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RED LINE TRANSPORTATION CO.

, petitioner-appellant, party in interest making the application, whether the Rural


vs. Transit Company, Ltd., as appeared on the face of the
RURAL TRANSIT CO., LTD., respondent-appellee. application, or the Bachrach Motor Company, Inc., using
G.R. No. 41570 September 6, 1934 name of the Rural Transit Company, Ltd., as a trade
name. The evidence given by the applicant's secretary,
This case is before us on a petition for review of an order Olsen, is certainly very dubious and confusing, as may be
of the Public Service Commission entered December 21, seen from the following:
1932, granting to the Rural Transit Company, Ltd., a Q. Will you please answer the question whether it is the
certificate of public convenience to operate a Bachrach Motor Company operating under the trade name of
transportation service between Ilagan in the Province of the Rural Transit Company, Limited, or whether it is the Rural
Transit Company, Limited in its own name this application was
Isabela and Tuguegarao in the Province of Cagayan, and
filed?
additional trips in its existing express service between A. The Bachrach Motor Company is the principal
Manila Tuguegarao. stockholder.
Q. Please answer the question.
On June 4, 1932, the Rural Transit Company, Ltd., a ESPELETA. Objecion porque la pregunta ya ha sido
Philippine corporation, filed with the Public Company contestada
Service Commission an application in which it is stated in JUEZ. Puede contestar.
substance that it is the holder of a certificate or public A. I do not know what the legal construction or
relationship existing between the two.
convenience to operate a passenger bus service between
JUDGE. I do not know what is in your mind by not telling the
Manila and Tuguegarao; that it is the only operator of real applicant in this case?
direct service between said points and the present A. It is the Rural Transit Company, Ltd.
authorized schedule of only one trip daily is not sufficient; JUDGE. As an entity by itself and not by the Bachrach Motor
that it will be also to the public convenience to grant the Company?
applicant a certificate for a new service between A. I do not know. I have not given that phase of the
Tuguegarao and Ilagan. matter much thought, as in previous occassion had not
necessitated.
JUDGE. In filing this application, you filed it for the operator on
On July 22, 1932, the appellant, Red Line Transportation
that line? Is it not!
Company, filed an opposition to the said application A. Yes, sir.
alleging in substance that as to the service between JUDGE. Who is that operator?
Tuguegarao and Ilagan, the oppositor already holds a A. The Rural Transit Company, Ltd.
certificate of public convenience and is rendering JUDGE. By itself, or as a commercial name of the Bachrach
adequate and satisfactory service; that the granting of the Motor Company?
application of the Rural Transit Company, Ltd., would not A. I cannot say.
serve public convenience but would constitute a ruinous ESPELETA. The Rural Transit Company, Ltd., is a corporation
duly established in accordance with the laws of the Philippine
competition for the oppositor over said route.
Islands.
JUDGE. According to the records of this commission the
After testimony was taken, the commission, on December Bachrach Motor Company is the owner of the certificates and
21, 1932, approved the application of the Rural Transit the Rural Transit Company, Ltd., is operating without any
Company, Ltd., and ordered that the certificate of public certificate.
convenience applied for be "issued to the applicant Rural JUDGE. If you filed this application for the Rural Transit
Transit Company, Ltd.," with the condition, among others, Company, Ltd., and afterwards it is found out that the Rural
that "all the other terms and conditions of the various Transit Company, Ltd., is not an operator, everything will be
turned down.
certificates of public convenience of the herein applicant
JUDGE. My question was, when you filed this application you
and herein incorporated are made a part hereof." evidently made it for the operator?
On January 14, 1933, the oppositor Red Line A. Yes, sir.
Transportation Company filed a motion for rehearing and JUDGE. Who was that operator you had in mind?
reconsideration in which it called the commission's A. According to the status of the ownership of the
attention to the fact that there was pending in the Court of certificates of the former Rural Transit Company, the operator
First Instance of Manila case N. 42343, an application for was the operator authorized in case No. 23217 to whom all of
the voluntary dissolution of the corporation, Rural Transit the assets of the former Rural Transit Company were sold.
JUDGE. Bachrach Motor Company?
Company, Ltd. Said motion for reconsideration was set
A. All actions have been prosecuted in the name of the
down for hearing on March 24, 1933. On March 23, 1933, Rural Transit Company, Ltd.
the Rural Transit Company, Ltd., the applicant, filed a JUDGE. You mean the Bachrach Motor Company, Inc., doing
motion for postponement. This motion was verified by M. business under the name of the Rural Transit Company, Ltd.?
Olsen who swears "that he was the secretary of the Rural A. Yes, sir.
Transit Company, Ltd., in the above entitled case." Upon LOCKWOOD. I move that this case be dismissed, your Honor,
the hearing of the motion for reconsideration, the on the ground that this application was made in the name of
commission admitted without objection the following one party but the real owner is another party.
ESPELETA. We object to that petition.
documents filed in said case No. 42343 in the Court of
JUDGE. I will have that in mind when I decide the case. If I
First Instance of Manila for the dissolution of the Rural agree with you everything would be finished.
Transit Company, Ltd. the petition for dissolution dated
July 6, 1932, the decision of the said Court of First The Bachrach Motor Company, Inc., entered no
Instance of Manila, dated February 28, 1933, decreeing appearance and ostensibly took no part in the hearing of
the dissolution of the Rural Transit Company, Ltd. the application of the Rural Transit Company, Ltd. It may
At the trial of this case before the Public Service be a matter of some surprise that the commission did not
Commission an issue was raised as to who was the real on its own motion order the amendment of the application
by substituting the Bachrach Motor Company, Inc., as the UNIVERSAL MILLS CORPORATION, petitioner,
applicant. However, the hearing proceeded on the vs.
application as filed and the decision of December 2, 1932, UNIVERSAL TEXTILE MILLS, INC., respondent.
was rendered in favor of the Rural Transit Company, Ltd.,
G.R. No. L-28351 July 28, 1977
and the certificate ordered to be issued in its name, in the
face of the evidence that the said corporation was not the
real party in interest. In its said decision, the commission Appeal from the order of the Securities and Exchange
undertook to meet the objection by referring to its Commission in S.E.C. Case No. 1079, entitled In the
resolution of November 26, 1932, entered in another case. Matter of the Universal Textile Mills, Inc. vs. Universal
This resolution in case No. 23217 concludes as follows: Mills Corporation, a petition to have appellant change its
Premises considered we hereby authorize the corporate name on the ground that such name is
Bachrach Motor Co., Inc., to continue using the name
"confusingly and deceptively similar" to that of appellee,
of "Rural Transit Co., Ltd.," as its trade name in all the
applications, motions or other petitions to be filed in which petition the Commission granted.
this commission in connection with said business and
that this authority is given retroactive effect as of the According to the order, "the Universal Textile Mills, Inc.
date, of filing of the application in this case, to wit, was organ on December 29, 1953, as a textile
April 29, 1930. manufacturing firm for which it was issued a certificate of
registration on January 8, 1954. The Universal Mills
We know of no law that empowers the Public Service
Corporation, on the other hand, was registered in this
Commission or any court in this jurisdiction to authorize
one corporation to assume the name of another Commission on October 27, 1954, under its original name,
corporation as a trade name. Both the Rural Transit Universal Hosiery Mills Corporation, having as its primary
Company, Ltd., and the Bachrach Motor Co., Inc., are purpose the "manufacture and production of hosieries and
Philippine corporations and the very law of their creation wearing apparel of all kinds." On May 24, 1963, it filed an
and continued existence requires each to adopt and certify amendment to its articles of incorporation changing its
a distinctive name. The incorporators "constitute a body
name to Universal Mills Corporation, its present name, for
politic and corporate under the name stated in the
certificate." (Section 11, Act No. 1459, as amended.) A which this Commission issued the certificate of approval
corporation has the power "of succession by its corporate on June 10, 1963.
name." (Section 13, ibid.) The name of a corporation is
therefore essential to its existence. It cannot change its The immediate cause of this present complaint, however,
name except in the manner provided by the statute. By was the occurrence of a fire which gutted respondent's
that name alone is it authorized to transact business. The spinning mills in Pasig, Rizal. Petitioner alleged that as a
law gives a corporation no express or implied authority to
result of this fire and because of the similarity of
assume another name that is unappropriated: still less that
of another corporation, which is expressly set apart for it respondent's name to that of herein complainant, the news
and protected by the law. If any corporation could assume items appearing in the various metropolitan newspapers
at pleasure as an unregistered trade name the name of carrying reports on the fire created uncertainty and
another corporation, this practice would result in confusion confusion among its bankers, friends, stockholders and
and open the door to frauds and evasions and difficulties customers prompting petitioner to make announcements,
of administration and supervision. The policy of the law clarifying the real Identity of the corporation whose
expressed in our corporation statute and the Code of
property was burned. Petitioner presented documentary
Commerce is clearly against such a practice. (Cf.
Scarsdale Pub. Co. Colonial Press vs. Carter, 116 New and testimonial evidence in support of this allegation.
York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish
Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.) On the other hand, respondent's position is that the
The order of the commission of November 26, 1932, names of the two corporations are not similar and
authorizing the Bachrach Motor Co., Incorporated, to even if there be some similarity, it is not confusing or
assume the name of the Rural Transit Co., Ltd. likewise in
deceptive; that the only reason that respondent
corporated, as its trade name being void, and accepting
the order of December 21, 1932, at its face as granting a changed its name was because it expanded its
certificate of public convenience to the applicant Rural business to include the manufacture of fabrics of all
Transit Co., Ltd., the said order last mentioned is set aside kinds; and that the word 'textile' in petitioner's name is
and vacated on the ground that the Rural Transit dominant and prominent enough to distinguish the
Company, Ltd., is not the real party in interest and its two. It further argues that petitioner failed to present
application was fictitious. evidence of confusion or deception in the ordinary
course of business; that the only supposed confusion
In view of the dissolution of the Rural Transit Company,
Ltd. by judicial decree of February 28, 1933, we do not proved by complainant arose out of an extraordinary
see how we can assess costs against said respondent, occurrence — a disastrous fire. (pp. 16-&17, Record.)
Rural Transit Company, Ltd
Upon these premises, the Commission held:

From the facts proved and the jurisprudence on the


matter, it appears necessary under the circumstances to
enjoin the respondent Universal Mills Corporation from public generally are capable of using and may be
further using its present corporate name. Judging from expected to exercise" invoked by appellant, We are
what has already happened, confusion is not only apprehensive confusion will usually arise, considering that
apparent, but possible. It does not matter that the under the second amendment of its articles of
instance of confusion between the two corporate names incorporation on August 14, 1964, appellant included
was occasioned only by a fire or an extraordinary among its primary purposes the "manufacturing, dyeing,
occurrence. It is precisely the duty of this Commission to finishing and selling of fabrics of all kinds" in which
prevent such confusion at all times and under all respondent had been engaged for more than a decade
circumstances not only for the purpose of protecting the ahead of petitioner. Factually, the Commission found
corporations involved but more so for the protection of existence of such confusion, and there is evidence to
the public. support its conclusion. Since respondent is not claiming
damages in this proceeding, it is, of course, immaterial
In today's modern business life where people go by whether or not appellant has acted in good faith, but We
tradenames and corporate images, the corporate name cannot perceive why of all names, it had to choose a
becomes the more important. This Commission cannot name already being used by another firm engaged in
close its eyes to the fact that usually it is the sound of all practically the same business for more than a decade
the other words composing the names of business enjoying well earned patronage and goodwill, when there
corporations that sticks to the mind of those who deal are so many other appropriate names it could possibly
with them. The word "textile" in Universal Textile Mills, adopt without arousing any suspicion as to its motive and,
Inc.' can not possibly assure the exclusion of all other more importantly, any degree of confusion in the mind of
entities with similar names from the mind of the public the public which could mislead even its own customers,
especially so, if the business they are engaged in are existing or prospective. Premises considered, there is no
the same, like in the instant case. warrant for our interference.

This Commission further takes cognizance of the fact As this is purely a case of injunction, and considering the
that when respondent filed the amendment changing its time that has elapsed since the facts complained of took
name to Universal Mills Corporation, it correspondingly place, this decision should not be deemed as foreclosing
filed a written undertaking dated June 5, 1963 and any further remedy which appellee may have for the
signed by its President, Mr. Mariano Cokiat, promising protection of its interests.
to change its name in the event that there is another
person, firm or entity who has obtained a prior right to WHEREFORE, with the reservation already mentioned,
the use of such name or one similar to it. That promise the appealed decision is affirmed. Costs against
is still binding upon the corporation and its responsible petitioners.
officers. (pp. 17-18, Record.)

It is obvious that the matter at issue is within the


competence of the Securities and Exchange Commission
to resolve in the first instance in the exercise of the
jurisdiction it used to possess under Commonwealth Act
287 as amended by Republic Act 1055 to administer the LYCEUM OF THE PHILIPPINES, INC., vs. COURT OF
application and enforcement of all laws affecting domestic APPEALS, LYCEUM OF APARRI, LYCEUM OF
corporations and associations, reserving to the courts only CABAGAN, LYCEUM OF CAMALANIUGAN, INC.,
conflicts of judicial nature, and, of course, the Supreme LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC.,
Court's authority to review the Commissions actuations in BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN
appropriate instances involving possible denial of due PHILIPPINES, LYCEUM OF EASTERN MINDANAO,
process and grave abuse of discretion. Thus, in the case INC. and WESTERN PANGASINAN LYCEUM, INC.,
at bar, there being no claim of denial of any constitutional G.R. No. 101897. March 5, 1993.
right, all that We are called upon to determine is whether
or not the order of the Commission enjoining petitioner to SYLLABUS
its corporate name constitutes, in the light of the 1. CORPORATION LAW; CORPORATE NAMES;
REGISTRATION OF PROPOSED NAME WHICH IS
circumstances found by the Commission, a grave abuse of
IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF
discretion. ANY EXISTING CORPORATION, PROHIBITED;
CONFUSION AND DECEPTION EFFECTIVELY
We believe it is not. Indeed, it cannot be said that the PRECLUDED BY THE APPENDING OF GEOGRAPHIC
impugned order is arbitrary and capricious. Clearly, it has NAMES TO THE WORD "LYCEUM". — The Articles of
rational basis. The corporate names in question are not Incorporation of a corporation must, among other things,
Identical, but they are indisputably so similar that even set out the name of the corporation. Section 18 of the
Corporation Code establishes a restrictive rule insofar as
under the test of "reasonable care and observation as the
corporate names are concerned: "Section 18. Corporate purchasing public, the word or phrase has come to mean
name. — No corporate name may be allowed by the that the article was his produce (Ana Ang vs. Toribio
Securities an Exchange Commission if the proposed name Teodoro, 74 Phil. 56). This circumstance has been
is identical or deceptively or confusingly similar to that of referred to as the distinctiveness into which the name or
any existing corporation or to any other name already phrase has evolved through the substantial and exclusive
protected by law or is patently deceptive, confusing or use of the same for a considerable period of time. . . . No
contrary to existing laws. When a change in the corporate evidence was ever presented in the hearing before the
name is approved, the Commission shall issue an Commission which sufficiently proved that the word
amended certificate of incorporation under the amended 'Lyceum' has indeed acquired secondary meaning in favor
name." The policy underlying the prohibition in Section 18 of the appellant. If there was any of this kind, the same
against the registration of a corporate name which is tend to prove only that the appellant had been using the
"identical or deceptively or confusingly similar" to that of disputed word for a long period of time. . . . In other words,
any existing corporation or which is "patently deceptive" or while the appellant may have proved that it had been
"patently confusing" or "contrary to existing laws," is the using the word 'Lyceum' for a long period of time, this fact
avoidance of fraud upon the public which would have alone did not amount to mean that the said word had
occasion to deal with the entity concerned, the evasion of acquired secondary meaning in its favor because the
legal obligations and duties, and the reduction of appellant failed to prove that it had been using the same
difficulties of administration and supervision over word all by itself to the exclusion of others. More so, there
corporations. We do not consider that the corporate was no evidence presented to prove that confusion will
names of private respondent institutions are "identical surely arise if the same word were to be used by other
with, or deceptively or confusingly similar" to that of the educational institutions. Consequently, the allegations of
petitioner institution. True enough, the corporate names of the appellant in its first two assigned errors must
private respondent entities all carry the word "Lyceum" but necessarily fail." We agree with the Court of Appeals. The
confusion and deception are effectively precluded by the number alone of the private respondents in the case at bar
appending of geographic names to the word "Lyceum." suggests strongly that petitioner's use of the word
Thus, we do not believe that the "Lyceum of Aparri" can "Lyceum" has not been attended with the exclusivity
be mistaken by the general public for the Lyceum of the essential for applicability of the doctrine of secondary
Philippines, or that the "Lyceum of Camalaniugan" would meaning. Petitioner's use of the word "Lyceum" was not
be confused with the Lyceum of the Philippines. exclusive but was in truth shared with the Western
Pangasinan Lyceum and a little later with other private
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE respondent institutions which registered with the SEC
OF WORD "LYCEUM," NOT ATTENDED WITH using "Lyceum" as part of their corporation names. There
EXCLUSIVITY. — It is claimed, however, by petitioner that may well be other schools using Lyceum or Liceo in their
the word "Lyceum" has acquired a secondary meaning in names, but not registered with the SEC because they
relation to petitioner with the result that word, although have not adopted the corporate form of organization.
originally a generic, has become appropriable by petitioner
to the exclusion of other institutions like private 3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY
respondents herein. The doctrine of secondary meaning TO DETERMINE WHETHER THEY ARE CONFUSINGLY
originated in the field of trademark law. Its application has, OR DECEPTIVELY SIMILAR TO ANOTHER
however, been extended to corporate names sine the right CORPORATE ENTITY'S NAME. — petitioner institution is
to use a corporate name to the exclusion of others is not entitled to a legally enforceable exclusive right to use
based upon the same principle which underlies the right to the word "Lyceum" in its corporate name and that other
use a particular trademark or tradename. In Philippine Nut institutions may use "Lyceum" as part of their corporate
Industry, Inc. v. Standard Brands, Inc., the doctrine of names. To determine whether a given corporate name is
secondary meaning was elaborated in the following terms: "identical" or "confusingly or deceptively similar" with
" . . . a word or phrase originally incapable of exclusive another entity's corporate name, it is not enough to
appropriation with reference to an article on the market, ascertain the presence of "Lyceum" or "Liceo" in both
because geographically or otherwise descriptive, might names. One must evaluate corporate names in their
nevertheless have been used so long and so exclusively entirety and when the name of petitioner is juxtaposed
by one producer with reference to his article that, in that with the names of private respondents, they are not
trade and to that branch of the purchasing public, the word reasonably regarded as "identical" or "confusingly or
or phrase has come to mean that the article was his deceptively similar" with each other.
product." The question which arises, therefore, is whether
or not the use by petitioner of "Lyceum" in its corporate DECISION
name has been for such length of time and with such Petitioner is an educational institution duly registered with
exclusivity as to have become associated or identified with the Securities and Exchange Commission ("SEC"). When
the petitioner institution in the mind of the general public it first registered with the SEC on 21 September 1950, it
(or at least that portion of the general public which has to used the corporate name Lyceum of the Philippines, Inc.
do with schools). The Court of Appeals recognized this and has used that name ever since.
issue and answered it in the negative: "Under the doctrine
of secondary meaning, a word or phrase originally On 24 February 1984, petitioner instituted proceedings
incapable of exclusive appropriation with reference to an before the SEC to compel the private respondents, which
article in the market, because geographical or otherwise are also educational institutions, to delete the word
descriptive might nevertheless have been used so long "Lyceum" from their corporate names and permanently to
and so exclusively by one producer with reference to this enjoin them from using "Lyceum" as part of their
article that, in that trade and to that group of the respective names.
Some of the private respondents actively participated in word "Lyceum." The hearing officer relied upon the SEC
the proceedings before the SEC. These are the following, ruling in the Lyceum of Baguio, Inc. case (SEC-Case No.
the dates of their original SEC registration being set out 1241) and held that the word "Lyceum" was capable of
below opposite their respective names: appropriation and that petitioner had acquired an
Western Pangasinan Lyceum — 27 October 1950 enforceable exclusive right to the use of that word.
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972 On appeal, however, by private respondents to the SEC
Lyceum of Aparri — 28 March 1972 En Banc, the decision of the hearing officer was reversed
Lyceum of Tuao, Inc. — 28 March 1972 and set aside. The SEC En Banc did not consider the
Lyceum of Camalaniugan — 28 March 1972 word "Lyceum" to have become so identified with
petitioner as to render use thereof by other institutions as
The following private respondents were declared in default productive of confusion about the identity of the schools
for failure to file an answer despite service of summons: concerned in the mind of the general public. Unlike its
Buhi Lyceum; hearing officer, the SEC En Banc held that the attaching of
Central Lyceum of Catanduanes; geographical names to the word "Lyceum" served
Lyceum of Eastern Mindanao, Inc.; and sufficiently to distinguish the schools from one another,
Lyceum of Southern Philippines especially in view of the fact that the campuses of
Petitioner's original complaint before the SEC had petitioner and those of the private respondents were
included three (3) other entities: physically quite remote from each other. 3
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo Petitioner then went on appeal to the Court of Appeals. In
its Decision dated 28 June 1991, however, the Court of
Appeals affirmed the questioned Orders of the SEC En
The complaint was later withdrawn insofar as concerned Banc. 4 Petitioner filed a motion for reconsideration,
the Lyceum of Malacanay and the Lyceum of Marbel, for without success.
failure to serve summons upon these two (2) entities. The
case against the Liceum of Araullo was dismissed when
that school motu proprio change its corporate name to Before this Court, petitioner asserts that the Court of
"Pamantasan ng Araullo." Appeals committed the following errors:

