CORPORATION LAW – CASE RULINGS (Week 9)
Jann Claudine M. Amago 3 – A
1. Dulay Enterprises vs. CA
Manuel R. Dulay Enterprises is a domestic close corporation.
Petitioner corporation through its president obtained various loans for the
constructionof its hotel project, Dulay Continental Hotel. It even had to
borrow money from petitioner Virgilio Dulay to be able to continue the
hotel project. As a result of said loan, petitioner Virgilio Dulay occupied
one of the unit apartments of the subject property since property since
1973 while at the same time managing the Dulay Apartment at his
shareholdings in the corporation was subsequently increased by his
father.
Through a board resolution, Manuel Dulay sold the subject property
to Spouses Veloso with right to repurchase. Spouses Veloso, on the other
hand, mortgaged the property to Manuel Torres without Dulay’s
knowledge. Both Dualy and Veloso failed to redeem the property. Torres
then filed and was issued by the court an affidavit of consolidation.
However, when petitioner Virgilio Dulay was never authorized by the
petitioner corporation to sell or mortgage the subject property, the trial
court ordered private respondent Torres to implead petitioner corporation
as an indispensable party but the latter moved for the dismissal of his
petition which was granted. Torres and Palaban real estate administrator
filed an action for recoveryof possession, sum of money and damages.
Petitioner corporation filed an action for cancellation of sale. Torres and
Palaban was able to obtain a favorable decision ordering the respondents
to vacate the premises.
Thereafter, petitioner corporation and Virgilio Dulay filed an action
against the presiding judge of the Metropolitan Trial Court of Pasay City,
private respondents Pabalan and Torres for the annulment of said
decision.
Issue: Whether the sale of the subject property between spouses Veloso
and Manuel Dulay has no binding effect on the corporation
Ruling: YES.
Legal Basis: Section 101, Corporation Code
In the instant case, petitioner corporation is classified as a close
corporation and consequently a board resolution authorizing the sale or
mortgage of the subject property is not necessary to bind the corporation
for the action of its president. At any rate, corporate action taken at a
board meeting without proper call or notice in a close corporation is
deemed ratified by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after having
knowledge of the meeting which, in his case, petitioner Virgilio Dulay
failed to do.
It is relevant to note that although a corporation is an entity
which has a personality distinct and separate from its individual
stockholders or members, the veil of corporate fiction may be pierced
when it is used to defeat public convenience justify wrong, protect fraud
or defend crime. The privilege of being treated as an entity distinct and
separate from its stockholder or members is therefore confined to its
legitimate uses and is subject to certain limitations to prevent the
commission of fraud or other illegal or unfair act. When the corporation
is used merely as an alter ego or business conduit of a person, the law will
regard the corporation as the act of that person. The Supreme Court had
repeatedly disregarded the separate personality of the corporation where
the corporate entity was used to annul a valid contract executed by one
of its members.
Petitioners' claim that the sale of the subject property by its
president, Manuel Dulay, to private respondents spouses Veloso is null
and void as the alleged Board Resolution No. 18 was passed without the
knowledge and consent of the other members of the board of directors
cannot be sustained.
Thus, the sale is binding.
*Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals wherein the Court ruled
that xxx petitioner corporation is classified as a close corporation and, consequently, a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the
action of its president. But the factual milieu in Dulay is not on all fours with the present
case. In Dulay, the sale of real property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors.
2. San Juan Structural Steel Fabricators Inc. vs. CA
Plaintiff-appellant San Juan Steel Fabricators entered into an
agreement with defendant-appellee Motorich Sales Corporation for the
transfer to it of a parcel of land. As stipulated in the agreement, the
plaintiff paid the down payment and the balance to be paid on or before
March 2, 1988.
Plaintiff-appellant was ready with the amount corresponding to the
balance, covered by Metrobank Cashiers Check No. 004223, payable to
defendant-appellee Motorich Sales Corporation; that plaintiff-appellant
and defendant-appellee Motorich Sales Corporation were supposed to
meet in the office of plaintiff-appellant but defendant-appellees treasurer,
Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich
Sales Corporation despite repeated demands and in utter disregard of its
commitments had refused to execute the Transfer of Rights/Deed of
Assignment which is necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded as a necessary party since
TCT is still in the name of said defendant.
In its answer, defendants-appellees Motorich Sales Corporation and
Nenita Lee Gruenberg interposed as affirmative defense that the President
and Chairman of Motorich did not sign the agreement adverted to in par.
3 of the amended complaint; that Mrs. Gruenbergs signature on the
agreement is inadequate to bind Motorich. The other signature, that of
Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required;
that plaintiff knew this from the very beginning as it was presented a copy
of the Transfer of Rights at the time the Agreement was signed.
Issues: Was there a valid contract of sale between petitioner and
Motorich? May the doctrine of piercing the veil of corporate fiction
be applied to Motorich?
Ruling:
Validity of the sale
The contract of sale signed by Gruenburg cannot bind
Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the corporation is
not the property of its stockholders or members and may not be sold by
the stockholders or members without express authorization from the
corporation’s board of directors.
In the case at bar, Respondent Motorich categorically denies
that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject
parcel of land. Consequently, petitioner had the burden of proving that
Nenita Gruenberg was in fact authorized to represent and bind Motorich
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in the transaction. Petitioner failed to discharge this burden. Its offer of
evidence before the trial court contained no proof of such authority. It has
not shown any provision of said respondent’s articles of incorporation,
bylaws or board resolution to prove that Nenita Gruenberg possessed
such power.
Petitioner cannot assume that she, by virtue of her position,
was authorized to sell the property of the corporation. Selling is obviously
foreign to a corporate treasurers function, which generally has been
described as to receive and keep the funds of the corporation, and to
disburse them in accordance with the authority given him by the board or
the properly authorized officers. Neither was such real estate sale shown
to be a normal business activity of Motorich. The primary purpose of
Motorich is marketing, distribution, export and import in relation to a
general merchandising business. Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real property, an
activity which falls way beyond the scope of her general authority.

Piercing the veil of corporate fiction

The petitioner itself concedes having raised the issue belatedly.
The question of piercing the veil of corporate fiction is essentially, then, a
matter of proof.
In the present case, however, the Court finds no reason to
pierce the corporate veil of Respondent Motorich. Petitioner utterly failed
to establish that said corporation was formed, or that it is operated, for
the purpose of shielding any alleged fraudulent or illegal activities of its
officers or stockholders; or that the said veil was used to conceal fraud,
illegality or inequity at the expense of third persons, like petitioner.
The defendant is not a close corporation. The articles of
incorporation of Motorich Sales Corporation does not contain any
provision stating that
a) the number of stockholders shall not exceed 20, or
b) a preemption of shares is restricted in favor of any stockholder
or of the corporation, or
c) listing its stocks in any stock exchange or making a public
offering of such stocks is prohibited.
From its articles, it is clear that Respondent Motorich is not a
close corporation. Motorich does not become one either, just because
Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The [m]ere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate
corporate personalities. So too, a narrow distribution of ownership does
not, by itself, make a close corporation.