings on account of a prejudicial question; and,
2. In G.R. No. 205972 - whether or not the CA correctly denied the petition for review filed by
Caterpillar.

RULING:

G.R. No. 164352

Civil Case No. Q-00-41446 did not operate as a prejudicial question that justified the
suspension of the proceedings in Criminal Cases Nos. Q-02-108043-44.

Civil Case No. Q-00-41446, the civil case filed by Caterpillar in the RTC in Quezon City, was for
unfair competition, damages and cancellation of trademark, while Criminal Cases Nos. Q-02-
108043-44 were the criminal prosecution of Samson for unfair competition. A common element
of all such cases for unfair competition - civil and criminal - was fraud. Under Article 33 of the
Civil Code, a civil action entirely separate and distinct from the criminal action may be brought
by the injured party in cases of fraud, and such civil action shall proceed independently of the
criminal prosecution.

Furthermore, the present case failed to meet the elements of a prejudicial question provided in
Page 37 of 45
 MERCANTILE LAW
J. BERSAMIN

Section 7 of Rule 111, Rules of Court, to wit: (a) a previously instituted civil action involves an
issue similar to or intimately related to the issue raised in the subsequent criminal action, and
(b) the resolution of such issue determines whether or not the criminal action may proceed.

An action for the cancellation of trademark like Civil Case No. Q-00- 41446 is a remedy available
to a person who believes that he is or will be damaged by the registration of a mark. On the
other hand, the criminal actions for unfair competition (Criminal Cases Nos. Q-02-108043-44)
involved the determination of whether or not Samson had given his goods the general
appearance of the goods of Caterpillar, with the intent to deceive the public or defraud
Caterpillar as his competitor. In the suit for the cancellation of trademark, the issue of
lawful registration should necessarily be determined, but registration was not a
consideration necessary in unfair competition. Indeed, unfair competition is committed if
the effect of the act is "to pass off to the public the goods of one man as the goods of another; it
is independent of registration. As fittingly put in R.F. & Alexander & Co. v. Ang,"one may be
declared unfair competitor even if his competing trade-mark is registered."

Clearly, the determination of the lawful ownership of the trademark in the civil action was not
determinative of whether or not the criminal actions for unfair competition shall proceed
against Samson.

G.R. No. 205972

CA correctly denied the petition for review filed by Caterpillar.

Firstly, Caterpillar assailed the resolution of the Secretary of Justice by filing a petition for
review under Rule 43 of the Rules of Court. Such resort to the petition for review under Rule 43
was erroneous, and the egregious error warranted the denial of the appeal. The petition for
review under Rule 43 applied to all appeals to the CA from quasi-judicial agencies or bodies,
particularly those listed in Section 1 of Rule 43. However, the Secretary of Justice, in the review
of the findings of probable cause by the investigating public prosecutor, was not exercising a
quasi-judicial function, but performing an executive function.

Moreover, the courts could intervene in the determination of probable cause only through the
special civil action for certiorari under Rule 65 of the Rules of Court, not by appeal through the
petition for review under Rule 43. Thus, the CA could not reverse or undo the findings and
conclusions on probable cause by the Secretary of Justice except upon clear demonstration of
grave abuse of discretion amounting to lack or excess of jurisdiction committed by the Secretary
of Justice.

Even discounting the technicalities as to consider Caterpillar's petition for review as one
brought under Rule 65, the recourse must still fail. In not finding probable cause to indict
Samson for unfair competition, State Prosecutor Abad as the investigating public prosecutor
discharged the discretion given to him by the law. Specifically, he resolved as follows:

It appears from the records that respondent (referring to SAMSON) started marketing his (class
25) products bearing the trademark Caterpillar as early as 1992. In 1994, respondent caused the
registration of the trademark "Caterpillar With A Triangle Device Beneath The Letter [A]" with
the Intellectual Property Office. Sometime on June 16, 1997, the IPO issued Certificate of
Registration No. 64705 which appears to be valid for twenty (20) years, or up to June 16, 2017.
Upon the strength of this registration, respondent continued with his business of marketing
shoes, slippers, sandals, boots and similar Class 25 items bearing his registered trademark
"Caterpillar". Under the law, respondent's operative act of registering his Caterpillar trademark
and the concomitant approval/issuance by the governmental entity concerned, conferred upon
him the exclusive right to use said trademark unless otherwise declared illegal. There being no
Page 38 of 45
 MERCANTILE LAW
J. BERSAMIN

evidence to controvert the fact that respondent's Certificate of Registration No. 64705 covering
Caterpillar trademark was fraudulently or illegally obtained, it necessarily follows that its
subsequent use and/or being passed on to the public militates malice or fraudulent intent on
the part of respondent. Otherwise stated and from the facts obtaining, presumption of regularity
lies, both from the standpoint of registration and use/passing on of the assailed Caterpillar
products.

Complainant's argument(referring to CATERPILLAR) that respondent may still be held liable

for unfair competition by reason of his having passed on five (5) other Caterpillar products like
"Cat", "Caterpillar", "Cat and Design", "Walking Machines" and "Track-Type Tractor Design" is
equally difficult to sustain. As may be gleaned from the records, respondent has been engaged
in the sale and distribution of Caterpillar products since 1992 leading to the establishment of
numerous marketing outlets. As such, it would be difficult to assail the presumption that
respondent has already established goodwill insofar as his registered Caterpillar products are
concerned. On the other hand, complainant's registration of the other Caterpillar products
appears to have been caused only in 1995. In this premise, respondent may be considered as prior
user, while the latter, a subsequent one. Jurisprudence dictates that prior user of the trademark
by one, will controvert the claim by a subsequent one.

_________________________________________________________________________________

MICROSOFT CORPORATION v. ROLANDO MANANSALA and/or MEL MANANSALA,

doing business as DATAMAN TRADING COMPANY and/or COMIC ALLEY*
G.R.No. 166391, OCTOBER 21, 2015, BERSAMIN, J., FIRST DIVISION

Criminal Law; Copyright Infringement; The commission of any of the acts mentioned in
Section 5 of Presidential Decree (PD) No. 49 without the copyright owner’s consent constituted
actionable copyright infringement.—Accordingly, the commission of any of the acts mentioned
in Section 5 of Presidential Decree No. 49 without the copyright owner’s consent constituted
actionable copyright infringement. In Columbia Pictures, Inc. v. Court of Appeals, 261 SCRA 144
(1996), the Court has emphatically declared: Infringement of a copyright is a trespass on a
private domain owned and occupied by the owner of the copyright, and, therefore, protected
by law, and infringement of copyright, or piracy, which is a synonymous term in this
connection, consists in the doing by any person, without the consent of the owner of the
copyright, of anything the sole right to do which is conferred by statute on the owner of the
copyright.

Criminal Law; Copyright Infringement; To hold, as the Court of Appeals (CA) incorrectly
did, that the legislative intent was to require that the computer programs be first photographed,
photo-engraved, or pictorially illustrated as a condition for the commission of copyright
infringement invites ridicule.—Presidential Decree No. 49 thereby already acknowledged the
existence of computer programs as works or creations protected by copyright. To hold, as the
CA incorrectly did, that the legislative intent was to require that the computer programs be
first photographed, photo-engraved, or pictorially illustrated as a condition for the commission
of copyright infringement invites ridicule. Such interpretation of Section 5(a) of Presidential
Decree No. 49 defied logic and common sense because it focused on terms like “copy,”
“multiply,” and “sell,” but blatantly ignored terms like “photographs,” “photo-engravings,” and
“pictorial illustrations.” Had the CA taken the latter words into proper account, it would have
quickly seen the absurdity of its interpretation.