The background of the case at bar needs some 1. The Court of Appeals erred in holding that the
recounting. Petitioner had sometime before commenced in Resolution of the Supreme Court in G.R. No. L-46595 did
the SEC a proceeding (SEC-Case No. 1241) against the not constitute stare decisis as to apply to this case and in
Lyceum of Baguio, Inc. to require it to change its corporate not holding that said Resolution bound subsequent
name and to adopt another name not "similar [to] or determinations on the right to exclusive use of the word
identical" with that of petitioner. In an Order dated 20 April Lyceum.
1977, Associate Commissioner Julio Sulit held that the 2. The Court of Appeals erred in holding that respondent
corporate name of petitioner and that of the Lyceum of Western Pangasinan Lyceum, Inc. was incorporated
Baguio, Inc. were substantially identical because of the earlier than petitioner.
presence of a "dominant" word, i.e., "Lyceum," the name 3. The Court of Appeals erred in holding that the word
of the geographical location of the campus being the only Lyceum has not acquired a secondary meaning in favor of
word which distinguished one from the other corporate petitioner.
name. The SEC also noted that petitioner had registered 4. The Court of Appeals erred in holding that Lyceum as a
as a corporation ahead of the Lyceum of Baguio, Inc. in generic word cannot be appropriated by the petitioner to
point of time, 1 and ordered the latter to change its name the exclusion of others.
to another name "not similar or identical [with]" the names
of previously registered entities. We will consider all the foregoing ascribed errors, though
not necessarily seriatim. We begin by noting that the
The Lyceum of Baguio, Inc. assailed the Order of the SEC Resolution of the Court in G.R. No. L-46595 does not, of
before the Supreme Court in a case docketed as G.R. No. course, constitute res adjudicata in respect of the case at
L-46595. In a Minute Resolution dated 14 September bar, since there is no identity of parties. Neither is stare
1977, the Court denied the Petition for Review for lack of decisis pertinent, if only because the SEC En Banc itself
merit. Entry of judgment in that case was made on 21 has re-examined Associate Commissioner Sulit's ruling in
October 1977. the Lyceum of Baguio case. The Minute Resolution of the
Court in G.R. No. L-46595 was not a reasoned adoption of
the Sulit ruling.
Armed with the Resolution of this Court in G.R. No. L-
46595, petitioner then wrote all the educational institutions
it could find using the word "Lyceum" as part of their The Articles of Incorporation of a corporation must, among
corporate name, and advised them to discontinue such other things, set out the name of the corporation. 6
use of "Lyceum." When, with the passage of time, it Section 18 of the Corporation Code establishes a
became clear that this recourse had failed, petitioner restrictive rule insofar as corporate names are concerned:
instituted before the SEC SEC-Case No. 2579 to enforce
what petitioner claims as its proprietary right to the word "SECTION 18. Corporate name. — No corporate name
"Lyceum." The SEC hearing officer rendered a decision may be allowed by the Securities an Exchange
sustaining petitioner's claim to an exclusive right to use the Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing a generic, has become appropriable by petitioner to the
corporation or to any other name already protected by law exclusion of other institutions like private respondents
or is patently deceptive, confusing or contrary to existing herein.
laws. When a change in the corporate name is approved,
the Commission shall issue an amended certificate of The doctrine of secondary meaning originated in the field
incorporation under the amended name." (Emphasis of trademark law. Its application has, however, been
supplied) extended to corporate names sine the right to use a
corporate name to the exclusion of others is based upon
The policy underlying the prohibition in Section 18 against the same principle which underlies the right to use a
the registration of a corporate name which is "identical or particular trademark or tradename. In Philippine Nut
deceptively or confusingly similar" to that of any existing Industry, Inc. v. Standard Brands, Inc., the doctrine of
corporation or which is "patently deceptive" or "patently secondary meaning was elaborated in the following terms:
confusing" or "contrary to existing laws," is the avoidance
of fraud upon the public which would have occasion to " . . . a word or phrase originally incapable of exclusive
deal with the entity concerned, the evasion of legal appropriation with reference to an article on the market,
obligations and duties, and the reduction of difficulties of because geographically or otherwise descriptive, might
administration and supervision over corporations. nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that
We do not consider that the corporate names of private trade and to that branch of the purchasing public, the word
respondent institutions are "identical with, or deceptively or or phrase has come to mean that the article was his
confusingly similar" to that of the petitioner institution. True product."
enough, the corporate names of private respondent
entities all carry the word "Lyceum" but confusion and The question which arises, therefore, is whether or not the
deception are effectively precluded by the appending of use by petitioner of "Lyceum" in its corporate name has
geographic names to the word "Lyceum." Thus, we do not been for such length of time and with such exclusivity as
believe that the "Lyceum of Aparri" can be mistaken by the to have become associated or identified with the petitioner
general public for the Lyceum of the Philippines, or that institution in the mind of the general public (or at least that
the "Lyceum of Camalaniugan" would be confused with portion of the general public which has to do with schools).
the Lyceum of the Philippines. The Court of Appeals recognized this issue and answered
it in the negative:
Etymologically, the word "Lyceum" is the Latin word for the
Greek lykeion which in turn referred to a locality on the "Under the doctrine of secondary meaning, a word or
river Ilissius in ancient Athens "comprising an enclosure phrase originally incapable of exclusive appropriation with
dedicated to Apollo and adorned with fountains and reference to an article in the market, because
buildings erected by Pisistratus, Pericles and Lycurgus geographical or otherwise descriptive might nevertheless
frequented by the youth for exercise and by the have been used so long and so exclusively by one
philosopher Aristotle and his followers for teaching." 8 In producer with reference to this article that, in that trade
time, the word "Lyceum" became associated with schools and to that group of the purchasing public, the word or
and other institutions providing public lectures and phrase has come to mean that the article was his produce
concerts and public discussions. Thus today, the word (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
"Lyceum" generally refers to a school or an institution of circumstance has been referred to as the distinctiveness
learning. While the Latin word "lyceum" has been into which the name or phrase has evolved through the
incorporated into the English language, the word is also substantial and exclusive use of the same for a
found in Spanish (liceo) and in French (lycee). As the considerable period of time. Consequently, the same
Court of Appeals noted in its Decision, Roman Catholic doctrine or principle cannot be made to apply where the
schools frequently use the term; e.g., "Liceo de Manila," evidence did not prove that the business (of the plaintiff)
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de has continued for so long a time that it has become of
Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as consequence and acquired a good will of considerable
generic in character as the word "university." In the name value such that its articles and produce have acquired a
of the petitioner, "Lyceum" appears to be a substitute for well-known reputation, and confusion will result by the use
"university;" in other places, however, "Lyceum," or "Liceo" of the disputed name (by the defendant) (Ang Si Heng vs.
or "Lycee" frequently denotes a secondary school or a Wellington Department Store, Inc., 92 Phil. 448).
college. It may be (though this is a question of fact which
we need not resolve) that the use of the word "Lyceum"
may not yet be as widespread as the use of "university," With the foregoing as a yardstick, [we] believe the
but it is clear that a not inconsiderable number of appellant failed to satisfy the aforementioned requisites.
educational institutions have adopted "Lyceum" or "Liceo" No evidence was ever presented in the hearing before the
as part of their corporate names. Since "Lyceum" or Commission which sufficiently proved that the word
"Liceo" denotes a school or institution of learning, it is not 'Lyceum' has indeed acquired secondary meaning in favor
unnatural to use this word to designate an entity which is of the appellant. If there was any of this kind, the same
organized and operating as an educational institution. tend to prove only that the appellant had been using the
disputed word for a long period of time. Nevertheless, its
(appellant) exclusive use of the word (Lyceum) was never
It is claimed, however, by petitioner that the word established or proven as in fact the evidence tend to
"Lyceum" has acquired a secondary meaning in relation to convey that the cross-claimant was already using the word
petitioner with the result that that word, although originally 'Lyceum' seventeen (17) years prior to the date the
appellant started using the same word in its corporate We conclude and so hold that petitioner institution is not
name. Furthermore, educational institutions of the Roman entitled to a legally enforceable exclusive right to use the
Catholic Church had been using the same or similar word word "Lyceum" in its corporate name and that other
like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, institutions may use "Lyceum" as part of their corporate
Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before names. To determine whether a given corporate name is
appellant started using the word 'Lyceum'. The appellant "identical" or "confusingly or deceptively similar" with
also failed to prove that the word 'Lyceum' has become so another entity's corporate name, it is not enough to
identified with its educational institution that confusion will ascertain the presence of "Lyceum" or "Liceo" in both
surely arise in the minds of the public if the same word names. One must evaluate corporate names in their
were to be used by other educational institutions. entirety and when the name of petitioner is juxtaposed
with the names of private respondents, they are not
In other words, while the appellant may have proved that it reasonably regarded as "identical" or "confusingly or
had been using the word 'Lyceum' for a long period of deceptively similar" with each other.
time, this fact alone did not amount to mean that the said
word had acquired secondary meaning in its favor WHEREFORE, the petitioner having failed to show any
because the appellant failed to prove that it had been reversible error on the part of the public respondent Court
using the same word all by itself to the exclusion of others. of Appeals, the Petition for Review is DENIED for lack of
More so, there was no evidence presented to prove that merit, and the Decision of the Court of Appeals dated 28
confusion will surely arise if the same word were to be June 1991 is hereby AFFIRMED. No pronouncement as to
used by other educational institutions. Consequently, the costs.
allegations of the appellant in its first two assigned errors SO ORDERED.
must necessarily fail." 13 (Underscoring partly in the
original and partly supplied)

We agree with the Court of Appeals. The number alone of


the private respondents in the case at bar suggests
strongly that petitioner's use of the word "Lyceum" has not
been attended with the exclusivity essential for PHILIPS EXPORT B.V., PHILIPS ELECTRICAL
applicability of the doctrine of secondary meaning. It may LAMPS, INC. and PHILIPS INDUSTRIAL
be noted also that at least one of the private respondents, DEVELOPMENT, INC., petitioners,
i.e., the Western Pangasinan Lyceum, Inc., used the term vs.
"Lyceum" seventeen (17) years before the petitioner COURT OF APPEALS, SECURITIES & EXCHANGE
registered its own corporate name with the SEC and COMMISSION and STANDARD PHILIPS
began using the word "Lyceum." It follows that if any CORPORATION, respondents.
institution had acquired an exclusive right to the word G.R. No. 96161 February 21, 1992
"Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner Petitioners challenge the Decision of the Court of Appeals,
institution. dated 31 July 1990, in CA-GR Sp. No. 20067, upholding
the Order of the Securities and Exchange Commission,
In this connection, petitioner argues that because the dated 2 January 1990, in SEC-AC No. 202, dismissing
Western Pangasinan Lyceum, Inc. failed to reconstruct its petitioners' prayer for the cancellation or removal of the
records before the SEC in accordance with the provisions word "PHILIPS" from private respondent's corporate
of R.A. No. 62, which records had been destroyed during name.
World War II, Western Pangasinan Lyceum should be
deemed to have lost all rights it may have acquired by Petitioner Philips Export B.V. (PEBV), a foreign
virtue of its past registration. It might be noted that the corporation organized under the laws of the Netherlands,
Western Pangasinan Lyceum, Inc. registered with the although not engaged in business here, is the registered
SEC soon after petitioner had filed its own registration on owner of the trademarks PHILIPS and PHILIPS SHIELD
21 September 1950. Whether or not Western Pangasinan EMBLEM under Certificates of Registration Nos. R-1641
Lyceum, Inc. must be deemed to have lost its rights under and R-1674, respectively issued by the Philippine Patents
its original 1933 registration, appears to us to be quite Office (presently known as the Bureau of Patents,
secondary in importance; we refer to this earlier Trademarks and Technology Transfer). Petitioners Philips
registration simply to underscore the fact that petitioner's Electrical Lamps, Inc. (Philips Electrical, for brevity) and
use of the word "Lyceum" was neither the first use of that Philips Industrial Developments, Inc. (Philips Industrial, for
term in the Philippines nor an exclusive use thereof. short), authorized users of the trademarks PHILIPS and
Petitioner's use of the word "Lyceum" was not exclusive PHILIPS SHIELD EMBLEM, were incorporated on 29
but was in truth shared with the Western Pangasinan August 1956 and 25 May 1956, respectively. All petitioner
Lyceum and a little later with other private respondent corporations belong to the PHILIPS Group of Companies.
institutions which registered with the SEC using "Lyceum"
as part of their corporation names. There may well be Respondent Standard Philips Corporation (Standard
other schools using Lyceum or Liceo in their names, but Philips), on the other hand, was issued a Certificate of
not registered with the SEC because they have not Registration by respondent Commission on 19 May 1982.
adopted the corporate form of organization.
On 24 September 1984, Petitioners filed a letter complaint
with the Securities & Exchange Commission (SEC) asking
for the cancellation of the word "PHILIPS" from Private cannot be used as part of Private Respondent's corporate
Respondent's corporate name in view of the prior name as the same constitutes a dominant part of
registration with the Bureau of Patents of the trademark Petitioners' corporate names. In so holding, the Appellate
"PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in Court observed that the Converse case is not four-square
the name of Petitioner, PEBV, and the previous with the present case inasmuch as the contending parties
registration of Petitioners Philips Electrical and Philips in Converse are engaged in a similar business, that is, the
Industrial with the SEC. manufacture of rubber shoes. Upholding the SEC, the
Appellate Court concluded that "private respondents'
As a result of Private Respondent's refusal to amend its products consisting of chain rollers, belts, bearings and
Articles of Incorporation, Petitioners filed with the SEC, on cutting saw are unrelated and non-competing with
6 February 1985, a Petition (SEC Case No. 2743) praying petitioners' products i.e. electrical lamps such that
for the issuance of a Writ of Preliminary Injunction, consumers would not in any probability mistake one as the
alleging, among others, that Private Respondent's use of source or origin of the product of the other."
the word PHILIPS amounts to an infringement and clear
violation of Petitioners' exclusive right to use the same The Appellate Court denied Petitioners' Motion for
considering that both parties engage in the same Reconsideration on 20 November 1990, hence, this
business. Petition which was given due course on 22 April 1991,
after which the parties were required to submit their
In its Answer, dated 7 March 1985, Private Respondent memoranda, the latest of which was received on 2 July
countered that Petitioner PEBV has no legal capacity to 1991. In December 1991, the SEC was also required to
sue; that its use of its corporate name is not at all similar elevate its records for the perusal of this Court, the same
to Petitioners' trademark PHILIPS when considered in its not having been apparently before respondent Court of
entirety; and that its products consisting of chain rollers, Appeals.
belts, bearings and cutting saw are grossly different from
Petitioners' electrical products. We find basis for petitioners' plea.

After conducting hearings with respect to the prayer for As early as Western Equipment and Supply Co. v. Reyes,
Injunction; the SEC Hearing Officer, on 27 September 51 Phil. 115 (1927), the Court declared that a corporation's
1985, ruled against the issuance of such Writ. right to use its corporate and trade name is a property
right, a right in rem, which it may assert and protect
On 30 January 1987, the same Hearing Officer dismissed against the world in the same manner as it may protect its
the Petition for lack of merit. In so ruling, the latter tangible property, real or personal, against trespass or
declared that inasmuch as the SEC found no sufficient conversion. It is regarded, to a certain extent, as a
ground for the granting of injunctive relief on the basis of property right and one which cannot be impaired or
the testimonial and documentary evidence presented, it defeated by subsequent appropriation by another
cannot order the removal or cancellation of the word corporation in the same field (Red Line Transportation Co.
"PHILIPS" from Private Respondent's corporate name on vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
the basis of the same evidence adopted in toto during trial
on the merits. Besides, Section 18 of the Corporation A name is peculiarly important as necessary to the very
Code (infra) is applicable only when the corporate names existence of a corporation (American Steel Foundries vs.
in question are identical. Here, there is no confusing Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160;
similarity between Petitioners' and Private Respondent's Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First
corporate names as those of the Petitioners contain at National Bank vs. Huntington Distilling Co. 40 W Va 530,
least two words different from that of the Respondent. 23 SE 792). Its name is one of its attributes, an element of
Petitioners' Motion for Reconsideration was likewise its existence, and essential to its identity (6 Fletcher [Perm
denied on 17 June 1987. Ed], pp. 3-4). The general rule as to corporations is that
each corporation must have a name by which it is to sue
On appeal, the SEC en banc affirmed the dismissal and be sued and do all legal acts. The name of a
declaring that the corporate names of Petitioners and corporation in this respect designates the corporation in
Private Respondent hardly breed confusion inasmuch as the same manner as the name of an individual designates
each contains at least two different words and, therefore, the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky
rules out any possibility of confusing one for the other. 356, 26 SW 538; Newport Mechanics Mfg. Co. vs.
Starbird. 10 NH 123); and the right to use its corporate
name is as much a part of the corporate franchise as any
On 30 January 1990, Petitioners sought an extension of other privilege granted (Federal Secur. Co. vs. Federal
time to file a Petition for Review on Certiorari before this Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934;
Court, which Petition was later referred to the Court of Paulino vs. Portuguese Beneficial Association, 18 RI 165,
Appeals in a Resolution dated 12 February 1990. 26 A 36).

In deciding to dismiss the petition on 31 July 1990, the A corporation acquires its name by choice and need not
Court of select a name identical with or similar to one already
Appeals swept aside Petitioners' claim that following the
1
appropriated by a senior corporation while an individual's
ruling in Converse Rubber Corporation v. Universal name is thrust upon him (See Standard Oil Co. of New
Converse Rubber Products, Inc., et al, (G. R. No. L-27906, Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973,
January 8, 1987, 147 SCRA 154), the word PHILIPS 977). A corporation can no more use a corporate name in
violation of the rights of others than an individual can use corporation, PEBV, are known in the Philippines and
his name legally acquired so as to mislead the public and abroad as the PHILIPS Group of Companies.
injure another (Armington vs. Palmer, 21 RI 109. 42 A
308). Respondents maintain, however, that Petitioners did not
present an iota of proof of actual confusion or deception of
Our own Corporation Code, in its Section 18, expressly the public much less a single purchaser of their product
provides that: who has been deceived or confused or showed any
likelihood of confusion. It is settled, however, that proof of
No corporate name may be allowed by the Securities actual confusion need not be shown. It suffices that
and Exchange Commission if the proposed name confusion is probably or likely to occur (6 Fletcher [Perm
is identical or deceptively or confusingly similar to that Ed], pp. 107-108, enumerating a long line of cases).
of any existing corporation or to any other name
already protected by law or is patently deceptive, It may be that Private Respondent's products also consist
confusing or contrary to existing law. Where a change of chain rollers, belts, bearing and the like, while
in a corporate name is approved, the commission petitioners deal principally with electrical products. It is
shall issue an amended certificate of incorporation significant to note, however, that even the Director of
under the amended name. (Emphasis supplied) Patents had denied Private Respondent's application for
registration of the trademarks "Standard Philips & Device"
The statutory prohibition cannot be any clearer. To come for chain, rollers, belts, bearings and cutting saw. That
within its scope, two requisites must be proven, namely: office held that PEBV, "had shipped to its subsidiaries in
the Philippines equipment, machines and their parts which
fall under international class where "chains, rollers, belts,
(1) that the complainant corporation acquired a prior right bearings and cutting saw," the goods in connection with
over the use of such corporate name; and which Respondent is seeking to register 'STANDARD
PHILIPS' . . . also belong" ( Inter Partes Case No. 2010,
(2) the proposed name is either: June 17, 1988, SEC Rollo).
(a) identical; or
(b) deceptively or confusingly similar to that of any Furthermore, the records show that among Private
existing corporation or to any other name already Respondent's primary purposes in its Articles of
protected by law; or Incorporation (Annex D, Petition p. 37, Rollo) are the
(c) patently deceptive, confusing or contrary to existing following:
law.
To buy, sell, barter, trade, manufacture, import,
The right to the exclusive use of a corporate name with export, or otherwise acquire, dispose of, and deal in
freedom from infringement by similarity is determined by and deal with any kind of goods, wares, and
priority of adoption (1 Thompson, p. 80 citing Munn v. merchandise such as but not limited to plastics,
Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco carbon products, office stationery and supplies,
Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In hardware parts, electrical wiring devices, electrical
this regard, there is no doubt with respect to Petitioners' component parts, and/or complement of industrial,
prior adoption of' the name ''PHILIPS" as part of its agricultural or commercial machineries, constructive
corporate name. Petitioners Philips Electrical and Philips supplies, electrical supplies and other merchandise
Industrial were incorporated on 29 August 1956 and 25 which are or may become articles of commerce
May 1956, respectively, while Respondent Standard except food, drugs and cosmetics and to carry on
Philips was issued a Certificate of Registration on 12 April such business as manufacturer, distributor, dealer,
1982, twenty-six (26) years later (Rollo, p. 16). Petitioner indentor, factor, manufacturer's representative
PEBV has also used the trademark "PHILIPS" on capacity for domestic or foreign companies.
electrical lamps of all types and their accessories since 30 (emphasis ours)
September 1922, as evidenced by Certificate of
Registration No. 1651.
For its part, Philips Electrical also includes, among its
primary purposes, the following:
The second requisite no less exists in this case. In
determining the existence of confusing similarity in
corporate names, the test is whether the similarity is such To develop manufacture and deal in electrical
as to mislead a person, using ordinary care and products, including electronic, mechanical and other
discrimination. In so doing, the Court must look to the similar products . . . (p. 30, Record of SEC Case No.
record as well as the names themselves (Ohio Nat. Life 2743)
Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the
corporate names of Petitioners and Private Respondent Given Private Respondent's aforesaid underlined primary
are not identical, a reading of Petitioner's corporate purpose, nothing could prevent it from dealing in the same
names, to wit: PHILIPS EXPORT B.V., PHILIPS line of business of electrical devices, products or supplies
ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL which fall under its primary purposes. Besides, there is
DEVELOPMENT, INC., inevitably leads one to conclude showing that Private Respondent not only manufactured
that "PHILIPS" is, indeed, the dominant word in that all the and sold ballasts for fluorescent lamps with their corporate
companies affiliated or associated with the principal name printed thereon but also advertised the same as,
among others, Standard Philips (TSN, before the SEC, pp.
14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, the status of a well-known mark in the Philippines and
1985). As aptly pointed out by Petitioners, [p]rivate internationally as well (Bureau of Patents Decision No. 88-
respondent's choice of "PHILIPS" as part of its corporate 35 [TM], June 17, 1988, SEC Records).
name [STANDARD PHILIPS CORPORATION] . . . tends
to show said respondent's intention to ride on the In support of its application for the registration of its
popularity and established goodwill of said petitioner's Articles of Incorporation with the SEC, Private Respondent
business throughout the world" (Rollo, p. 137). The had submitted an undertaking "manifesting its willingness
subsequent appropriator of the name or one confusingly to change its corporate name in the event another person,
similar thereto usually seeks an unfair advantage, a free firm or entity has acquired a prior right to the use of the
ride of another's goodwill (American Gold Star Mothers, said firm name or one deceptively or confusingly similar to
Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC it." Private respondent must now be held to its
269, 191 F 2d 488). undertaking.

In allowing Private Respondent the continued use of its As a general rule, parties organizing a corporation
corporate name, the SEC maintains that the corporate must choose a name at their peril; and the use of a
names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. name similar to one adopted by another corporation,
and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain whether a business or a nonbusiness or non-profit
at least two words different from that of the corporate organization if misleading and likely to injure it in the
name of respondent STANDARD PHILIPS exercise in its corporate functions, regardless of
CORPORATION, which words will readily identify Private intent, may be prevented by the corporation having
Respondent from Petitioners and vice-versa. the prior right, by a suit for injunction against the new
corporation to prevent the use of the name (American
True, under the Guidelines in the Approval of Corporate Gold Star Mothers, Inc. v. National Gold Star Mothers,
and Partnership Names formulated by the SEC, the Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).
proposed name "should not be similar to one already used
by another corporation or partnership. If the proposed WHEREFORE, the Decision of the Court of Appeals dated
name contains a word already used as part of the firm 31 July 1990, and its Resolution dated 20 November
name or style of a registered company; the proposed 1990, are SET ASIDE and a new one entered ENJOINING
name must contain two other words different from the private respondent from using "PHILIPS" as a feature of
company already registered" (Emphasis ours). It is then its corporate name, and ORDERING the Securities and
pointed out that Petitioners Philips Electrical and Philips Exchange Commission to amend private respondent's
Industrial have two words different from that of Private Articles of Incorporation by deleting the word PHILIPS
Respondent's name. from the corporate name of private respondent.
No costs.
What is lost sight of, however, is that PHILIPS is a SO ORDERED.
trademark or trade name which was registered as far back
as 1922. Petitioners, therefore, have the exclusive right to
its use which must be free from any infringement by
similarity. A corporation has an exclusive right to the use
of its name, which may be protected by injunction upon a
principle similar to that upon which persons are protected
in the use of trademarks and tradenames (18 C.J.S. 574). ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO
Such principle proceeds upon the theory that it is a fraud HESUS, H.S.K. SA BANSANG PILIPINAS,
on the corporation which has acquired a right to that name INC.,petitioner,
and perhaps carried on its business thereunder, that vs.
another should attempt to use the same name, or the IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT
same name with a slight variation in such a way as to SUHAY NG KATOTOHANAN, respondent.
induce persons to deal with it in the belief that they are G.R. No. 137592 December 12, 2001
dealing with the corporation which has given a reputation
to the name (6 Fletcher [Perm Ed], pp. 39- This is a petition for review assailing the Decision dated
40, citing Borden Ice Cream Co. v. Borden's Condensed October 7, 19971 and the Resolution dated February 16,
Milk Co., 210 F 510). Notably, too, Private Respondent's 19992 of the Court of Appeals in CA-G.R. SP No. 40933,
name actually contains only a single word, that is, which affirmed the Decision of the Securities and
"STANDARD", different from that of Petitioners inasmuch Exchange and Commission (SEC) in SEC-AC No. 539.3
as the inclusion of the term "Corporation" or "Corp."
merely serves the Purpose of distinguishing the
corporation from partnerships and other business Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at
organizations. Suhay ng Katotohanan (Church of God in Christ Jesus,
the Pillar and Ground of Truth),4 is a non-stock religious
society or corporation registered in 1936. Sometime in
The fact that there are other companies engaged in other 1976, one Eliseo Soriano and several other members of
lines of business using the word "PHILIPS" as part of their respondent corporation disassociated themselves from the
corporate names is no defense and does not warrant the latter and succeeded in registering on March 30, 1977 a
use by Private Respondent of such word which constitutes new non-stock religious society or corporation,
an essential feature of Petitioners' corporate name named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan
previously adopted and registered and-having acquired ng Katotohanan.
On July 16, 1979, respondent corporation filed with the the SEC En Banc. Petitioner's motion for reconsideration
SEC a petition to compel the Iglesia ng Dios Kay Kristo was denied by the Court of Appeals on February 16, 1992.
Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name, which petition was docketed as SEC Hence, the instant petition for review, raising the following
Case No. 1774. On May 4, 1988, the SEC rendered assignment of errors:
judgment in favor of respondent, ordering the Iglesia ng I
Dios Kay Kristo Hesus, Haligi at Saligan ng THE HONORABLE COURT OF APPEALS ERRED IN
Katotohanan to change its corporate name to another CONCLUDING THAT PETITIONER HAS NOT BEEN
name that is not similar or identical to any name already DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
used by a corporation, partnership or association PROCESS, THE HONORABLE COURT OF APPEALS
registered with the Commission.5No appeal was taken DISREGARDED THE JURISPRUDENCE APPLICABLE
from said decision. TO THE CASE AT BAR AND INSTEAD RELIED ON
TOTALLY INAPPLICABLE JURISPRUDENCE.
It appears that during the pendency of SEC Case No. II
1774, Soriano, et al., caused the registration on April 25, THE HONORABLE COURT OF APPEALS ERRED IN ITS
1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia INTERPRETATION OF THE CIVIL CODE PROVISIONS
ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. ON EXTINCTIVE PRESCRIPTION, THEREBY
The acronym "H.S.K." stands for Haligi at Saligan ng RESULTING IN ITS FAILURE TO FIND THAT THE
Katotohanan.6 RESPONDENT'S RIGHT OF ACTION TO INSTITUTE
THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO
On March 2, 1994, respondent corporation filed before the ITS INSTITUTION.
SEC a petition, docketed as SEC Case No. 03-94-4704, III
praying that petitioner be compelled to change its THE HONORABLE COURT OF APPEALS FAILED TO
corporate name and be barred from using the same or CONSIDER AND PROPERLY APPLY THE EXCEPTIONS
similar name on the ground that the same causes ESTABLISHED BY JURISPRUDENCE IN THE
confusion among their members as well as the public. APPLICATION OF SECTION 18 OF THE
CORPORATION CODE TO THE INSTANT CASE.
IV
Petitioner filed a motion to dismiss on the ground of lack of THE HONORABLE COURT OF APPEALS FAILED TO
cause of action. The motion to dismiss was denied. PROPERLY APPRECIATE THE SCOPE OF THE
Thereafter, for failure to file an answer, petitioner was CONSTITUTIONAL GUARANTEE ON RELIGIOUS
declared in default and respondent was allowed to present FREEDOM, THEREBY FAILING TO APPLY THE SAME
its evidence ex parte. TO PROTECT PETITIONER'S RIGHTS.9

On November 20, 1995, the SEC rendered a decision Invoking the case of Legarda v. Court of Appeals,10
ordering petitioner to change its corporate name. The petitioner insists that the decision of the Court of Appeals
dispositive portion thereof reads: and the SEC should be set aside because the negligence
of its former counsel of record, Atty. Joaquin Garaygay, in
PREMISES CONSIDERED, judgment is hereby failing to file an answer after its motion to dismiss was
rendered in favor of the petitioner (respondent denied by the SEC, deprived them of their day in court.
herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay The contention is without merit. As a general rule, the
Kristo Jesus (sic), H.S.K. sa Bansang Pilipinas negligence of counsel binds the client. This is based on
(petitioner herein) is hereby MANDATED to change the rule that any act performed by a lawyer within the
its corporate name to another not deceptively similar scope of his general or implied authority is regarded as an
or identical to the same already used by the act of his client.11 An exception to the foregoing is where
Petitioner, any corporation, association, and/or the reckless or gross negligence of the counsel deprives
partnership presently registered with the Commission. the client of due process of law. 12 Said exception,
Let a copy of this Decision be furnished the Records however, does not obtain in the present case.
Division and the Corporate and Legal Department
[CLD] of this Commission for their records, reference In Legarda v. Court of Appeals, the effort of the counsel in
and/or for whatever requisite action, if any, to be defending his client's cause consisted in filing a motion for
undertaken at their end. extension of time to file answer before the trial court.
SO ORDERED.7 When his client was declared in default, the counsel did
nothing and allowed the judgment by default to become
Petitioner appealed to the SEC En Banc, where its appeal final and executory. Upon the insistence of his client, the
was docketed as SEC-AC No. 539. In a decision dated counsel filed a petition to annul the judgment with the
March 4, 1996, the SEC En Banc affirmed the above Court of Appeals, which denied the petition, and again the
decision, upon a finding that petitioner's corporate name counsel allowed the denial to become final and executory.
was identical or confusingly or deceptively similar to that of This Court found the counsel grossly negligent and
respondent's corporate name.8 consequently declared as null and void the decision
adverse to his client.
Petitioner filed a petition for review with the Court of
Appeals. On October 7, 1997, the Court of Appeals The factual antecedents of the case at bar are different.
rendered the assailed decision affirming the decision of Atty. Garaygay filed before the SEC a motion to dismiss
on the ground of lack of cause of action. When his client hardly serve as an effective differentiating medium
was declared in default for failure to file an answer, Atty. necessary to avoid confusion or difficulty in distinguishing
Garaygay moved for reconsideration and lifting of the petitioner from respondent. This is especially so, since
order of default.13 After judgment by default was rendered both petitioner and respondent corporations are using the
against petitioner corporation, Atty. Garaygay filed a same acronym — H.S.K.;19 not to mention the fact that
motion for extension of time to appeal/motion for both are espousing religious beliefs and operating in the
reconsideration, and thereafter a motion to set aside the same place. Parenthetically, it is well to mention that the
decision.14 acronym H.S.K. used by petitioner stands for "Haligi at
Saligan ng Katotohanan."20
Evidently, Atty. Garaygay was only guilty of simple
negligence. Although he failed to file an answer that led to Then, too, the records reveal that in holding out their
the rendition of a judgment by default against petitioner, corporate name to the public, petitioner highlights the
his efforts were palpably real, albeit bereft of zeal.15 dominant words "IGLESIA NG DIOS KAY KRISTO
HESUS, HALIGI AT SALIGAN NG KATOTOHANAN,"
Likewise, the issue of prescription, which petitioner raised which is strikingly similar to respondent's corporate name,
for the first time on appeal to the Court of Appeals, is thus making it even more evident that the additional words
untenable. Its failure to raise prescription before the SEC "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are
can only be construed as a waiver of that defense.16 At any merely descriptive of and pertaining to the members of
rate, the SEC has the authority to de-register at all times respondent corporation.21
and under all circumstances corporate names which in its
estimation are likely to spawn confusion. It is the duty of Significantly, the only difference between the corporate
the SEC to prevent confusion in the use of corporate names of petitioner and respondent are the
names not only for the protection of the corporations words SALIGAN and SUHAY. These words are
involved but more so for the protection of the public. 17 synonymous — both mean ground, foundation or support.
Hence, this case is on all fours with Universal Mills
Section 18 of the Corporation Code provides: Corporation v. Universal Textile Mills, Inc.,22 where the
Corporate Name. — No corporate name may be Court ruled that the corporate names Universal Mills
allowed by the Securities and Exchange Commission Corporation and Universal Textile Mills, Inc., are
if the proposed name is identical or deceptively or undisputably so similar that even under the test of
confusingly similar to that of any existing corporation "reasonable care and observation" confusion may arise.
or to any other name already protected by law or is
patently deceptive, confusing or is contrary to existing Furthermore, the wholesale appropriation by petitioner of
laws. When a change in the corporate name is respondent's corporate name cannot find justification
approved, the Commission shall issue an amended under the generic word rule. We agree with the Court of
certificate of incorporation under the amended name. Appeals' conclusion that a contrary ruling would
encourage other corporations to adopt verbatim and
Corollary thereto, the pertinent portion of the SEC register an existing and protected corporate name, to the
Guidelines on Corporate Names states: detriment of the public.
(d) If the proposed name contains a word similar to a
word already used as part of the firm name or style of The fact that there are other non-stock religious societies
a registered company, the proposed name must or corporations using the names Church of the Living God,
contain two other words different from the name of the Inc., Church of God Jesus Christ the Son of God the
company already registered; Head, Church of God in Christ & By the Holy Spirit, and
other similar names, is of no consequence. It does not
Parties organizing a corporation must choose a name at authorize the use by petitioner of the essential and
their peril; and the use of a name similar to one adopted distinguishing feature of respondent's registered and
by another corporation, whether a business or a nonprofit protected corporate name.23
organization, if misleading or likely to injure in the exercise
of its corporate functions, regardless of intent, may be We need not belabor the fourth issue raised by petitioner.
prevented by the corporation having a prior right, by a suit Certainly, ordering petitioner to change its corporate name
for injunction against the new corporation to prevent the is not a violation of its constitutionally guaranteed right to
use of the name.18 religious freedom. In so doing, the SEC merely compelled
petitioner to abide by one of the SEC guidelines in the
Petitioner claims that it complied with the aforecited SEC approval of partnership and corporate names, namely its
guideline by adding not only two but eight words to their undertaking to manifest its willingness to change its
registered name, to wit: "Ang Mga Kaanib" and "Sa corporate name in the event another person, firm, or entity
Bansang Pilipinas, Inc.," which, petitioner argues, has acquired a prior right to the use of the said firm name
effectively distinguished it from respondent corporation. or one deceptively or confusingly similar to it.