Same; Same; The mere sale of the illicit copies of the software programs was enough by
itself to show the existence of probable cause for copyright infringement. There was no need for
the petitioner to still prove who copied, replicated or reproduced the software programs.—The
mere sale of the illicit copies of the software programs was enough by itself to show the
Page 39 of 45
 MERCANTILE LAW
J. BERSAMIN

existence of probable cause for copyright infringement. There was no need for the petitioner to
still prove who copied, replicated or reproduced the software programs. Indeed, the public
prosecutor and the DOJ gravely abused their discretion in dismissing the petitioner’s charge for
copyright infringement against the respondents for lack of evidence. There was grave abuse of
discretion because the public prosecutor and the DOJ acted whimsically or arbitrarily in
disregarding the settled jurisprudential rules on finding the existence of probable cause to
charge the offender in court. Accordingly, the CA erred in upholding the dismissal by the
DOJ of the petitioner’s petition for review.

FACTS

Petitioner (Microsoft Corporation) is the copyright and trademark owner of all rights
relating to all versions and editions of Microsoft software (computer programs) such as, but not
limited to, MS-DOS (disk operating system), Microsoft Encarta, Microsoft Windows, Microsoft
Word, Microsoft Excel, Microsoft Access, Microsoft Works, Microsoft Powerpoint, Microsoft
Office, Microsoft Flight Simulator and Microsoft FoxPro, among others, and their user’s
guide/manuals. Rolando Manansala is doing business under the name of DATAMAN TRADING
COMPANY and/or COMIC ALLEY. Manansala, without authority from petitioner, was engaged
in distributing and selling Microsoft computer software programs.

A private investigator accompanied by an agent from NBI was able to purchase 6 CD-
ROMs containing various computer programs belonging to petitioner. A search warrant was
then issued and was served on Manansala’s premises and yielded several illegal copies of
Microsoft programs. Subsequently, petitioner filed an Affidavit-Complaint in the DOJ based on
the results of the search and seizure operation conducted on private respondent’s premises.

However, the State Prosecutor dismissed the charge against Manansala for violation of
Section 29 P.D. 49 on the ground that there is no proof that Manansala was the one who really
printed or copied the products of Microsoft for sale in his store. The State Prosecutor
recommended that Manansala be charged for violation of Article 189 of the Revised Penal Code.
The charge for violation of Section 29 of PD No. 49 is recommended dismissed for lack of
evidence. Petitioner filed a Motion for Partial Reconsideration arguing that printing or copying
is not essential in the crime of copyright infringement under Section 29 of PD No. 49.

ISSUE

WON printing or copying is not essential in the commission of the crime of copyright
infringement under Section 29 of PD No. 49.

RULING

YES. The commission of any of the acts mentioned in Section 5 of PD No. 49 without the
copyright owner’s consent constituted actionable copyright infringement. Infringement of a
copyright is a trespass on a private domain owned and occupied by the owner of the copyright,
and, therefore, protected by law, and infringement of copyright, or piracy, which is a
synonymous term in this connection, consists in the doing by any person, without the consent
of the owner of the copyright, of anything the sole right to do which is conferred by statute on
the owner of the copyright.

The “gravamen of copyright infringement,” is not merely the unauthorized

manufacturing of intellectual works but rather the unauthorized performance of any of the acts
covered by Section 5. Hence, any person who performs any of the acts under Section 5 without
obtaining the copyright owners prior consent renders himself civilly and criminally liable for
copyright infringement.
Page 40 of 45
 MERCANTILE LAW
J. BERSAMIN

The conjunctive “and” should not be taken in its ordinary acceptation, but should be
construed like the disjunctive “or” if the literal interpretation of the law would pervert or
obscure the legislative intent. To accept the CA’s reading and interpretation is to accept absurd
results because the violations listed in Section 5(a) of PD No, 49 – “To print, reprint, publish,
copy, distribute, multiply, sell, and make photographs, photo-engravings, and pictorial
illustration of the works” – cannot be carried out on all of the classes of works enumerated in
Section 2 of PD No. 49.