The additional words "Ang Mga Kaanib" and "Sa Bansang WHEREFORE, in view of all the foregoing, the instant
Pilipinas, Inc." in petitioner's name are, as correctly petition for review is DENIED. The appealed decision of
observed by the SEC, merely descriptive of and also the Court of Appeals is AFFIRMED in toto.
referring to the members, or kaanib, of respondent who SO ORDERED.
are likewise residing in the Philippines. These words can
ZUELLIG FREIGHT AND CARGO SYSTEMS, Petitioner, Contrary to respondents’ claim that Zeta ceased
vs. operations and closed its business, we believe that there
NATIONAL LABOR RELATIONS COMMISSION AND was merely a change of business name and primary
RONALDO V. SAN MIGUEL, Respondents. purpose and upgrading of stocks of the corporation.
G.R. No. 157900 July 22, 2013 Zuellig and Zeta are therefore legally the same person and
entity and this was admitted by Zuellig’s counsel in its
DECISION letter to the VAT Department of the Bureau of Internal
The mere change in the corporate name is not considered Revenue on 08 June 1994 (Reply, Annex "A"). As such,
under the law as the creation of a new corporation; hence, the termination of complainant’s services allegedly due to
the renamed corporation remains liable for the illegal cessation of business operations of Zeta is deemed illegal.
dismissal of its employee separated under that guise. Notwithstanding his receipt of separation benefits from
The Case respondents, complainant is not estopped from
Petitioner employer appeals the decision promulgated on questioning the legality of his dismissal.6
November 6, 2001,1 whereby the Court of Appeals (CA) xxxx
dismissed its petition for certiorari and upheld the adverse WHEREFORE, in view of the foregoing, complainant
decision of the National Labor Relations Commission is found to have been illegally dismissed. Respondent
(NLRC) finding respondent Ronaldo V. San Miguel to have Zuellig Freight and Cargo Systems, Inc. is hereby
been illegally dismissed. ordered to pay complainant his backwages from April
1, 1994 up to November 15, 1999, in the amount of
Antecedents THREE HUNDRED TWENTY FOUR THOUSAND
San Miguel brought a complaint for unfair labor practice, SIX HUNDRED FIFTEEN PESOS (₱324,615.00).
illegal dismissal, non-payment of salaries and moral The same respondent is ordered to pay the
damages against petitioner, formerly known as Zeta complainant Ronaldo San Miguel attorney’s fees
Brokerage Corporation (Zeta).2 He alleged that he had equivalent to ten percent (10%) of the total award.
been a checker/customs representative of Zeta since All other claims are dismissed.
December 16, 1985; that in January 1994, he and other SO ORDERED.7
employees of Zeta were informed that Zeta would cease
operations, and that all affected employees, including him, Decision of the NLRC
would be separated; that by letter dated February 28, Petitioner appealed, but the NLRC issued a resolution on
1994, Zeta informed him of his termination effective March April 4, 2001,8 affirming the decision of the Labor Arbiter.
31, 1994; that he reluctantly accepted his separation pay
subject to the standing offer to be hired to his former The NLRC later on denied petitioner’s motion for
position by petitioner; and that on April 15, 1994, he was reconsideration via its resolution dated June 15, 2001.9
summarily terminated, without any valid cause and due
process.
Decision of the CA
Petitioner then filed a petition for certiorari in the CA,
San Miguel contended that the amendments of the articles imputing to the NLRC grave abuse of discretion amounting
of incorporation of Zeta were for the purpose of changing to lack or excess of jurisdiction, as follows:
the corporate name, broadening the primary functions, 1. In failing to consider the circumstances attendant to
and increasing the capital stock; and that such the cessation of business of Zeta;
amendments could not mean that Zeta had been thereby 2. In failing to consider that San Miguel failed to meet
dissolved.3 the deadline Zeta fixed for its employees to accept the
offer of petitioner for re-employment;
On its part, petitioner countered that San Miguel’s 3. In failing to consider that San Miguel’s employment
termination from Zeta had been for a cause authorized by with petitioner from April 1 to 15, 1994 could in no way
the Labor Code; that its non-acceptance of him had not be interpreted as a continuation of employment with
been by any means irregular or discriminatory; that its Zeta;
predecessor-in-interest had complied with the 4. In admitting in evidence the letter dated January 21,
requirements for termination due to the cessation of 1994 of petitioner’s counsel to the Bureau of Internal
business operations; that it had no obligation to employ Revenue; and
San Miguel in the exercise of its valid management 5. In awarding attorney’s fees to San Miguel based on
prerogative; that all employees had been given sufficient Article 2208 of the Civil Code and Article 111 of the
time to make their decision whether to accept its offer of Labor Code.
employment or not, but he had not responded to its offer On November 6, 2002, the CA promulgated its assailed
within the time set; that because of his failure to meet the decision dismissing the petition for certiorari,10 viz:
deadline, the offer had expired; that he had nonetheless
been hired on a temporary basis; and that when it decided A careful perusal of the records shows that the closure of
to hire another employee instead of San Miguel, such business operation was not validly made. Consider the
decision was not arbitrary because of seniority Certificate of Filing of the Amended Articles of
considerations.4 Incorporation which clearly shows that petitioner Zuellig is
actually the former Zeta as per amendment dated January
Decision of the Labor Arbiter 21, 1994. The same observation can be deduced with
On November 15, 1999, Labor Arbiter Francisco A. Robles respect to the Certificate of Filing of Amended By-Laws
rendered a decision holding that San Miguel had been dated May 10, 1994. As aptly pointed out by private
illegally dismissed,5 to wit: respondent San Miguel, the amendment of the articles of
incorporation merely changed its corporate name, in refusing to satisfy his plainly valid, just and demandable
broadened its primary purpose and increased its claim.
authorized capital stocks. The requirements contemplated
in Article 283 were not satisfied in this case. Good faith After careful and judicious evaluation of the arguments
was not established by mere registration with the advanced to support the propriety or impropriety of the
Securities and Exchange Commission (SEC) of the award of attorney’s fees to private respondent San Miguel,
Amended Articles of Incorporation and ByLaws. The this Court finds the resolutions of public respondent NLRC
factual milleu of the case, considered in its totality, shows supported by laws and jurisprudence. It does not need
that there was no closure to speak of. The termination of much imagination to see that by reason of petitioner
services allegedly due to cessation of business operations Zuellig’s feigned closure of business operations, private
of Zeta was illegal. Notwithstanding private respondent respondent San Miguel incurred expenses to protect his
San Miguel’s receipt of separation benefits from petitioner rights and interests. Therefore, the award of attorney’s
Zuellig, the former is not estopped from questioning the fees is in order.
legality of his dismissal.
WHEREFORE, in view of the foregoing, the resolutions
Petitioner Zuellig’s allegation that the five employees who dated April 4, 2001 and June 15, 2001 of the National
refused to receive the termination letters were verbally Labor Relations Commission affirming the November 15,
informed that they had until 6:00 p.m. of March 1, 1994 to 1999 decision of the Labor
receive the termination letters and sign the employment Arbiter in NLRC NCR 05-03639-94 (CA No. 022861-00)
contracts, otherwise the former would be constrained to are hereby AFFIRMED and the instant petition for
withdraw its offer of employment and seek for certiorari is hereby DENIED and ordered DISMISSED.
replacements in order to ensure the smooth operations of SO ORDERED.
the new company from its opening date, is of no moment Hence, petitioner appeals.
in view of the foregoing circumstances. There being no Issues
valid closure of business operations, the dismissal of Petitioner asserts that the CA erred in holding that the
private respondent San Miguel on alleged authorized NLRC did not act with grave abuse of discretion in ruling
cause of cessation of business pursuant to Article 283 of that the closure of the business operation of Zeta had not
the Labor Code, was utterly illegal. Despite verbal notice been bona fide, thereby resulting in the illegal dismissal of
that the employees had until 6:00 p.m. of March 1, 1994 to San Miguel; and in holding that the NLRC did not act with
receive the termination letters and sign the employment grave abuse of discretion in ordering it to pay San Miguel
contracts, the dismissal was still illegal for the said attorney’s fees.11
condition is null and void. In point of facts and law, private
respondent San Miguel remained an employee of
petitioner Zuellig. If at all, the alleged closure of business In his comment,12 San Miguel counters that the CA
operations merely operates to suspend employment correctly found no grave abuse of discretion on the part of
relation since it is not permanent in character. the NLRC because the ample evidence on record showed
that he had been illegally terminated; that such finding
accorded with applicable laws and jurisprudence; and that
Where there is no showing of a clear, valid, and legal he was entitled to back wages and attorney’s fees.
cause for the termination of employment, the law
considers the matter a case of illegal dismissal and the
burden is on the employer to prove that the termination In its reply,13 petitioner reiterates that the cessation of
was for a valid or authorized cause. Zeta’s business, which resulted in the severance of San
Miguel from his employment, was valid; that the CA erred
in upholding the NLRC’s finding that San Miguel had been
Findings of facts of the NLRC, particularly when both the illegally terminated; that his acknowledgment of the validity
NLRC and Labor Arbiter are in agreement, are deemed of his separation from Zeta by signing a quitclaim and
binding and conclusive upon the Supreme Court. waiver estopped him from claiming that it had
subsequently employed him; and that the award of
As regards the second and last argument advanced by attorney’s fees had no basis in fact and in law.
petitioner Zuellig that private respondent San Miguel is not
entitled to attorney’s fees, this Court finds no reason to
disturb the ruling of the public respondent NLRC. Ruling
Petitioner Zuellig maintains that the factual backdraft (sic) The petition for review on certiorari is denied for its lack of
of this petition does not call for the application of Article merit.
2208 of the Civil Code and Article 111 of the Labor Code
as private respondent’s wages were not withheld. On the First of all, the outcome reached by the CA that the NLRC
other hand, public respondent NLRC argues that did not commit any grave abuse of discretion was borne
paragraphs 2 and 3, Article 2208 of the Civil Code and out by the records of the case. We cannot undo such
paragraph (a), Article 111 of the Labor Code justify the finding without petitioner making a clear demonstration to
award of attorney’s fees. NLRC was saying to the effect the Court now that the CA gravely erred in passing upon
that by petitioner Zuellig’s act of illegally dismissing private the petition for certiorari of petitioner.
respondent San Miguel, the latter was compelled to litigate
and thus incurred expenses to protect his interest. In the Indeed, in a special civil action for certiorari brought
same passion, private respondent San Miguel contends against a court or quasi-judicial body with jurisdiction over
that petitioner Zuellig acted in gross and evident bad faith a case, petitioner carries the burden of proving that the
court or quasi-judicial body committed not a merely
reversible error but a grave abuse of discretion amounting not to pay because the IGLF loans were applied with and
to lack or excess of jurisdiction in issuing the impugned obtained from First Summa Savings and Mortgage Bank.
order.14Showing mere abuse of discretion is not enough, First Summa Savings and Mortgage Bank and PAIC
for it is necessary to demonstrate that the abuse of Savings and Mortgage Bank, Inc., are one and the same
discretion was grave. Grave abuse of discretion means bank to which petitioner corporation is indebted. A change
either that the judicial or quasi-judicial power was in the corporate name does not make a new corporation,
exercised in an arbitrary or despotic manner by reason of whether effected by a special act or under a general law. It
passion or personal hostility, or that the respondent judge, has no effect on the identity of the corporation, or on its
tribunal or board evaded a positive duty, or virtually property, rights, or liabilities. The corporation, upon to
refused to perform the duty enjoined or to act in change in its name, is in no sense a new corporation, nor
contemplation of law, such as when such judge, tribunal or the successor of the original corporation. It is the same
board exercising judicial or quasi-judicial powers acted in corporation with a different name, and its character is in no
a capricious or whimsical manner as to be equivalent to respect changed. (Bold underscoring supplied for
lack of jurisdiction.15 Under the circumstances, the CA emphasis)
committed no abuse of discretion, least of all grave,
because its justifications were supported by the records In short, Zeta and petitioner remained one and the same
and by the applicable laws and jurisprudence. corporation. The change of name did not give petitioner
the license to terminate employees of Zeta like San Miguel
Secondly, it is worthy to point out that the Labor Arbiter, without just or authorized cause. The situation was not
the NLRC, and the CA were united in concluding that the similar to that of an enterprise buying the business of
cessation of business by Zeta was not a bona fide closure another company where the purchasing company had no
to be regarded as a valid ground for the termination of obligation to rehire terminated employees of the
employment of San Miguel within the ambit of Article 283 latter.18 Petitioner, despite its new name, was the mere
of the Labor Code. The provision pertinently reads: continuation of Zeta's corporate being, and still held the
obligation to honor all of Zeta's obligations, one of which
Article 283. Closure of establishment and reduction of was to respect San Miguel's security of tenure. The
personnel. — The employer may also terminate the dismissal of San Miguel from employment on the pretext
employment of any employee due to the installation of that petitioner, being a different corporation, had no
labor-saving devices, redundancy, retrenchment to obligation to accept him as its employee, was illegal and
prevent losses or the closing or cessation of operation of ineffectual.
the establishment or undertaking unless the closing is for
the purpose of circumventing the provisions of this Title, And, lastly, the CA rightfully upheld the NLRC's affirmance
by serving a written notice on the workers and the of the grant of attorney's fees to San Miguel. Thereby, the
Department of Labor and Employment at least one (1) NLRC did not commit any grave abuse of its discretion,
month before the intended date thereof. x x x. considering that San Miguel had been compelled to litigate
and to incur expenses to protect his rights and interest. In
The unanimous conclusions of the CA, the NLRC and the Producers Bank of the Philippines v. Court of
Labor Arbiter, being in accord with law, were not tainted Appeals,19the Court ruled that attorney's fees could be
with any abuse of discretion, least of all grave, on the part awarded to a party whom an unjustified act of the other
of the NLRC. Verily, the amendments of the articles of party compelled to litigate or to incur expenses to protect
incorporation of Zeta to change the corporate name to his interest. It was plain that petitioner's refusal to reinstate
Zuellig Freight and Cargo Systems, Inc. did not produce San Miguel with backwages and other benefits to which he
the dissolution of the former as a corporation. For sure, had been legally entitled was unjustified, thereby entitling
the Corporation Code defined and delineated the different him to recover attorney's fees.
modes of dissolving a corporation, and amendment of the
articles of incorporation was not one of such modes. The WHEREFORE, the Court AFFIRMS the decision of the
effect of the change of name was not a change of the Court of Appeals promulgated on November 6, 2002; and
corporate being, for, as well stated in Philippine First ORDERS petitioner to pay the costs of suit.
Insurance Co., Inc. v. Hartigan:16 "The changing of the SO ORDERED.
name of a 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." CLAVECILLIA RADIO SYSTEM, petitioner-appellant,
vs.
HON. AGUSTIN ANTILLON, as City Judge of the
The consequences, legal and otherwise, of the change of
Municipal Court of Cagayan de Oro City
name were similarly dealt with in P.C. Javier & Sons, Inc.
and NEW CAGAYAN GROCERY, respondents-
v. Court of Appeals,17 with the Court holding thusly:
appellees.
G.R. No. L-22238 February 18, 1967
From the foregoing documents, it cannot be denied that
petitioner corporation was aware of First Summa Savings
This is an appeal from an order of the Court of First
and Mortgage Bank’s change of corporate name to PAIC
Instance of Misamis Oriental dismissing the petition of the
Savings and Mortgage Bank, Inc. Knowing fully well of
Clavecilla Radio System to prohibit the City Judge of
such change, petitioner corporation has no valid reason
Cagayan de Oro from taking cognizance of Civil Case No. follows that the suit against it may properly be filed in the
1048 for damages. City of Manila.

It appears that on June 22, 1963, the New Cagayan The appellee maintain, however, that with the filing of the
Grocery filed a complaint against the Clavecilla Radio action in Cagayan de Oro City, venue was properly laid on
System alleging, in effect, that on March 12, 1963, the the principle that the appellant may also be served with
following message, addressed to the former, was filed at summons in that city where it maintains a branch office.
the latter's Bacolod Branch Office for transmittal thru its This Court has already held in the case of Cohen vs.
branch office at Cagayan de Oro: Benguet Commercial Co., Ltd., 34 Phil. 526; that the term
NECAGRO CAGAYAN DE ORO (CLAVECILLA) "may be served with summons" does not apply when the
REURTEL WASHED NOT AVAILABLE REFINED defendant resides in the Philippines for, in such case, he
TWENTY FIFTY IF AGREEABLE SHALL SHIP LATER may be sued only in the municipality of his residence,
REPLY POHANG regardless of the place where he may be found and
served with summons. As any other corporation, the
The Cagayan de Oro branch office having received the Clavecilla Radio System maintains a residence which is
said message omitted, in delivering the same to the Manila in this case, and a person can have only one
New Cagayan Grocery, the word "NOT" between the residence at a time (See Alcantara vs. Secretary of the
words "WASHED" and "AVAILABLE," thus changing Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil.
entirely the contents and purport of the same and 387). The fact that it maintains branch offices in some
causing the said addressee to suffer damages. After parts of the country does not mean that it can be sued in
service of summons, the Clavecilla Radio System filed a any of these places. To allow an action to be instituted in
motion to dismiss the complaint on the grounds that it any place where a corporate entity has its branch offices
states no cause of action and that the venue is would create confusion and work untold inconvenience to
improperly laid. The New Cagayan Grocery interposed the corporation.
an opposition to which the Clavecilla Radio System filed
its rejoinder. Thereafter, the City Judge, on September It is important to remember, as was stated by this Court
18, 1963, denied the motion to dismiss for lack of merit in Evangelista vs. Santos, et al., supra, that the laying of
and set the case for hearing. 1äwphï1.ñët the venue of an action is not left to plaintiff's caprice
because the matter is regulated by the Rules of Court.
Hence, the Clavecilla Radio System filed a petition for Applying the provision of the Rules of Court, the venue in
prohibition with preliminary injunction with the Court of this case was improperly laid.
First Instance praying that the City Judge, Honorable
Agustin Antillon, be enjoined from further proceeding with The order appealed from is therefore reversed, but without
the case on the ground of improper venue. The prejudice to the filing of the action in Which the venue
respondents filed a motion to dismiss the petition but this shall be laid properly. With costs against the respondents-
was opposed by the petitioner. Later, the motion was appellees.
submitted for resolution on the pleadings.

In dismissing the case, the lower court held that the


Clavecilla Radio System may be sued either in Manila
where it has its principal office or in Cagayan de Oro City HYATT ELEVATORS AND ESCALATORS
where it may be served, as in fact it was served, with CORPORATION,
summons through the Manager of its branch office in said vs
city. In other words, the court upheld the authority of the GOLDSTAR ELEVATORS, PHILS., INC.,
city court to take cognizance of the case. 1äwphï1.ñët
G.R. No. 161026 October 24, 2005

DECISION
In appealing, the Clavecilla Radio System contends that Well established in our jurisprudence is the rule that
the suit against it should be filed in Manila where it holds the residence of a corporation is the place where its principal
its principal office. office is located, as stated in its Articles of Incorporation.

It is clear that the case for damages filed with the city court The Case
is based upon tort and not upon a written contract. Section Before us is a Petition for Review[1] on Certiorari, under
1 of Rule 4 of the New Rules of Court, governing venue of Rule 45 of the Rules of Court, assailing the June 26, 2003
actions in inferior courts, provides in its paragraph (b) (3) Decision[2] and the November 27, 2003 Resolution[3] of the
that when "the action is not upon a written contract, then in Court of Appeals (CA) in CA-GR SP No. 74319. The
the municipality where the defendant or any of the decretal portion of the Decision reads as follows:
defendants resides or may be served with summons."
(Emphasis supplied) WHEREFORE, in view of the foregoing, the
assailed Orders dated May 27, 2002 and October
1, 2002 of the RTC, Branch 213, Mandaluyong
Settled is the principle in corporation law that the
City in Civil Case No. 99-600, are hereby SET
residence of a corporation is the place where its principal
ASIDE. The said case is hereby
office is established. Since it is not disputed that the
ordered DISMISSED on the ground of improper
Clavecilla Radio System has its principal office in Manila, it
venue.[4]
of a joint venture agreement with Otis Elevator Company of
The assailed Resolution denied petitioners Motion for the USA, to LG Otis Elevator Company (LG OTIS, for
Reconsideration. brevity). Thus, LGISC was to be substituted or changed to
LG OTIS, its successor-in-interest. Likewise, the motion
The Facts averred that x x x GOLDSTAR was being utilized by LG
The relevant facts of the case are summarized by OTIS and LGIC in perpetrating their unlawful and unjustified
the CA in this wise: acts against HYATT. Consequently, in order to afford
complete relief, GOLDSTAR was to be additionally
Petitioner [herein Respondent] Goldstar Elevator impleaded as a party-defendant. Hence, in the Amended
Philippines, Inc. (GOLDSTAR for brevity) is a domestic Complaint, HYATT impleaded x x x GOLDSTAR as a party-
corporation primarily engaged in the business of defendant, and all references to LGISC were
marketing, distributing, selling, importing, installing, and correspondingly replaced with LG OTIS.
maintaining elevators and escalators, with address at
6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, On December 18, 2000, LG OTIS (LGISC) and LGIC
Makati City. filed their opposition to HYATTs motion to amend the
complaint. It argued that: (1) the inclusion of GOLDSTAR
On the other hand, private respondent [herein as party-defendant would lead to a change in the theory of
petitioner] Hyatt Elevators and Escalators Company the case since the latter took no part in the negotiations
(HYATT for brevity) is a domestic corporation similarly which led to the alleged unfair trade practices subject of the
engaged in the business of selling, installing and case; and (b) HYATTs move to amend the complaint at that
maintaining/servicing elevators, escalators and parking time was dilatory, considering that HYATT was aware of the
equipment, with address at the 6th Floor, Dao I existence of GOLDSTAR for almost two years before it
Condominium, Salcedo St., Legaspi Village, Makati, as sought its inclusion as party-defendant.
stated in its Articles of Incorporation.
On January 8, 2001, the [trial] court admitted the
On February 23, 1999, HYATT filed a Complaint for Amended Complaint. LG OTIS (LGISC) and LGIC filed a
unfair trade practices and damages under Articles 19, 20 motion for reconsideration thereto but was similarly
and 21 of the Civil Code of the Philippines against LG rebuffed on October 4, 2001.
Industrial Systems Co. Ltd. (LGISC) and LG International
Corporation (LGIC), alleging among others, that: in 1988, On April 12, 2002, x x x GOLDSTAR filed a Motion to
it was appointed by LGIC and LGISC as the exclusive Dismiss the amended complaint, raising the following
distributor of LG elevators and escalators in the grounds: (1) the venue was improperly laid, as neither
Philippines under a Distributorship Agreement; x x x HYATT nor defendants reside in Mandaluyong City, where
LGISC, in the latter part of 1996, made a proposal to the original case was filed; and (2) failure to state a cause
change the exclusive distributorship agency to that of a of action against [respondent], since the amended
joint venture partnership; while it looked forward to a complaint fails to allege with certainty what specific ultimate
healthy and fruitful negotiation for a joint venture, acts x x x Goldstar performed in violation of x x x Hyatts
however, the various meetings it had with LGISC and rights. In the Order dated May 27, 2002, which is the main
LGIC, through the latters representatives, were subject of the present petition, the [trial] court denied the
conducted in utmost bad faith and with malevolent motion to dismiss, ratiocinating as follows:
intentions; in the middle of the negotiations, in order to
put pressures upon it, LGISC and LGIC terminated the Upon perusal of the factual and legal arguments raised
Exclusive Distributorship Agreement; x x x [A]s a by the movants-defendants, the court finds that these
consequence, [HYATT] suffered P120,000,000.00 as are substantially the same issues posed by the then
actual damages, representing loss of earnings and defendant LG Industrial System Co. particularly the
business opportunities, P20,000,000.00 as damages for matter dealing [with] the issues of improper venue,
its reputation and goodwill, P1,000,000.00 as and by way failure to state cause of action as well as this courts lack
of exemplary damages, and P500,000.00 as and by way of jurisdiction. Under the circumstances obtaining, the
of attorneys fees. court resolves to rule that the complaint sufficiently
states a cause of action and that the venue is properly
On March 17, 1999, LGISC and LGIC filed a Motion to laid. It is significant to note that in the amended
Dismiss raising the following grounds: (1) lack of jurisdiction complaint, the same allegations are adopted as in the
over the persons of defendants, summons not having been original complaint with respect to the Goldstar
served on its resident agent; (2) improper venue; and (3) Philippines to enable this court to adjudicate a complete
failure to state a cause of action. The [trial] court denied the determination or settlement of the claim subject of the
said motion in an Order dated January 7, 2000. action it appearing preliminarily as sufficiently alleged in
the plaintiffs pleading that said Goldstar Elevator Philippines
On March 6, 2000, LGISC and LGIC filed an Answer with Inc., is being managed and operated by the same Korean
Compulsory Counterclaim ex abundante cautela. officers of defendants LG-OTIS Elevator Company and LG
International Corporation.
Thereafter, they filed a Motion for Reconsideration and to
Expunge Complaint which was denied.
On June 11, 2002, [Respondent] GOLDSTAR filed a
motion for reconsideration thereto. On June 18, 2002,
On December 4, 2000, HYATT filed a motion for leave of
without waiving the grounds it raised in its motion to
court to amend the complaint, alleging that subsequent to
dismiss, [it] also filed an Answer Ad Cautelam. On
the filing of the complaint, it learned that LGISC transferred
October 1, 2002, [its] motion for reconsideration was
all its organization, assets and goodwill, as a consequence
denied.
Appeals[11] ruled that for practical purposes, a corporation
From the aforesaid Order denying x x x Goldstars is in a metaphysical sense a resident of the place where
motion for reconsideration, it filed the x x x petition for its principal office is located as stated in the articles of
certiorari [before the CA] alleging grave abuse of incorporation.[12] Even before this ruling, it has already
discretion amounting to lack or excess of jurisdiction on been established that the residence of a corporation is the
the part of the [trial] court in issuing the assailed Orders place where its principal office is established.[13]
dated May 27, 2002 and October 1, 2002.[5]
This Court has also definitively ruled that for purposes
Ruling of the Court of Appeals of venue, the term residence is synonymous with
The CA ruled that the trial court had committed domicile.[14] Correspondingly, the Civil Code provides:
palpable error amounting to grave abuse of discretion
when the latter denied respondents Motion to Dismiss. Art. 51. When the law creating or recognizing
The appellate court held that the venue was clearly them, or any other provision does not fix the domicile
improper, because none of the litigants resided in of juridical persons, the same shall be understood to
Mandaluyong City, where the case was filed. be the place where their legal representation is
established or where they exercise their principal
According to the appellate court, since Makati was the functions.[15]
principal place of business of both respondent and
petitioner, as stated in the latters Articles of Incorporation, It now becomes apparent that the residence or
that place was controlling for purposes of determining the domicile of a juridical person is fixed by the law creating or
proper venue. The fact that petitioner had abandoned its recognizing it. Under Section 14(3) of the Corporation
principal office in Makati years prior to the filing of the Code, the place where the principal office of the
original case did not affect the venue where personal corporation is to be located is one of the required contents
actions could be commenced and tried. of the articles of incorporation, which shall be filed with the
Hence, this Petition.[6] Securities and Exchange Commission (SEC).

In the present case, there is no question as to the


The Issue residence of respondent. What needs to be examined is
In its Memorandum, petitioner submits this sole issue for that of petitioner. Admittedly,[16] the latters principal place
our consideration: of business is Makati, as indicated in its Articles of
Incorporation. Since the principal place of business of a
Whether or not the Court of Appeals, in reversing corporation determines its residence or domicile, then the
the ruling of the Regional Trial Court, erred as a place indicated in petitioners articles of incorporation
matter of law and jurisprudence, as well as becomes controlling in determining the venue for this
committed grave abuse of discretion, in holding that case.
in the light of the peculiar facts of this case, venue
was improper[.][7] Petitioner argues that the Rules of Court do not
provide that when the plaintiff is a corporation, the
This Courts Ruling complaint should be filed in the location of its principal
The Petition has no merit. office as indicated in its articles of
incorporation.[17] Jurisprudence has, however, settled that
Sole Issue: Venue the place where the principal office of a corporation is
The resolution of this case rests upon a proper located, as stated in the articles, indeed establishes its
understanding of Section 2 of Rule 4 of the 1997 Revised residence.[18] This ruling is important in determining the
Rules of Court: venue of an action by or against a corporation, [19] as in the
present case.
Sec. 2. Venue of personal actions. All other actions
may be commenced and tried where the plaintiff or any Without merit is the argument of petitioner that the
of the principal plaintiff resides, or where the defendant locality stated in its Articles of Incorporation does not
or any of the principal defendant resides, or in the case conclusively indicate that its principal office is still in the
of a non-resident defendant where he may be found, at same place. We agree with the appellate court in its
the election of the plaintiff. observation that the requirement to state in the articles the
place where the principal office of the corporation is to be
Since both parties to this case are corporations, there located is not a meaningless requirement. That proviso
is a need to clarify the meaning of residence. The law would be rendered nugatory if corporations were to be
recognizes two types of persons: (1) natural and (2) allowed to simply disregard what is expressly stated in
juridical. Corporations come under the latter in accordance their Articles of Incorporation.[20]
with Article 44(3) of the Civil Code.[8]
Inconclusive are the bare allegations of petitioner that
Residence is the permanent home -- the place to it had closed its Makati office and relocated to
which, whenever absent for business or pleasure, one Mandaluyong City, and that respondent was well aware of
intends to return.[9] Residence is vital when dealing with those circumstances. Assuming arguendo that they
venue.[10] A corporation, however, has no residence in the transacted business with each other in the Mandaluyong
same sense in which this term is applied to a natural office of petitioner, the fact remains that, in law, the latters
person. This is precisely the reason why the Court residence was still the place indicated in its Articles of
in Young Auto Supply Company v. Court of Incorporation. Further unacceptable is its faulty reasoning
that the ground for the CAs dismissal of its Complaint was and the three private respondents who owned the rest, at
its failure to amend its Articles of Incorporation so as to 100 shares each, deposited all their shares with the
reflect its actual and present principal office. The appellate Trustees. The trust agreement provided that upon Reese’s
court was clear enough in its ruling that the Complaint was death MANTRASCO shall purchase Reese’s shares. The
dismissed because the venue had been improperly laid, trust agreement was executed in view of Reese’s desire
not because of the failure of petitioner to amend the latters that upon his death the Company would continue under
Articles of Incorporation. the management of respondents. Upon Reese’s death and
partial payment by the company of Reeses’s share, a new
Indeed, it is a legal truism that the rules on the venue certificate was issued in the name of MANTRASCO, and
of personal actions are fixed for the convenience of the the certificate indorsed to the Trustees. Subsequently, the
plaintiffs and their witnesses. Equally settled, however, is stockholders reverted the 24,700 shares in the Treasury to
the principle that choosing the venue of an action is not the capital account of the company as stock dividends to
left to a plaintiffs caprice; the matter is regulated by the be distributed to the stockholders. When the entire
Rules of Court.[21] Allowing petitioners arguments may purchase price of Reese’s interest in the company was
lead precisely to what this Court was trying to avoid paid in full by the latter, the trust agreement was
in Young Auto Supply Company v. CA:[22] the creation of terminated, and the shares held in trust were delivered to
confusion and untold inconveniences to party litigants. the company.
Thus enunciated the CA:
The Bureau of Internal Revenue concluded that the
x x x. To insist that the proper venue is the actual distribution of the 24,700 shares of Reese as stock
principal office and not that stated in its Articles of dividends was in effect a distribution of the "assets or
Incorporation would indeed create confusion and property of the corporation." It therefore assessed
work untold inconvenience. Enterprising litigants respondents for deficiency income taxes as well as for
may, out of some ulterior motives, easily circumvent fraud penalty and interest charges. The Court of Tax
the rules on venue by the simple expedient of Appeals absolved respondent from any liability for
closing old offices and opening new ones in another receiving the questioned stock dividends on the ground
place that they may find well to suit their needs.[23] that their respective one-third interest in the Company
remained the same before and after the declaration of the
We find it necessary to remind party litigants, stock dividends and only the number of shares held by
especially corporations, as follows: each of them had changed.

The rules on venue, like the other procedural rules, On a petition for review, the Supreme Court held that the
are designed to insure a just and orderly administration newly acquired shares were not treasury shares; their
of justice or the impartial and evenhanded determination declaration as treasury stock dividends was a complete
of every action and proceeding. Obviously, this objective nullity and that the assessment by the Commissioner of
will not be attained if the plaintiff is given unrestricted fraud penalty and the imposition of interest charges
freedom to choose the court where he may file his pursuant to the provision of the Tax Code were made in
complaint or petition. accordance with law.
Judgment of the Court of Tax Appeals set aside.
The choice of venue should not be left to the
plaintiffs whim or caprice. He may be impelled by some SYLLABUS
ulterior motivation in choosing to file a case in a 1. PRIVATE CORPORATIONS; SHARES OF STOCKS;
particular court even if not allowed by the rules on TREASURY; SHARES. — Treasury shares are stocks
venue.[24] issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or
other means. They are therefore issued shares, but being
WHEREFORE, the Petition is
hereby DENIED, and the assailed Decision and in the treasury they do not have the status of outstanding
shares. Consequently, although a treasury share, not
Resolution AFFIRMED. Costs against petitioner.
having been retired by the corporation re-acquiring it, may
SO ORDERED.
be re-issued or sold again, such share, as long as it is
held by the corporation as a treasury share, participates
neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in the meetings of
the corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate
COMMISSIONER OF INTERNAL REVENUE, Petitioner, their control of the corporation though it still represent a
v. JOHN L. MANNING, W.D. McDONALD, E.E. paid — for interest in the property of the corporation.
SIMMONS and THE COURT OF TAX
APPEALS, Respondents. 2. ID.; ID.; ID.; DECLARATION OF QUESTIONED
[G.R. No. L-28398. August 6, 1975.] SHARES AS TREASURY STOCK DIVIDENDS, A
NULLITY. — Where the manifest intention of the parties to
SYNOPSIS the trust agreement was, in sum and substance, to treat
the shares of a deceased stockholder as absolutely
Under a trust agreement, Julius Reese who owned 24,700 outstanding shares of said stockholder’s estate until they
shares of the 25,000 common shares of MANTRASCO, were fully paid. the declaration of said shares as treasury
stock dividend was a complete nullity and plainly violative 6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD
of public policy. PENALTY AND IMPOSITION OF INTEREST CHARGES
IN ACCORDANCE WITH LAW DESPITE NULLITY OF
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RESOLUTION AUTHORIZING DISTRIBUTION OF
RETAINED EARNINGS. — A stock dividend, being one EARNINGS. — The fact that the resolution authorizing the
payable in capital stock, cannot be declared out of distribution of earnings is null and void is of no moment.
outstanding corporate stock, but only from retained Under the National Internal Revenue Code, income tax is
earnings. assessed on income received from any property, activity
or service that produces income. The Tax Code stands as
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN an indifferent, neutral party on the matter of where the
DISTRIBUTION OF EARNINGS TAXABLE. — Where by income comes from. The action taken by the
the use of a trust instrument as a convenient technical Commissioner of assessing fraud penalty and imposing
device, respondents bestowed unto themselves the full interest charges pursuant to the provisions of the Tax
worth and value of a deceased stockholder’s corporate Code is in accordance with law.
holding acquired with the very earnings of the companies,
such package device which obviously is not designed to DECISION
carry out the usual stock dividend purpose of corporate This is a petition for review of the decision of the Court of
expansion reinvestment, e.g., the acquisition of additional Tax Appeals, in CTA case 1626, which set aside the
facilities and other capital budget items, but exclusively for income tax assessments issued by the Commissioner of
expanding the capital base of the surviving stockholders in Internal Revenue against John L. Manning, W.D.
the company, cannot be allowed to deflect the latter’s McDonald and E.E. Simmons (hereinafter referred to as
responsibilities toward our income tax laws. The the respondents), for alleged undeclared stock dividends
conclusion is ineluctable that whenever the company received in 1958 from the Manila Trading and Supply Co.
parted with a portion of its earnings "to buy" the corporate (hereinafter referred to as the MANTRASCO) valued at
holdings of the deceased stockholders, it was in ultimate P7,973,660.
effect and result making a distribution of such earnings to
the surviving stockholders. All these amounts are In 1952 the MANTRASCO had an authorized capital stock
consequently subject to income tax as being, in truth and of P2,500,000 divided into 25,000 common shares; 24,700
in fact, a flow of cash benefits to the surviving of these were owned by Julius S. Reese, and the rest, at
stockholders. 100 shares each, by the three respondents.

5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED On February 29, 1952, in view of Reese’s desire that upon
ON THE TOTAL ACQUISITION COST OF THE ALLEGED his death MANTRASCO and its two subsidiaries,
TREASURY STOCK DIVIDENDS, ERROR. — Where the MANTRASCO (Guam), Inc. and the Port Motors, Inc.,
surviving stockholders, by resolution, partitioned among would continue under the management of the
themselves, as treasury stock dividends, the deceased respondents, a trust agreement on his and the
stockholder’s interest, and earnings of the corporation respondents’ interests in MANTRASCO was executed by
over a period of years were used to gradually wipe out the and among Reese (therein referred to as OWNER),
holdings therein of said deceased stockholder, the MANTRASCO (therein referred to as COMPANY), the law
earnings (which in effect have been distributed to the firm of Ross, Selph, Carrascoso and Janda (therein
surviving stockholders when they appropriated among referred to as TRUSTEES), and the respondents (therein
themselves the deceased stockholder’s interest), should referred to as MANAGERS).
be taxed for each of the corresponding years when
payments were made to the deceased’s estate on account The trust agreement pertinently provides as follows:
of his shares. In other words, the Tax Commissioner may "1. Upon the execution of this agreement the OWNER
not asses the surviving stockholders, for income tax shall deposit with the TRUSTEES, duly endorsed and
purposes, the total acquisition cost of the alleged treasury ready for transfer Twenty-Four Thousand Seven Hundred
stock dividends in one lump sum. However, with regard to (24,700) shares of the capital stock of the COMPANY,
payment made with the corporation’s earnings before the these shares being all shares of the capital stock of the
passage of the resolution declaring as stock dividends the COMPANIES belonging to him . . .
deceased stockholder’s interest (while indeed those
earnings were utilized in those years to gradually pay off "2. Upon the execution of this Agreement the MANAGERS
the value of the deceased stockholder’s holdings), the shall deposit with the TRUSTEES, duly endorsed and
surviving stockholders should be liable (in the absence of ready for transfer, all shares of the capital stock of the
evidence that prior to the passage of the stockholder’s COMPANIES belonging to any of them.
resolution the contributed of each of the surviving
stockholder rose corresponding), for income tax purposes, "3. (a) The OWNER and the MANAGERS, and each of
to the extent of the aggregate amount paid by the them, agree that if any of them shall at any time during the
corporation (prior to such resolution) to buy off the life of this trust acquire any additional shares of stock of
deceased stockholder’s shares. The reason is that it was any of the COMPANIES, or of any successor company, or
only by virtue of the authority contained in said resolution any shares in substitution, exchange or replacement of the
that the surviving stockholders actually, albeit illegally, shares subject to this agreement, they shall forthwith
appropriated and petitioned among themselves the endorse and deposit such shares with the TRUSTEES
stockholders equity representing the deceased hereunder and such additional or other shares shall
stockholder’s interest. become subject to this agreement; shares deposited by
the OWNER and shares received by the TRUSTEES as
stock dividends on, or in substitution, exchange or shares being purchased by any COMPANY or
replacement of, such shares so deposited under this COMPANIES should they in their exclusive discretion
agreement being MANAGERS’ SHARES. determine that such increase or decrease would be
necessary to carry out the intention of the parties that the
"(b) All shares deposited under paragraphs 1, 2 and 3(a) Estate and heirs of the OWNER shall receive the fair value
hereof shall, during the life of the OWNER, remain in the of the shares deposited in Trust as such value existed at
name of and shall be voted by the respective parties the date of the death of the OWNER. . .
making the deposit ...
"13. Should the said COMPANIES or any of them be
"4. (a) Upon the death of the OWNER and the receipt by unable or unwilling to comply with their obligations
the TRUSTEES of the initial payment from the company hereunder when due, the TRUSTEES may terminate this
purchasing the OWNER’S SHARES, the TRUSTEES shall agreement and dispose of all the shares of stock
cause the OWNER’S SHARES to be transferred into the deposited hereunder, whether or not payment shall have
name of such company and such company shall been made for part of such stock, applying the proceeds
thereupon transfer such shares into the name of the of such sale or disposition to the unpaid balance of the
TRUSTEES and the TRUSTEES shall hold such shares purchase price:
until payment for all such shares shall have been made by
the company as provided in this agreement. "(a) If, upon any such sale or disposition of the stock, the
x x x TRUSTEES shall receive an amount in excess of the
"(c) The TRUSTEES shall vote all stock standing in their unpaid balance of the purchase price agreed to be paid by
name or the name of their nominees at all meetings and the COMPANIES for the OWNER’S SHARES such
shall be in all respects entitled to all the rights as owners excess, after deducting all expenses, charges and taxes,
of said shares, subject, however, to the provisions of this shall be paid to the then MANAGERS.
agreement of trust. x x x
"17. Until the delivery to him of the shares purchased by
"(d) Any and all dividends paid on said shares after the him, no MANAGER, shall sell, assign, mortgage, pledge,
death of the OWNER shall be subject to the provisions of transfer or in anywise encumber or hypothecate such
this agreement. shares or his interest in this agreement.
x x x x x x
"5. (b) It is expressly agreed and understood, however, "19. After the death of the OWNER and during the period
that the declaration of dividends and amount of earnings of this trust the COMPANIES shall pay no dividends
transferred to surplus shall be subject to the approval of except as may be authorized by the TRUSTEES.
the TRUSTEES and the TRUSTEES shall participate to Dividends on MANAGER’S SHARES shall, so long as
such extent in the affairs of the COMPANIES as they they shall not be in default under this agreement, be paid
deem necessary to insure the carrying out of this over by the TRUSTEES to the MANAGERS. Dividends on
agreement and the discharge of the obligations of the OWNER’S SHARES shall be applied in liquidation of the
COMPANIES and each of them and of the MANAGERS COMPANIES’ liabilities hereunder as provided in Article
hereunder. 8(d).
x x x
"(c) The TRUSTEES shall designate one or more directors "26. The TRUSTEES may, after the death of the OWNER
of each of the COMPANIES as they shall consider and during the life of this trust, vote any and all shares
advisable and corresponding shares shall be transferred held in trust, at any general and special meeting of
to such directors to qualify them to act. stockholders for all purposes, including but not limited to
x x x wholly or partially liquidating or reducing the capital of any
"8. (a) Upon the death of the OWNER, the COMPANIES COMPANY or COMPANIES, authorizing the sale of any or
or any one or more of them shall purchase the OWNER’S all assets, and election of directors . . .
SHARES; it being the intent that any of the COMPANIES x x x
shall purchase all or a proportionate part of the OWNER’S "28. The COMPANIES and each of them undertake and
SHARES . . . agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend their
"(b) The purchase price of such shares shall be the book articles of incorporation, reorganize, liquidate, dissolve
value of such share computed in United States dollars . . . and do all other things the TRUSTEES in their discretion
x x x determine to be necessary to enable them to comply with
"(d) All dividends paid on stock that had been OWNER’S their obligations hereunder and the TRUSTEES are
SHARES, from the time of the transfer of such shares by hereby irrevocably authorized to vote all shares of the
one or more of the COMPANIES to the TRUSTEES as COMPANIES and each of them at any general or special
provided in Article 4 until payment in full for such meeting for the accomplishment of such purposes. . . ." cralaw