PD No. 49 thereby already acknowledged the existence of computer programs as works

or creations protected by copyright. To hold that the legislative intent was to require that the
computer programs be first photographed, photo-engraved, or pictorially illustrated as a
condition for the commission of copyright infringement invites ridicule. Such interpretation of
Section 5(a) of PD No. 49 defied logic, and common sense because if focused on terms like
“copy,” “multiply’” and “sell’” but blatantly ignored terms like “photographs,” “photo-
engravings,” and “pictorial illustrations.” Had the CA taken the latter words into proper
account, it would have quickly seen the absurdity of its interpretation.

The mere sale of the illicit copies of the software programs was enough by itself to
show the existence of probable cause for copyright infringement. There was no need for the
petitioner to still prove who copied, replicated or reproduced the software programs.

JUNO BATISTIS v. PEOPLE OF THE PHILIPPINES

G.R. No. 181571, 16 December 2009, FIRST DIVISION (BERSAMIN, J.)

The act of unauthorized manufacture, sale and distribution of counterfeit products

constitute infringement of trademark.

The Fundador trademark characterized the brandy products manufactured by Pedro

Domecq, S.A. of Cadiz, Spain. It was duly registered in the Principal Register of the Philippines
Patent Office on July 12, 1968 under Certificate of Registration No. 15987, for a term of 20 years
from November 5, 1970. The registration was renewed for another 20 years effective November
5, 1990. Allied Domecq Philippines, Inc., a Philippine corporation exclusively authorized
to distribute Fundador brandy products imported from Spain wholly in finished form, initiated
this case against Juno Batistis. Upon its request, agents of the National Bureau of
Investigation (NBI) conducted a test-buy in the premises of Batistis, and thereby confirmed
that he was actively engaged in the manufacture, sale and distribution of counterfeit Fundador
brandy products. Upon application of the NBI agents based on the positive results of the test-
buy, Judge Antonio M. Eugenio, Jr. of the Manila RTC issued a search warrant authorizing the
search of the premises of Batistis. The search yielded 20 empty Carlos I bottles, 10 empty bottles
of Black Label whiskey, two empty bottles of Johnny Walker Swing, an empty bottle of Remy
Martin XO, an empty bottle of Chabot, 241 empty Fundador bottles, 163 boxes of Fundador, a
half sack of Fundador plastic caps, two filled bottles of Fundador brandy, and eight cartons of
empty Jose Cuervo bottles.

The Office of the City Prosecutor of Manila then formally charged Batistis in the RTC
with two separate offenses, namely, infringement of trademark and unfair competition to which
he was found guilty beyond reasonable on the two offenses. Batistis appealed to the CA, which
affirmed his conviction for infringement of trademark, but acquitted him of unfair competition.
After the CA denied his motion for reconsideration, Batistis brought this appeal.

ISSUE:

Page 41 of 45
 MERCANTILE LAW
J. BERSAMIN

Whether Batistis is guilty of infringement of trademark.

RULING:

YES. Article 155 of the Intellectual Property Code identifies the acts constituting
infringement of trademark, viz:

Section 155. Remedies; Infringement. Any person who shall, without the consent
of the owner of the registered mark:

155.1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a

registered mark or the same container or a dominant feature thereof in connection
with the sale, offering for sale, distribution, advertising of any goods or services
including other preparatory steps necessary to carry out the sale of any goods or
services on or in connection with which such use is likely to cause confusion, or
to cause mistake, or to deceive; or

155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a

dominant feature thereof and apply such reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints, packages, wrappers, receptacles or
advertisements intended to be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake,
or to deceive, shall be liable in a civil action for infringement by the registrant for
the remedies hereinafter set forth: Provided, That the infringement takes place at
the moment any of the acts stated in Subsection 155.1 or this subsection are
committed regardless of whether there is actual sale of goods or services using
the infringing material.