OWNER’S SHARES shall have been made by each of the


virtua1aw library

COMPANIES which shall have purchased the same, shall On October 19, 1954 Reese died. The projected transfer
be credited as payments on account of the purchase price of his shares in the name of MANTRASCO could not,
of such shares and shall be a prepayment on account of however, be immediately effected for lack of sufficient
the next due installment or installments of such purchase funds to cover initial payment on the shares.
price.
x x x On February 2, 1955, after MANTRASCO made a partial
"12. The TRUSTEES may from time to time increase or payment of Reese’s shares, the certificate for the 24,700
decrease the unpaid balance of the purchase price of the shares in Reese’s name was cancelled and a new
certificate was issued in the name of MANTRASCO. On TOTAL AMOUNT DUE & COLLECTIBLE P2,430,067.92
the same date, and in the meantime that Reese’s interest P2,423,767.92 2,436,729.12
had not been fully paid, the new certificate was endorsed
to the law firm of Ross, Selph, Carrascoso and Janda, as The respondents unsuccessfully challenged the foregoing
trustees for and in behalf of MANTRASCO. assessments and, failing to secure a favorable
reconsideration, appealed to the Court of Tax Appeals.
On December 22, 1958, at a special meeting of
MANTRASCO stockholders, the following resolution was On October 30, 1967 the CTA rendered judgment
passed: absolving the respondents from any liability for receiving
the questioned stock dividends on the ground that their
"RESOLVED, that the 24,700 shares in the Treasury be respective one-third interest in MANTRASCO remained
reverted back to the capital account of the company as a the same before and after the declaration of stock
stock dividend to be distributed to shareholders of record dividends and only the number of shares held by each of
at the close of business on December 22, 1958, in them had changed.
accordance with the action of the Board of Directors at its
meeting on December 19, 1958 which action is hereby Hence, the present recourse.
approved and confirmed." cralaw virtua1aw library

All the parties rely upon the same provisions of the Tax
On November 25, 1963 the entire purchase price of Code and internal revenue regulations to bolster their
Reese’s interest in MANTRASCO was finally paid in full by respective positions. These are:
the latter, On May 4, 1964 the trust agreement was
terminated and the trustees delivered to MANTRASCO all A. National Internal Revenue Code
the shares which they were holding in trust.
"SEC. 83. Distribution of dividends or assets by
Meanwhile, on September 14, 1962, an examination of corporations — (a) Definition of Dividends — The term
MANTRASCO’s books was ordered by the Bureau of ‘dividends’ when used in this Title means any distribution
Internal Revenue. The examination disclosed that (a) as of made by a corporation to its shareholders out of its
December 31, 1958 the 24,700 shares declared as earnings or profits accrued since March first, nineteen
dividends had been proportionately distributed to the hundred and thirteen, and payable to its shareholders,
respondents, representing a total book value or acquisition whether in money or in other property.
cost of P7,973,660; (b) the respondents failed to declare
the said stock dividends as part of their taxable income for "Where a corporation distributes all of its assets in
the year 1958; and (c) from 1956 to 1961 the following complete liquidation or dissolution the gain realized or loss
amounts were paid by MANTRASCO to Reese’s estate by sustained by the stockholder, whether individual or
virtue of the trust agreement, to wit: chanrob1es virtual 1aw library corporate, is a taxable income or deductible loss, as the
case may be.
Amounts
Year Liabilities Paid "(b) Stock dividend. — A stock dividend representing the
1956 P5,830,587.86 P 2,143,073.00 transfer of surplus to capital account shall not be subject
1957 5,317,137.86 513,450.00
to tax. However, if a corporation cancels or redeems stock
1958 4,824,059.28 493,078.58
1959 4,319,420.14 504,639.14 issued as a dividend at such time and in such manner as
1960 3,849,720.14 469,700.00 to make the distribution and cancellation or redemption, in
1961 3,811,387.69 38,332.45 whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in
On the basis of their examination, the BIR examiners redemption or cancellation of the stock shall be
concluded that the distribution of Reese’s shares as stock considered as taxable income to the extent that it
dividends was in effect a distribution of the "asset or represents a distribution of earnings or profits
property of the corporation as may be gleaned from the accumulated after March first, nineteen hundred and
payment of cash for the redemption of said stock and thirteen."
distributing the same as stock dividend." On April 14, 1965
the Commissioner of Internal Revenue issued notices of B. B.I.R. Regulations
assessment for deficiency income taxes to the
respondents for the year 1958, as follows: chanrob1es virtual 1aw library "SEC. 251. Dividends paid in property. — Dividends paid
in securities or other property (other than its own stock), in
J.L. Manning W.D. McDonald E.E. Simmons which the earnings of the corporation have been invested,
are income to the recipients to the amount of the full
Deficiency Income Tax P1,416,469.00 P1,442,719.00 market value of such property when receivable by
P1,450,434.00 individual stockholders . . .

Add 50% surcharge* 723,234.50 721,359.507 25,217.00 "SEC. 252. Stock dividend. — A stock dividend which
represents the transfer of surplus to capital account is not
1/2% monthly interest from subject to income tax. However, a dividend in stock may
constitute taxable income to the recipients thereof
6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12 notwithstanding the fact that the officers or directors of the
———— ———— ———— corporation (as defined in section 84) choose to call such
distribution as a stock dividend. The distinction between a
stock dividend which does not, and one which does, of said shares" — this authority is reiterated in paragraphs
constitute income taxable to the shareholders is the 26 and 28 of the trust agreement;
distinction between a stock dividend which works no
change in the corporate entity, the same interest in the (b) under paragraph 4(d), "Any and all dividends paid on
same corporation being represented after the distribution said shares after the death of the OWNER shall be subject
by more shares of precisely the same character, and a to the provisions of this agreement;"
stock dividend where there either has been change of
corporate identity or a change in the nature of the shares (c) under paragraph 5(b), the amount of retained earnings
issued as dividends whereby the proportional interest of to be declared as dividends was made subject to the
the shareholder after the distribution is essentially different approval of the trustees of the 24,700 shares;
from the former interest. A stock dividend constitutes
income if it gives the shareholder an interest different from (d) under paragraph 5(c), the choice of corporate directors
that which his former stockholdings represented. A stock was delegated exclusively to the trustees who were also
dividend does not constitute income if the new shares given the authority to transfer qualifying shares to such
confer no different rights or interests than did the old — directors; and
the new certificate plus the old representing the same
proportionate interest in the net assets of the corporation (e) under paragraph 19, MANTRASCO and its two
as did the old." subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the
The parties differ, however, on the taxability of the TRUSTEES;" in the same paragraph mention was also
"treasury" stock dividends received by the respondents. made of "dividends on OWNER’S SHARES" which shall
be applied to the liquidation of the liabilities of the three
The respondents anchor their argument on the same basis companies for the price of Reese’s shares.
as the Court of Tax Appeals; whereas the Commissioner
maintains that the full value (P7,973,660) of the shares The manifest intention of the parties to the trust agreement
redeemed from Reese by MANTRASCO which were was, in sum and substance, to treat the 24,700 shares of
subsequently distributed to the respondents as stock Reese as absolutely outstanding shares of Reese’s estate
dividends in 1958 should be taxed as income of the until they were fully paid. Such being the true nature of the
respondents for that year, the said distribution being in 24,700 shares, their declaration as treasury stock dividend
effect a distribution of cash. The respondents’ interests in in 1958 was a complete nullity and plainly violative of
MANTRASCO, he further argues, were only .4% prior to public policy. A stock dividend, being one payable in
the declaration of the stock dividends in 1958, but rose to capital stock, cannot be declared out of outstanding
33 1/3% each after the said declaration. corporate stock, but only from retained earnings: 7

In submitting their respective contentions, it is the Of pointed relevance is this useful discussion of the nature
assumption of both parties that the 24,700 shares of a stock dividend: 8
declared as stock dividends were treasury shares. We are
however convinced, after a careful study of the trust "‘A stock dividend always involves a transfer of surplus (or
agreement, that the said shares were not, on December profit) to capital stock.’ Graham and Katz, Accounting in
22, 1958 or at anytime before or after that date, treasury Law Practice, 2d ed. 1938, No. 70. As the court said in
shares. The reasons are quite plain. United States v. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78
ALR 672: ‘A stock dividend is a conversion of surplus or
Although authorities may differ on the exact legal and undivided profits into capital stock, which is distributed to
accounting status of so-called "treasury shares," 1 they stockholders in lieu of a cash dividend.’ Congress itself
are more or less in agreement that treasury shares are has defined the term ‘dividend’ in No. 115(a) of the Act as
stocks issued and fully paid for and re-acquired by the meaning any distribution made by a corporation to its
corporation either by purchase, donation, forfeiture or shareholders, whether in money or in other property, out
other means. 2 Treasury shares are therefore issued of its earnings or profits. In Eisner v. Macomber, 1920, 252
shares, but being in the treasury they do not have the US 189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both the
status of outstanding shares. 3 Consequently, although a prevailing and the dissenting opinions recognized that
treasury share, not having been retired by the corporation within the meaning of the revenue acts the essence of a
re-acquiring it, may be re-issued or sold again, such stock dividend was the segregation out of surplus account
share, as long as it is held by the corporation as a treasury of a definite portion of the corporate earnings as part of
share, participates neither in dividends, because dividends the permanent capital resources of the corporation by the
cannot be declared by the corporation to itself, 4 nor in the device of capitalizing the same, and the issuance to the
meetings of the corporation as voting stock, for otherwise stockholders of additional shares of stock representing the
equal distribution of voting powers among stockholders profits so capitalized."
cralaw virtua1aw library