Harvey Tan, Operations Manager of Pedro Domecq, S.A. whose task involved the
detection of counterfeit products in the Philippines, testified that the seized Fundador brandy,
when compared with the genuine product, revealed several characteristics of counterfeiting,
namely: (a) the Bureau of Internal Revenue (BIR) seal label attached to the confiscated products
did not reflect the word tunay when he flashed a black light against the BIR label; (b) the tamper
evident ring on the confiscated item did not contain the word Fundador; and (c) the word
Fundador on the label was printed flat with sharper edges, unlike the raised, actually
embossed, and finely printed genuine Fundador trademark.

There is no question, therefore, that Batistis exerted the effort to make the counterfeit
products look genuine to deceive the unwary public into regarding the products as genuine.
The buying public would be easy to fall for the counterfeit products due to their having been
given the appearance of the genuine products, particularly with the difficulty of detecting
whether the products were fake or real if the buyers had no experience and the tools for
detection, like black light. He thereby infringed the registered Fundador trademark by the
colorable imitation of it through applying the dominant features of the trademark on the fake
products, particularly the two bottles filled with Fundador brandy. His acts constituted
infringement of trademark as set forth in Section 155, supra.

_________________________________________________________________________________

Page 42 of 45
 MERCANTILE LAW
J. BERSAMIN

SPECIAL LAWS

FINANCIAL REHABILITATION AND INSOLVENCY ACT

PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND

PACKAGING CORPORATION
G.R. No. 187581, FIRST DIVISION, October 20, 2014, BERSAMIN, J.

Corporations; Corporate Rehabilitation; Under the Interim Rules, rehabilitation is the

process of restoring “the debtor to a position of successful operation and solvency, if it is shown
that its continuance of operation is economically feasible and its creditors can recover by way of
the present value of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated.”— It contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency.

Same; Same; The basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation.—Consequently,
the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the petitioning corporation. The determination of such
issues was to be carried out by the court appointed rehabilitation receiver, who was Cacho in
this case. Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act [FRIA]
of 2010), a law that is applicable hereto, has defined a corporate debtor as a corporation duly
organized and existing under Philippine laws that has become insolvent. The term insolvent is
defined in Republic Act No. 10142 as “the financial condition of a debtor thatis generally unable
to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that
are greater than its or his assets.”

FACTS:

Basic Polyprinters and Packaging Corporation was a domestic corporation engaged in

the business of printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and
other novelty items.

Basic Polyprinters, along with the eight other corporations belonging to the Limtong
Group of Companies, filed a joint petition for suspension of payments with approval of the
proposed rehabilitation in the RTC. The RTC issued a stay order, and eventually approved the
rehabilitation plan, but the CA reversed the RTC on October 25, 2005, and directed the
petitioning corporations to file their individual petitions for suspension of payments and
rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, averring therein that:

a. its business since incorporation had been very viable and financially profitable;
b. it had obtained loans from various banks, and had owed accounts payable to various
creditors;
c. the Asian currency crisis, devaluation of the Philippine peso, and the current state of
affairs of the Philippine economy, coupled with: (i) high interest rates, penalties and
charges by its creditors; (ii) low demand for gift items and cards due to the economic
recession and the use of cellular phones; (iii) direct competition from stores like SM,
Gaisano, Robinson and other malls; and (iv) the fire of July 19, 2002 that had
destroyed its warehouse containing inventories worth P264,000,000.00,
resulting in difficulty of meeting its obligations;
Page 43 of 45
 MERCANTILE LAW
J. BERSAMIN

d. its operations would be hampered and would render rehabilitation difficult should
its creditors enforce their claims through legal actions, including foreclosure
proceedings;
e. included in its overall Rehabilitation Program was the full payment of its outstanding
loans in favor of petitioner Philippine Bank of Communications (PBCOM), RCBC,
Land Bank, EPCIBank and AUB via repayment over 15 years with moratorium of two-
years for the interest and five years for the principal at 5% interest per annum and a
dacion en pago of its affiliate property in favor of EPCI Bank; and
f. its assets worth P15,374,654.00 with net liabilities amounting to P13,031,438.00.

RTC issued the stay order and appointed Manuel N. Cacho III as the rehabilitation
receiver, and required all creditors and interested parties, including the SEC.

After the initial hearing and evaluation of the comments and opposition of the creditors,
including PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation
receiver for evaluation and recommendation.

After the rehabilitation receiver submitted his report recommending the approval of the
rehabilitation plan, the RTC issued an order approving the rehabilitation plan which was
affirmed by the CA agreeing with the finding of the rehabilitation receiver that there were
sufficient evidence, factors and actual opportunities in the rehabilitation plan indicating that
Basic Polyprinters could be successfully rehabilitated in due time.

PBCOM consistently opposed the rehabilitation from RTC to the CA and to the SC
arguing mainly that Basic Polyprinters’ liquidity was material in proceedings for corporate
rehabilitation and that a petition for rehabilitation presupposed that the petitioning
corporation had sufficient property to cover all its indebtedness, but Basic Polyprinters
did not show so because its assets were much less than its outstanding obligations. Likewise, it
averred that no that the rehabilitation plan did not contain the material financial commitments
required by Section 5, Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation.

ISSUES:

1. Whether liquidity is an issue in a petition for rehabilitation.

2. Whether material financial commitment is required in a rehabilitation plan.

RULING:

LIQUIDITY IS NOT AN ISSUE IN A PETITION FOR REHABILITATION

Rehabilitation is the process of restoring “the debtor to a position of successful operation

and solvency, if it is shown that its continuance of operation is economically feasible ad its
creditors can recover by way of the present value of payments projected in the plan more if the
corporation continues as a going concern that if it is immediately liquidated.” It contemplates
a continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency.

Rehabilitation proceedings have a two-pronged purpose, namely: (a) to efficiently and

equitably distribute the assets of the insolvent debtor to its creditors; and (b) to provide the
debtor with a fresh start.

The purpose of rehabilitation proceedings is to enable the company to gain a new lease
on life and thereby allow creditors to be paid their claims from its earnings. Consequently, the
Page 44 of 45
 MERCANTILE LAW
J. BERSAMIN

basic issues in rehabilitation proceedings concern the viability and desirability of

continuing the business operations of the petitioning corporation. The determination of
such issues was to be carried out by the court-appointed rehabilitation receiver.

Republic Act No. 10142 (FRIA of 2010), a law that is applicable hereto, has defined a
corporate debtor as a corporation duly organized and existing under Philippine laws that has
become insolvent. The term insolvent is defined in said law as “the financial condition of a
debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course
of business or has liabilities that are greater than its or his assets.” As such, the contention that
rehabilitation becomes inappropriate because of the perceived insolvency of Basic Polyprinters
was incorrect.

MATERIAL FINANCIAL COMMITMENT IS REQUIRED IN A REHABILITATION PLAN

A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary undertakings
of the stockholders or the would-be investors of the debtor-corporation indicating their
readiness, willingness and ability to contribute funds or property to guarantee the continued
successful operation of the debtor corporation during the period of rehabilitation.

The financial commitments presented by Basic Polyprinters were insufficient for the
purpose of rehabilitation. The commitment to add P10,000,000.00 working capital appeared to
be doubtful considering that the insurance claim from which said working capital would be
sourced had already been written-off by Basic Polyprinters’s affiliate, Wonder Book
Corporation.

The conversion of all deposits for future subscriptions to common stock and the
treatment of all payables to officers and stockholders as trade payables was hardly constituting
material financial commitments. Such “conversion” of cash advances to trade payables was, in
fact, a mere re-classification of the liability entry and had no effect on the shareholders’ deficit.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it
intended to address the low demands for their products and the effect of direct competition
from stores like SM, Gaisano, Robinsons, and other malls.
Basic Polyprinters’s proposal to enter into the dacion en pago to create a source of “fresh
capital” was not feasible because the object thereof would not be its own property but one
belonging to its affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation.

Hence, the Court held that the rehabilitation plan for Basic Polyprinters cannot be said
to be genuine and made in good faith, for it was, in fact, unilateral and detrimental to its
creditors and the public.

Page 45 of 45