will be effectively lost and the directors will be able to


perpetuate their control of the corporation, 5 though it still The declaration by the respondents and Reese’s trustees
represents a paid-for interest in the property of the of MANTRASCO’s alleged treasury stock dividends in
corporation. 6 The foregoing essential features of a favor of the former, brings, however, into clear focus the
treasury stock are lacking in the questioned shares. Thus, ultimate purpose which the parties to the trust instrument
aimed to realize: to make the respondents the sole owners
(a) under paragraph 4(c) of the trust agreement, the of Reese’s interest in MANTRASCO by utilizing the
trustees were authorized to vote all stock standing in their periodic earnings of that company and its subsidiaries to
names at all meetings and to exercise all rights "as owners directly subsidize their purchase of the said interests, and
by making it appear outwardly, through the formal
declaration of non-existent stock dividends in the treasury, ACCORDINGLY, the judgment of the Court of Tax
that they have not received any income from those firms Appeals absolving the respondents from any deficiency
when, in fact, by that declaration they secured to income tax liability is set aside, and this case is hereby
themselves the means to turn around as full owners of remanded to the Court of Tax Appeals for further
Reese’s shares. In other words, the respondents, using proceedings. More specifically, the Court of Tax Appeals
the trust instrument as a convenient technical device, shall recompute the income tax liabilities of the
bestowed unto themselves the full worth and value of respondents in accordance with this decision and with the
Reese’s corporate holdings with the use of the very Tax Code, and thereafter pronounce and enter judgment
earnings of the companies. Such package device, accordingly. No costs.
obviously not designed to carry out the usual stock
dividend purpose of corporate expansion reinvestment,
e.g. the acquisition of additional facilities and other capital
budget items, but exclusively for expanding the capital
base of the respondents in MANTRASCO, cannot be
allowed to deflect the respondents’ responsibilities toward
our income tax laws. The conclusion is thus ineluctable
that whenever the companies involved herein parted with CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-
a portion of their earnings "to buy" the corporate holdings appellant,
of Reese, they were in ultimate effect and result making a vs.
distribution of such earnings to the respondents. All these TEODORO SANDIKO, defendant-appellee.
amounts are consequently subject to income tax as being, G.R. No. L-43350 December 23, 1937
in truth and in fact, a flow of cash benefits to the
respondents. This is an appeal from a judgment of the Court of First
Instance of Manila absolving the defendant from the
We are of the opinion, however, that the Commissioner plaintiff's complaint.
erred in assessing the respondents the total acquisition
cost (P7,973,660) of the alleged treasury stock dividends
in one lump sum. The record shows that the earnings of Manuel Tabora is the registered owner of four parcels of
MANTRASCO over a period of years were used to land situated in the barrio of Linao, town of Aparri,
gradually wipe out the holdings therein of Reese. Province of Cagayan, as evidenced by transfer certificate
Consequently, those earnings, which we hold, under the of title No. 217 of the land records of Cagayan, a copy of
facts disclosed in the case at bar, as in effect having been which is in evidence as Exhibit 1. To guarantee the
distributed to the respondents, should be taxed for each of payment of a loan in the sum of P8,000, Manuel Tabora,
the corresponding years when payments were made to on August 14, 1929, executed in favor of the Philippine
Reese’s estate on account of his 24,700 shares. With National Bank a first mortgage on the four parcels of land
regard to payments made with MANTRASCO earnings in above-mentioned. A second mortgage in favor of the
1958 and the years before, while indeed those earnings same bank was in April of 1930 executed by Tabora over
were utilized in those years to gradually pay off the value the same lands to guarantee the payment of another loan
of Reese’s holdings in MANTRASCO, there is no evidence amounting to P7,000. A third mortgage on the same lands
from which it can be inferred that prior to the passage of was executed on April 16, 1930 in favor of Severina Buzon
the stockholders’ resolution of December 22, 1958 the to whom Tabora was indebted in the sum of P2,9000.
contributed equity of each of the respondents rose These mortgages were registered and annotations thereof
correspondingly. It was only by virtue of the authority appear at the back of transfer certificate of title No. 217.
contained in the said resolution that the respondents
actually, albeit illegally, appropriated and partitioned On May 31, 1930, Tabora executed a public document
among themselves the stockholders’ equity representing entitled "Escritura de Transpaso de Propiedad Inmueble"
Reese’s interests in MANTRASCO. As those payments (Exhibit A) by virtue of which the four parcels of land
accrued in favor of the respondents in 1958 they are and owned by him was sold to the plaintiff company, said to
should be liable, for income tax purposes, to the extent of under process of incorporation, in consideration of one
the aggregate amount paid, from 1955 to 1958, by peso (P1) subject to the mortgages in favor of the
MANTRASCO to buy off Reese’s shares. Philippine National Bank and Severina Buzon and, to the
condition that the certificate of title to said lands shall not
The fact that the resolution authorizing the distribution of be transferred to the name of the plaintiff company until
the said earnings is null and void is of no moment. Under the latter has fully and completely paid Tabora's
the National Internal Revenue Code, income tax is indebtedness to the Philippine National Bank.
assessed on income received from any property, activity
or service that produces income. 9 The Tax Code stands The plaintiff company filed its article incorporation with the
as an indifferent, neutral party on the matter of where the Bureau of Commerce and Industry on October 22, 1930
income comes from. 10 (Exhibit 2). A year later, on October 28, 1931, the board of
directors of said company adopted a resolution (Exhibit G)
Subject to the foregoing qualifications, we find the action authorizing its president, Jose Ventura, to sell the four
taken by the Commissioner in all other respects — that is, parcels of lands in question to Teodoro Sandiko for
the assessment of a fraud penalty and imposition of P42,000. Exhibits B, C and D were thereafter made and
interest charges pursuant to the provisions of the Tax executed. Exhibit B is a deed of sale executed before a
Code — to be in accordance with law. notary public by the terms of which the plaintiff sold ceded
and transferred to the defendant all its right, titles, and they are terms of the offer, and must be complied with
interest in and to the four parcels of land described in substantially before legal corporate existence can be
transfer certificate in turn obligated himself to shoulder the acquired. (14 C. J., sec. 111, p. 118.)
three mortgages hereinbefore referred to. Exhibit C is a
promisory note for P25,300. drawn by the defendant in That a corporation should have a full and complete
favor of the plaintiff, payable after one year from the date organization and existence as an entity before it can
thereof. Exhibit D is a deed of mortgage executed before a enter into any kind of a contract or transact any
notary public in accordance with which the four parcels of business, would seem to be self evident. . . . A
land were given a security for the payment of the corporation, until organized, has no being, franchises
promissory note, Exhibit C. All these three instrument or faculties. Nor do those engaged in bringing it into
were dated February 15, 1932. being have any power to bind it by contract, unless so
authorized by the charter there is not a corporation
The defendant having failed to pay the sum stated in the nor does it possess franchise or faculties for it or
promissory note, plaintiff, on January 25, 1934, brought others to exercise, until it acquires a complete
this action in the Court of First Instance of Manila praying existence. (Gent vs. Manufacturers and Merchant's
that judgment be rendered against the defendant for the Mutual Insurance Company, 107 Ill., 652, 658.)
sum of P25,300, with interest at legal rate from the date of
the filing of the complaint, and the costs of the suits. After Boiled down to its naked reality, the contract here (Exhibit
trial, the court below, on December 18, 1934, rendered A) was entered into not between Manuel Tabora and a
judgment absolving the defendant, with costs against the non-existent corporation but between the Manuel Tabora
plaintiff. Plaintiff presented a motion for new trial on as owner of the four parcels of lands on the one hand and
January 14, 1935, which motion was denied by the trial the same Manuel Tabora, his wife and others, as mere
court on January 19 of the same year. After due exception promoters of a corporations on the other hand. For
and notice, plaintiff has appealed to this court and makes reasons that are self-evident, these promoters could not
an assignment of various errors. have acted as agent for a projected corporation since that
which no legal existence could have no agent. A
In dismissing the complaint against the defendant, the corporation, until organized, has no life and therefore no
court below, reached the conclusion that Exhibit B is faculties. It is, as it were, a child in ventre sa mere. This is
invalid because of vice in consent and repugnancy to law. not saying that under no circumstances may the acts of
While we do not agree with this conclusion, we have promoters of a corporation be ratified by the corporation if
however voted to affirm the judgment appealed from the and when subsequently organized. There are, of course,
reasons which we shall presently state. exceptions (Fletcher Cyc. of Corps., permanent edition,
1931, vol. I, secs. 207 et seq.), but under the peculiar facts
The transfer made by Tabora to the Cagayan fishing and circumstances of the present case we decline to
Development Co., Inc., plaintiff herein, was affected on extend the doctrine of ratification which would result in the
May 31, 1930 (Exhibit A) and the actual incorporation of commission of injustice or fraud to the candid and
said company was affected later on October 22, 1930 unwary.(Massachusetts rule, Abbott vs. Hapgood, 150
(Exhibit 2). In other words, the transfer was made almost Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St.
five months before the incorporation of the company. Rep., 193; citing English cases; Koppel vs. Massachusetts
Unquestionably, a duly organized corporation has the Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke
power to purchase and hold such real property as the Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65
purposes for which such corporation was formed may N. E., 54.) It should be observed that Manuel Tabora was
permit and for this purpose may enter into such contracts the registered owner of the four parcels of land, which he
as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, succeeded in mortgaging to the Philippine National Bank
Act No. 1459). But before a corporation may be said to be so that he might have the necessary funds with which to
lawfully organized, many things have to be done. Among convert and develop them into fishery. He appeared to
other things, the law requires the filing of articles of have met with financial reverses. He formed a corporation
incorporation (secs. 6 et seq., Act. No. 1459). Although composed of himself, his wife, and a few others. From the
there is a presumption that all the requirements of law articles of incorporation, Exhibit 2, it appears that out of
have been complied with (sec. 334, par. 31 Code of Civil the P48,700, amount of capital stock subscribed, P45,000
Procedure), in the case before us it can not be denied that was subscribed by Manuel Tabora himself and P500 by
the plaintiff was not yet incorporated when it entered into a his wife, Rufina Q. de Tabora; and out of the P43,300,
contract of sale, Exhibit A. The contract itself referred to amount paid on subscription, P42,100 is made to appear
the plaintiff as "una sociedad en vias de incorporacion." It as paid by Tabora and P200 by his wife. Both Tabora and
was not even a de facto corporation at the time. Not being His wife were directors and the latter was treasurer as
in legal existence then, it did not possess juridical capacity well. In fact, to this day, the lands remain inscribed in
to enter into the contract. Tabora's name. The defendant always regarded Tabora
as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation,
Corporations are creatures of the law, and can only intervened only to sign the contract, Exhibit B, in behalf of
come into existence in the manner prescribed by law. the plaintiff. Even the Philippine National Bank, mortgagee
As has already been stated, general law authorizing of the four parcels of land, always treated Tabora as the
the formation of corporations are general offers to any owner of the same. (See Exhibits E and F.) Two civil suits
persons who may bring themselves within their (Nos. 1931 and 38641) were brought against Tabora in
provisions; and if conditions precedent are prescribed the Court of First Instance of Manila and in both cases a
in the statute, or certain acts are required to be done, writ of attachment against the four parcels of land was
issued. The Philippine National Bank threatened to municipal officials from performing the functions of their
foreclose its mortgages. Tabora approached the respective office relying on the ruling of this Court
defendant Sandiko and succeeded in the making him sign in Pelaez v. Auditor General 2 and Municipality of San
Exhibits B, C, and D and in making him, among other Joaquin v. Siva. 3
things, assume the payment of Tabora's indebtedness to
the Philippine National Bank. The promisory note, Exhibit In Pelaez this Court, through Mr. Justice (now Chief
C, was made payable to the plaintiff company so that it Justice) Concepcion, ruled: (1) that section 23 of Republic
may not attached by Tabora's creditors, two of whom had Act 2370 [Barrio Charter Act, approved January 1, 1960],
obtained writs of attachment against the four parcels of by vesting the power to create barrios in the provincial
land. board, is a "statutory denial of the presidential authority to
create a new barrio [and] implies a negation of
If the plaintiff corporation could not and did not acquire the the bigger power to create municipalities," and (2) that
four parcels of land here involved, it follows that it did not section 68 of the Administrative Code, insofar as it gives
possess any resultant right to dispose of them by sale to the President the power to create municipalities, is
the defendant, Teodoro Sandiko. unconstitutional (a) because it constitutes an undue
delegation of legislative power and (b) because it offends
Some of the members of this court are also of the opinion against section 10 (1) of article VII of the Constitution,
that the transfer from Manuel Tabora to the Cagayan which limits the President's power over local governments
Fishing Development Company, Inc., which transfer is to mere supervision. As this Court summed up its
evidenced by Exhibit A, was subject to a condition discussion: "In short, even if it did not entail an undue
precedent (condicion suspensiva), namely, the payment of delegation of legislative powers, as it certainly does, said
the mortgage debt of said Tabora to the Philippine section 68, as part of the Revised Administrative Code,
National Bank, and that this condition not having been approved on March 10, 1917, must be deemed repealed
complied with by the Cagayan Fishing Development by the subsequent adoption of the Constitution, in 1935,
Company, Inc., the transfer was ineffective. (Art. 1114, which is utterly incompatible and inconsistent with said
Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; statutory enactment."
Manresa, vol. 8, p. 141.) However, having arrived at the
conclusion that the transfer by Manuel Tabora to the On the other hand, the respondents, while admitting the
Cagayan Fishing Development Company, Inc. was null facts alleged in the petition, nevertheless argue that the
because at the time it was affected the corporation was rule announced in Pelaez can have no application in this
non-existent, we deem it unnecessary to discuss this case because unlike the municipalities involved in Pelaez,
point.
lawphil.net the municipality of Balabagan is at least a de
facto corporation, having been organized under color of a
The decision of the lower court is accordingly affirmed, statute before this was declared unconstitutional, its
with costs against the appellant. So Ordered. officers having been either elected or appointed, and the
municipality itself having discharged its corporate
functions for the past five years preceding the institution of
this action. It is contended that as a de facto corporation,
its existence cannot be collaterally attacked, although it
may be inquired into directly in an action for quo
warranto at the instance of the State and not of an
individual like the petitioner Balindong.
THE MUNICIPALITY OF MALABANG, LANAO DEL
SUR, and AMER MACAORAO
BALINDONG, petitioners, It is indeed true that, generally, an inquiry into the legal
vs. existence of a municipality is reserved to the State in a
PANGANDAPUN BENITO, HADJI NOPODIN proceeding for quo warranto or other direct proceeding,
MACAPUNUNG, HADJI HASAN MACARAMPAD, and that only in a few exceptions may a private person
FREDERICK V. DUJERTE MONDACO ONTAL, exercise this function of government. 4 But the rule
MARONSONG ANDOY, MACALABA INDAR disallowing collateral attacks applies only where the
LAO. respondents. municipal corporation is at least a de
G.R. No. L-28113 March 28, 1969 facto corporations. 5 For where it is neither a corporation de
jure nor de facto, but a nullity, the rule is that its existence
may be, questioned collaterally or directly in any action or
The petitioner Amer Macaorao Balindong is the mayor of proceeding by any one whose rights or interests ate
Malabang, Lanao del Sur, while the respondent affected thereby, including the citizens of the territory
Pangandapun Bonito is the mayor, and the rest of the incorporated unless they are estopped by their conduct
respondents are the councilors, of the municipality of from doing so. 6
Balabagan of the same province. Balabagan was formerly
a part of the municipality of Malabang, having been
created on March 15, 1960, by Executive Order 386 of the And so the threshold question is whether the municipality
then President Carlos P. Garcia, out of barrios and of Balabagan is a de facto corporation. As earlier stated,
sitios1 of the latter municipality. the claim that it is rests on the fact that it was organized
before the promulgation of this Court's decision in Pelaez. 7
The petitioners brought this action for prohibition to nullify
Executive Order 386 and to restrain the respondent Accordingly, we address ourselves to the question
whether a statute can lend color of validity to an attempted
organization of a municipality despite the fact that such IV. There can be no de facto corporation created to take
statute is subsequently declared unconstitutional. lawphi 1.ñet the place of an existing de jure corporation, as such
organization would clearly be a usurper.10
This has been a litigiously prolific question, sharply
dividing courts in the United States. Thus, some hold that In the cases where a de facto municipal corporation was
a de facto corporation cannot exist where the statute or recognized as such despite the fact that the statute
charter creating it is unconstitutional because there can be creating it was later invalidated, the decisions could fairly
no de facto corporation where there can be no de be made to rest on the consideration that there was some
jure one, 8 while others hold otherwise on the theory that a other valid law giving corporate vitality to the organization.
statute is binding until it is condemned as Hence, in the case at bar, the mere fact that Balabagan
unconstitutional. 9 was organized at a time when the statute had not been
invalidated cannot conceivably make it a de
An early article in the Yale Law Journal offers the factocorporation, as, independently of the Administrative
following analysis: Code provision in question, there is no other valid statute
to give color of authority to its creation. Indeed,
in Municipality of San Joaquin v. Siva, 11 this Court granted
It appears that the true basis for denying to the a similar petition for prohibition and nullified an executive
corporation a de facto status lay in the absence of any order creating the municipality of Lawigan in Iloilo on the
legislative act to give vitality to its creation. An basis of thePelaez ruling, despite the fact that the
examination of the cases holding, some of them municipality was created in 1961, before section 68 of the
unreservedly, that a de facto office or municipal Administrative Code, under which the President had
corporation can exist under color of an acted, was invalidated. 'Of course the issue of de
unconstitutional statute will reveal that in no instance facto municipal corporation did not arise in that case.
did the invalid act give life to the corporation, but that
either in other valid acts or in the constitution itself the
office or the corporation was potentially created.... In Norton v. Shelby Count, 12 Mr. Justice Field said: "An
unconstitutional act is not a law; it confers no rights; it
imposes no duties; it affords no protection; it creates no
The principle that color of title under an office; it is, in legal contemplation, as inoperative as
unconstitutional statute can exist only where there is though it had never been passed." Accordingly, he held
some other valid law under which the organization that bonds issued by a board of commissioners created
may be effected, or at least an authority in potentia by under an invalid statute were unenforceable.
the state constitution, has its counterpart in the
negative propositions that there can be no color of
authority in an unconstitutional statute that plainly so Executive Order 386 "created no office." This is not to
appears on its face or that attempts to authorize the say, however, that the acts done by the municipality of
ousting of a de jure or de facto municipal corporation Balabagan in the exercise of its corporate powers are a
upon the same territory; in the one case the fact nullity because the executive order "is, in legal
would imply the imputation of bad faith, in the other contemplation, as inoperative as though it had never been
the new organization must be regarded as a mere passed." For the existence of Executive, Order 386 is "an
usurper.... operative fact which cannot justly be ignored." As Chief
Justice Hughes explained in Chicot County Drainage
District v. Baxter State Bank: 13
As a result of this analysis of the cases the following
principles may be deduced which seem to reconcile
the apparently conflicting decisions: The courts below have proceeded on the theory that
the Act of Congress, having been found to be
unconstitutional, was not a law; that it was inoperative,
I. The color of authority requisite to the organization of conferring no rights and imposing no duties, and hence
a de facto municipal corporation may be: affording no basis for the challenged decree. Norton v.
Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry.
1. A valid law enacted by the legislature. Co. v. Hackett, 228 U.S. 559, 566. It is quite clear,
2. An unconstitutional law, valid on its face, which however, that such broad statements as to the effect of
has either (a) been upheld for a time by the courts or a determination of unconstitutionality must be taken with
(b) not yet been declared void; provided that a qualifications. The actual existence of a statute, prior to
warrant for its creation can be found in some other such a determination, is an operative fact and may have
valid law or in the recognition of its potential consequences which cannot justly be ignored. The past
existence by the general laws or constitution of the cannot always be erased by a new judicial declaration.
state. The effect of the subsequent ruling as to invalidity may
have to be considered in various aspects — with
II. There can be no de facto municipal corporation respect to particular relations, individual and corporate,
unless either directly or potentially, such a de jure and particular conduct, private and official. Questions of
corporation is authorized by some legislative fiat. rights claimed to have become vested, of status of prior
determinations deemed to have finality and acted upon
accordingly, of public policy in the light of the nature
III. There can be no color of authority in an both of the statute and of its previous application,
unconstitutional statute alone, the invalidity of which is demand examination. These questions are among the
apparent on its face. most difficult of those which have engaged the attention
of courts, state and federal, and it is manifest from they wished to have it dissolved because of bitter
numerous decisions that an all-inclusive statement of a dissension among the members, mismanagement and
principle of absolute retroactive invalidity cannot be fraud by the managers and heavy financial losses.
justified.
(5) The defendants in the suit, namely, C. Arnold Hall and
There is then no basis for the respondents' apprehension Bradley P. Hall, filed a motion to dismiss, contesting the
that the invalidation of the executive order creating court's jurisdiction and the sufficiently of the cause of
Balabagan would have the effect of unsettling many an act action.
done in reliance upon the validity of the creation of that
municipality. 14 (6) After hearing the parties, the Hon. Edmund S. Piccio
ordered the dissolution of the company; and at the request
ACCORDINGLY, the petition is granted, Executive Order of plaintiffs, appointed of the properties thereof, upon the
386 is declared void, and the respondents are hereby filing of a P20,000 bond.
permanently restrained from performing the duties and
functions of their respective offices. No pronouncement as (7) The defendants therein (petitioners herein) offered to
to costs. file a counter-bond for the discharge of the receiver, but
the respondent judge refused to accept the offer and to
discharge the receiver. Whereupon, the present special
civil action was instituted in this court. It is based upon two
main propositions, to wit:
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs. (a) The court had no jurisdiction in civil case No. 381 to
EDMUNDO S. PICCIO, Judge of the Court of First decree the dissolution of the company, because it being
Instance of Leyte, FRED BROWN, EMMA BROWN, a de facto corporation, dissolution thereof may only be
HIPOLITA CAPUCIONG, in his capacity as receiver of ordered in a quo warranto proceeding instituted in
the Far Eastern Lumber accordance with section 19 of the Corporation Law.
G.R. No. L-2598 June 29, 1950
(b) Inasmuch as respondents Fred Brown and Emma
This is petition to set aside all the proceedings had in civil Brown had signed the article of incorporation but only a
case No. 381 of the Court of First Instance of Leyte and to partnership.
enjoin the respondent judge from further acting upon the
same. Discussion: The second proposition may at once be
dismissed. All the parties are informed that the Securities
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Exchange Commission has not, so far, issued the
and Bradley P. Hall, and the respondents Fred Brown, corresponding certificate of incorporation. All of them
Emma Brown, Hipolita D. Chapman and Ceferino S. know, or sought to know, that the personality of a
Abella, signed and acknowledged in Leyte, the article of corporation begins to exist only from the moment such
incorporation of the Far Eastern Lumber and Commercial certificate is issued — not before (sec. 11, Corporation
Co., Inc., organized to engage in a general lumber Law). The complaining associates have not represented to
business to carry on as general contractors, operators and the others that they were incorporated any more than the
managers, etc. Attached to the article was an affidavit of latter had made similar representations to them. And as
the treasurer stating that 23,428 shares of stock had been nobody was led to believe anything to his prejudice and
subscribed and fully paid with certain properties damage, the principle of estoppel does not apply.
transferred to the corporation described in a list appended Obviously this is not an instance requiring the enforcement
thereto. of contracts with the corporation through the rule of
estoppel.
(2) Immediately after the execution of said articles of
incorporation, the corporation proceeded to do business The first proposition above stated is premised on the
with the adoption of by-laws and the election of its officers. theory that, inasmuch as the Far Eastern Lumber and
Commercial Co., is a de facto corporation, section 19 of
the Corporation Law applies, and therefore the court had
(3) On December 2, 1947, the said articles of not jurisdiction to take cognizance of said civil case
incorporation were filed in the office of the Securities and number 381. Section 19 reads as follows:
Exchange Commissioner, for the issuance of the
corresponding certificate of incorporation.
. . . The due incorporation of any corporations
claiming in good faith to be a corporation under this
(4) On March 22, 1948, pending action on the articles of Act and its right to exercise corporate powers shall
incorporation by the aforesaid governmental office, the not be inquired into collaterally in any private suit to
respondents Fred Brown, Emma Brown, Hipolita D. which the corporation may be a party, but such
Chapman and Ceferino S. Abella filed before the Court of inquiry may be had at the suit of the Insular
First Instance of Leyte the civil case numbered 381, Government on information of the Attorney-General.
entitled "Fred Brown et al. vs. Arnold C. Hall et al.",
alleging among other things that the Far Eastern Lumber
and Commercial Co. was an unregistered partnership; that
There are least two reasons why this section does not Mabalacat and Magalang, Pampanga to dismiss Civil
govern the situation. Not having obtained the certificate of Case No. 1214 for lack of jurisdiction.
incorporation, the Far Eastern Lumber and Commercial
Co. — even its stockholders — may not probably claim "in The facts are undisputed. On December 19, 1995,
good faith" to be a corporation. petitioner Reynaldo M. Lozano filed Civil Case No. 1214
for damages against respondent Antonio Anda before the
Under our statue it is to be noted (Corporation Law, Municipal Circuit Trial Court (MCTC), Mabalacat and
sec. 11) that it is the issuance of a certificate of Magalang, Pampanga. Petitioner alleged that he was the
incorporation by the Director of the Bureau of president of the Kapatirang Mabalacat-Angeles Jeepney
Commerce and Industry which calls a corporation into Drivers' Association, Inc. (KAMAJDA) while respondent
being. The immunity if collateral attack is granted to Anda was the president of the Samahang Angeles-
corporations "claiming in good faith to be a Mabalacat Jeepney Operators' and Drivers' Association,
corporation under this act." Such a claim is Inc. (SAMAJODA); in August 1995, upon the request of
compatible with the existence of errors and the Sangguniang Bayan of Mabalacat, Pampanga,
irregularities; but not with a total or substantial petitioner and private respondent agreed to consolidate
disregard of the law. Unless there has been an their respective associations and form the Unified
evident attempt to comply with the law the claim to be Mabalacat-Angeles Jeepney Operators' and Drivers
a corporation "under this act" could not be made "in Association, Inc. (UMAJODA); petitioner and private
good faith." (Fisher on the Philippine Law of Stock respondent also agreed to elect one set of officers who
Corporations, p. 75. See also Humphreys vs. Drew, shall be given the sole authority to collect the daily dues
59 Fla., 295; 52 So., 362.) from the members of the consolidated association;
elections were held on October 29, 1995 and both
Second, this is not a suit in which the corporation is a petitioner and private respondent ran for president;
party. This is a litigation between stockholders of the petitioner won; private respondent protested and, alleging
alleged corporation, for the purpose of obtaining its fraud, refused to recognize the results of the election;
dissolution. Even the existence of a de jure corporation private respondent also refused to abide by their
may be terminated in a private suit for its dissolution agreement and continued collecting the dues from the
between stockholders, without the intervention of the members of his association despite several demands to
state. desist. Petitioner was thus constrained to file the complaint
to restrain private respondent from collecting the dues and
to order him to pay damages in the amount of P25,000.00
There might be room for argument on the right of minority and attorney's fees of P500.00. 1

stockholders to sue for dissolution;1 but that question does


not affect the court's jurisdiction, and is a matter for
decision by the judge, subject to review on appeal. Whkch Private respondent moved to dismiss the complaint for
brings us to one principal reason why this petition may not lack of jurisdiction, claiming that jurisdiction was lodged
prosper, namely: the petitioners have their remedy by with the Securities and Exchange Commission (SEC). The
appealing the order of dissolution at the proper time. MCTC denied the motion on February 9, 1996. It denied 2

reconsideration on March 8, 1996. 3

There is a secondary issue in connection with the


appointment of a receiver. But it must be admitted that Private respondent filed a petition for certiorari before the
receivership is proper in proceedings for dissolution of a Regional Trial Court, Branch 58, Angeles City. The trial
4

company or corporation, and it was no error to reject the court found the dispute to be intracorporate, hence,
counter-bond, the court having declared the dissolution. subject to the jurisdiction of the SEC, and ordered the
As to the amount of the bond to be demanded of the MCTC to dismiss Civil Case No. 1214 accordingly. It 5

receiver, much depends upon the discretion of the trial denied reconsideration on May 31, 1996. 6

court, which in this instance we do not believe has been


clearly abused. Hence this petition. Petitioner claims that:

THE RESPONDENT JUDGE ACTED WITH GRAVE


ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION AND SERIOUS
ERROR OF LAW IN CONCLUDING THAT THE
SECURITIES AND EXCHANGE COMMISSION HAS
JURISDICTION OVER A CASE OF DAMAGES
REYNALDO M. LOZANO, petitioner, BETWEEN HEADS/PRESIDENTS OF TWO (2)
vs. ASSOCIATIONS WHO INTENDED TO
HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, CONSOLIDATE/MERGE THEIR ASSOCIATIONS
RTC, Br. 58, Angeles City; and ANTONIO BUT NOT YET [SIC] APPROVED AND
ANDA, respondents. REGISTERED WITH THE SECURITIES AND
G.R. No. 125221 June 19, 1997 EXCHANGE COMMISSION. 7

This petition for certiorari seeks to annul and set aside the The jurisdiction of the Securities and Exchange
decision of the Regional Trial Court, Branch 58, Angeles Commission (SEC) is set forth in Section 5 of Presidential
City which ordered the Municipal Circuit Trial Court, Decree No. 902-A. Section 5 reads as follows:
Sec. 5. . . . [T]he Securities and Exchange There is no intracorporate nor partnership relation
Commission [has] original and exclusive jurisdiction to between petitioner and private respondent. The
hear and decide cases involving: controversy between them arose out of their plan to
consolidate their respective jeepney drivers' and
(a) Devices or schemes employed by or any acts of operators' associations into a single common association.
the board of directors, business associates, its This unified association was, however, still a proposal. It
officers or partners, amounting to fraud and had not been approved by the SEC, neither had its officers
misrepresentation which may be detrimental to the and members submitted their articles of consolidation is
interest of the public and/or of the stockholders, accordance with Sections 78 and 79 of the Corporation
partners, members of associations or organizations Code. Consolidation becomes effective not upon mere
registered with the Commission. agreement of the members but only upon issuance of the
certificate of consolidation by the SEC. When the SEC,
13

upon processing and examining the articles of


(b) Controversies arising out of intracorporate or consolidation, is satisfied that the consolidation of the
partnership relations, between and among corporations is not inconsistent with the provisions of the
stockholders, members or associates; between any or Corporation Code and existing laws, it issues a certificate
all of them and the corporation, partnership or of consolidation which makes the reorganization
association of which they are stockholders, members, official. The new consolidated corporation comes into
14

or associates, respectively; and between such existence and the constituent corporations dissolve and
corporation, partnership or association and the state cease to exist. 15

insofar as it concerns their individual franchise or right


to exist as such entity.
The KAMAJDA and SAMAJODA to which petitioner and
private respondent belong are duly registered with the
(c) Controversies in the election or appointment of SEC, but these associations are two separate entities. The
directors, trustees, officers or managers of such dispute between petitioner and private respondent is not
corporations, partnerships or associations. within the KAMAJDA nor the SAMAJODA. It is between
members of separate and distinct associations. Petitioner
(d) Petitions of corporations, partnerships or and private respondent have no intracorporate relation
associations to be declared in the state of suspension much less do they have an intracorporate dispute. The
of payments in cases where the corporation, SEC therefore has no jurisdiction over the complaint.
partnership or association possesses sufficient
property to cover all its debts but foresees the The doctrine of corporation by estoppel advanced by
16

impossibility of meeting them when they respectively private respondent cannot override jurisdictional
fall due or in cases where the corporation, partnership requirements. Jurisdiction is fixed by law and is not subject
or association has no sufficient assets to over its to the agreement of the parties. It cannot be acquired
17

liabilities, but is under the management of a through or waived, enlarged or diminished by, any act or
Rehabilitation Receiver or Management Committee omission of the parties, neither can it be conferred by the
created pursuant to this Decree. acquiescence of the court. 18

The grant of jurisdiction to the SEC must be viewed in Corporation by estoppel is founded on principles of equity
the light of its nature and function under the law. This
8
and is designed to prevent injustice and unfairness. It
19

jurisdiction is determined by a concurrence of two applies when persons assume to form a corporation and
elements: (1) the status or relationship of the parties; exercise corporate functions and enter into business
and (2) the nature of the question that is the subject of relations with third person. Where there is no third person
their controversy. 9
involved and the conflict arises only among those
assuming the form of a corporation, who therefore know
The first element requires that the controversy must arise that it has not been registered, there is no corporation by
out of intracorporate or partnership relations between and estoppel. 20

among stockholders, members, or associates; between


any or all of them and the corporation, partnership or IN VIEW WHEREOF, the petition is granted and the
association of which they are stockholders, members or decision dated April 18, 1996 and the order dated May 31,
associates, respectively; and between such corporation, 1996 of the Regional Trial Court, Branch 58, Angeles City
partnership or association and the State in so far as it are set aside. The Municipal Circuit Trial Court of
concerns their individual franchises. The second element
10
Mabalacat and Magalang, Pampanga is ordered to
requires that the dispute among the parties be intrinsically proceed with dispatch in resolving Civil Case No. 1214. No
connected with the regulation of the corporation, costs.
partnership or association or deal with the internal affairs SO ORDERED.
of the corporation, partnership or association. After all,
11

the principal function of the SEC is the supervision and


control of corporations, partnership and associations with
the end in view that investments in these entities may be
encouraged and protected, and their entities may be
encouraged and protected, and their activities pursued for
the promotion of economic development. 12
MARIANO A. ALBERT, plaintiff-appellant, As aforesaid, we reduced the amount of damages to
vs. P15,000.00, to be executed in full. Thereafter, on July 22,
UNIVERSITY PUBLISHING CO., INC., defendant- 1961, the court a quo ordered issuance of an execution
appellee. writ against University Publishing Co., Inc. Plaintiff,
G.R. No. L-19118 January 30, 1965 however, on August 10, 1961, petitioned for a writ of
execution against Jose M. Aruego, as the real defendant,
No less than three times have the parties here appealed to stating, "plaintiff's counsel and the Sheriff of Manila
this Court. discovered that there is no such entity as University
Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission
In Albert vs. University Publishing Co., Inc., L-9300, April dated July 31, 1961, attesting: "The records of this
18, 1958, we found plaintiff entitled to damages (for Commission do not show the registration of UNIVERSITY
breach of contract) but reduced the amount from PUBLISHING CO., INC., either as a corporation or
P23,000.00 to P15,000.00. partnership." "University Publishing Co., Inc." countered by
filing, through counsel (Jose M. Aruego's own law firm), a
Then in Albert vs. University Publishing Co., Inc., L-15275, "manifestation" stating that "Jose M. Aruego is not a party
October 24, 1960, we held that the judgment for to this case," and that, therefore, plaintiff's petition should
P15,000.00 which had become final and executory, should be denied.
be executed to its full amount, since in fixing it, payment
already made had been considered. Parenthetically, it is not hard to decipher why "University
Publishing Co., Inc.," through counsel, would not want
Now we are asked whether the judgment may be Jose M. Aruego to be considered a party to the present
executed against Jose M. Aruego, supposed President of case: should a separate action be now instituted against
University Publishing Co., Inc., as the real defendant. Jose M. Aruego, the plaintiff will have to reckon with the
statute of limitations.
Fifteen years ago, on September 24, 1949, Mariano A.
Albert sued University Publishing Co., Inc. Plaintiff The court a quo denied the petition by order of September
alleged inter alia that defendant was a corporation duly 9, 1961, and from this, plaintiff has appealed.
organized and existing under the laws of the Philippines;
that on July 19, 1948, defendant, through Jose M. Aruego, The fact of non-registration of University Publishing Co.,
its President, entered into a contract with plaintifif; that Inc. in the Securities and Exchange Commission has not
defendant had thereby agreed to pay plaintiff P30,000.00 been disputed. Defendant would only raise the point that
for the exclusive right to publish his revised Commentaries "University Publishing Co., Inc.," and not Jose M. Aruego,
on the Revised Penal Code and for his share in previous is the party defendant; thereby assuming that "University
sales of the book's first edition; that defendant had Publishing Co., Inc." is an existing corporation with an
undertaken to pay in eight quarterly installments of independent juridical personality. Precisely, however, on
P3,750.00 starting July 15, 1948; that per contract failure account of the non-registration it cannot be considered a
to pay one installment would render the rest due; and that corporation, not even a corporation de facto (Hall vs.
defendant had failed to pay the second installment. Piccio, 86 Phil. 603). It has therefore no personality
separate from Jose M. Aruego; it cannot be sued
Defendant admitted plaintiff's allegation of defendant's independently.
corporate existence; admitted the execution and terms of
the contract dated July 19, 1948; but alleged that it was The corporation-by-estoppel doctrine has not been
plaintiff who breached their contract by failing to deliver his invoked. At any rate, the same is inapplicable here.
manuscript. Furthermore, defendant counterclaimed for Aruego represented a non-existent entity and induced not
damages. 1äwphï1.ñët

only the plaintiff but even the court to believe in such


representation. He signed the contract as "President" of
Plaintiff died before trial and Justo R. Albert, his estate's "University Publishing Co., Inc.," stating that this was "a
administrator, was substituted for him. corporation duly organized and existing under the laws of
the Philippines," and obviously misled plaintiff (Mariano A.
The Court of First Instance of Manila, after trial, rendered Albert) into believing the same. One who has induced
decision on April 26, 1954, stating in the dispositive another to act upon his wilful misrepresentation that a
portion — corporation was duly organized and existing under the
law, cannot thereafter set up against his victim the
principle of corporation by estoppel (Salvatiera vs.
IN VIEW OF ALL THE FOREGOING, the Court Garlitos, 56 O.G. 3069).
renders judgment in favor of the plaintiff and against
the defendant the University Publishing Co., Inc.,
ordering the defendant to pay the administrator Justo "University Publishing Co., Inc." purported to come to
R. Albert, the sum of P23,000.00 with legal [rate] of court, answering the complaint and litigating upon the
interest from the date of the filing of this complaint merits. But as stated, "University Publishing Co., Inc." has
until the whole amount shall have been fully paid. The no independent personality; it is just a name. Jose M.
defendant shall also pay the costs. The counterclaim Aruego was, in reality, the one who answered and
of the defendant is hereby dismissed for lack of litigated, through his own law firm as counsel. He was in
evidence. fact, if not, in name, the defendant.
Even with regard to corporations duly organized and contribution with respect to the payment he makes under
existing under the law, we have in many a case pierced the judgment in question, he may, of course, proceed
the veil of corporate fiction to administer the ends of against them through proper remedial measures.
justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we
ruled: "A person acting or purporting to act on behalf of a PREMISES CONSIDERED, the order appealed from is
corporation which has no valid existence assumes such hereby set aside and the case remanded ordering the
privileges and obligations and becomes personally lower court to hold supplementary proceedings for the
liable for contracts entered into or for other acts performed purpose of carrying the judgment into effect against
as such agent." Had Jose M. Aruego been named as party University Publishing Co., Inc. and/or Jose M. Aruego. So
defendant instead of, or together with, "University ordered.
Publishing Co., Inc.," there would be no room for debate
as to his personal liability. Since he was not so named, the
matters of "day in court" and "due process" have arisen.

In this connection, it must be realized that parties to a suit


are "persons who have a right to control the proceedings,
to make defense, to adduce and cross-examine MANUELA T. VDA. DE SALVATIERRA, petitioner,
witnesses, and to appeal from a decision" (67 C.J.S. 887) vs.
— and Aruego was, in reality, the person who had and HON. LORENZO C. GARLITOS, in his capacity as
exercised these rights. Clearly, then, Aruego had his day Judge of the Court of First Instance of Leyte, Branch
in court as the real defendant; and due process of law has II, and SEGUNDINO REFUERZO, respondents.
been substantially observed. G.R. No. L-11442 May 23, 1958

By "due process of law" we mean " "a law which hears This is a petition for certiorari filed by Manuela T. Vda. de
before it condemns; which proceeds upon inquiry, and Salvatierra seeking to nullify the order of the Court of First
renders judgment only after trial. ... ." (4 Wheaton, U.S. Instance of Leyte in Civil Case No. 1912, dated March 21,
518, 581.)"; or, as this Court has said, " "Due process of 1956, relieving Segundino Refuerzo of liability for the
law" contemplates notice and opportunity to be heard contract entered into between the former and the
before judgment is rendered, affecting one's person or Philippine Fibers Producers Co., Inc., of which Refuerzo is
property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." the president. The facts of the case are as follows:
(Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not
be amiss to mention here also that the "due process" Manuela T. Vda. de Salvatierra appeared to be the owner
clause of the Constitution is designed to secure justice as of a parcel of land located at Maghobas, Poblacion,
a living reality; not to sacrifice it by paying undue homage Burauen, Teyte. On March 7, 1954, said landholder
to formality. For substance must prevail over form. It may entered into a contract of lease with the Philippine Fibers
now be trite, but none the less apt, to quote what long ago Producers Co., Inc., allegedly a corporation "duly
we said in Alonso vs. Villamor, 16 Phil. 315, 321-322: organized and existing under the laws of the Philippines,
domiciled at Burauen, Leyte, Philippines, and with
A litigation is not a game of technicalities in which business address therein, represented in this instance by
one, more deeply schooled and skilled in the subtle Mr. Segundino Q. Refuerzo, the President". It was
art of movement and position, entraps and destroys provided in said contract, among other things, that the
the other. It is, rather, a contest in which each lifetime of the lease would be for a period of 10 years; that
contending party fully and fairly lays before the court the land would be planted to kenaf, ramie or other crops
the facts in issue and then, brushing side as wholly suitable to the soil; that the lessor would be entitled to 30
trivial and indecisive all imperfections of form and per cent of the net income accruing from the harvest of
technicalities of procedure, asks that Justice be done any, crop without being responsible for the cost of
upon the merits. Lawsuits, unlike duels, are not to be production thereof; and that after every harvest, the lessee
won by a rapier's thrust. Technicality, when it deserts was bound to declare at the earliest possible time the
its proper office as an aid to justice and becomes its income derived therefrom and to deliver the corresponding
great hindrance and chief enemy, deserves scant share due the lessor.
consideration from courts. There should be no vested
rights in technicalities. Apparently, the aforementioned obligations imposed on
the alleged corporation were not complied with because
The evidence is patently clear that Jose M. Aruego, acting on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with
as representative of a non-existent principal, was the real the Court of First Instance of Leyte a complaint against the
party to the contract sued upon; that he was the one who Philippine Fibers Producers Co., Inc., and Segundino Q.
reaped the benefits resulting from it, so much so that Refuerzo, for accounting, rescission and damages (Civil
partial payments of the consideration were made by him; Case No. 1912). She averred that sometime in April, 1954,
that he violated its terms, thereby precipitating the suit in defendants planted kenaf on 3 hectares of the leased
question; and that in the litigation he was the real property which crop was, at the time of the
defendant. Perforce, in line with the ends of justice, commencement of the action, already harvested,
responsibility under the judgment falls on him. processed and sold by defendants; that notwithstanding
that fact, defendants refused to render an accounting of
We need hardly state that should there be persons who the income derived therefrom and to deliver the lessor's
under the law are liable to Aruego for reimbursement or share; that the estimated gross income was P4,500, and
the deductible expenses amounted to P1,000; that as petitioner is good and substantial cause of action or
defendants' refusal to undertake such task was in violation defense, as the case may be, which he may prove if
of the terms of the covenant entered into between the his petition be granted". (Rule 38)
plaintiff and defendant corporation, a rescission was but
proper. The aforequoted provision treats of 2 periods, i.e., 60 days
after petitioner learns of the judgment, and not more than
As defendants apparently failed to file their answer to the 6 months after the judgment or order was rendered, both
complaint, of which they were allegedly notified, the Court of which must be satisfied. As the decision in the case at
declared them in default and proceeded to receive bar was under date of June 8, 1955, whereas the motion
plaintiff's evidence. On June 8, 1955, the lower Court filed by respondent Refuerzo was dated January 31, 1956,
rendered judgment granting plaintiff's prayer, and required or after the lapse of 7 months and 23 days, the filing of the
defendants to render a complete accounting of the harvest aforementioned motion was clearly made beyond the
of the land subject of the proceeding within 15 days from prescriptive period provided for by the rules. The remedy
receipt of the decision and to deliver 30 per cent of the net allowed by Rule 38 to a party adversely affected by a
income realized from the last harvest to plaintiff, with legal decision or order is certainly an alert of grace or
interest from the date defendants received payment for benevolence intended to afford said litigant a penultimate
said crop. It was further provide that upon defendants' opportunity to protect his interest. Considering the nature
failure to abide by the said requirement, the gross income of such relief and the purpose behind it, the periods fixed
would be fixed at P4,200 or a net income of P3,200 after by said rule are non-extendible and never interrupted; nor
deducting the expenses for production, 30 per cent of could it be subjected to any condition or contingency
which or P960 was held to be due the plaintiff pursuant to because it is of itself devised to meet a condition or
the aforementioned contract of lease, which was declared contingency (Palomares vs. Jimenez,* G.R. No. L-4513,
rescinded. January 31, 1952). On this score alone, therefore, the
petition for a writ of certiorari filed herein may be granted.
No appeal therefrom having been perfected within the However, taking note of the question presented by the
reglementary period, the Court, upon motion of plaintiff, motion for relief involved herein, We deem it wise to delve
issued a writ of execution, in virtue of which the Provincial in and pass upon the merit of the same.
Sheriff of Leyte caused the attachment of 3 parcels of land
registered in the name of Segundino Refuerzo. No Refuerzo, in praying for his exoneration from any liability
property of the Philippine Fibers Producers Co., Inc., was resulting from the non-fulfillment of the obligation imposed
found available for attachment. On January 31, 1956, on defendant Philippine Fibers Producers Co., Inc.,
defendant Segundino Refuerzo filed a motion claiming that interposed the defense that the complaint filed with the
the decision rendered in said Civil Case No. 1912 was null lower court contained no allegation which would hold him
and void with respect to him, there being no allegation in liable personally, for while it was stated therein that he
the complaint pointing to his personal liability and thus was a signatory to the lease contract, he did so in his
prayed that an order be issued limiting such liability to capacity as president of the corporation. And this
defendant corporation. Over plaintiff's opposition, the allegation was found by the Court a quo to be supported
Court a quo granted the same and ordered the Provincial by the records. Plaintiff on the other hand tried to refute
Sheriff of Leyte to release all properties belonging to the this averment by contending that her failure to specify
movant that might have already been attached, after defendant's personal liability was due to the fact that all
finding that the evidence on record made no mention or the time she was under the impression that the Philippine
referred to any fact which might hold movant personally Fibers Producers Co., Inc., represented by Refuerzo was
liable therein. As plaintiff's petition for relief from said order a duly registered corporation as appearing in the contract,
was denied, Manuela T. Vda. de Salvatierra instituted the but a subsequent inquiry from the Securities and
instant action asserting that the trial Judge in issuing the Exchange Commission yielded otherwise. While as a
order complained of, acted with grave abuse of discretion general rule a person who has contracted or dealt with an
and prayed that same be declared a nullity. association in such a way as to recognize its existence as
a corporate body is estopped from denying the same in an
From the foregoing narration of facts, it is clear that the action arising out of such transaction or dealing, (Asia
order sought to be nullified was issued by tile respondent Banking Corporation vs. Standard Products Co., 46 Phil.,
Judge upon motion of defendant Refuerzo, obviously 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1;
pursuant to Rule 38 of the Rules of Court. Section 3 of Ohta Development Co.; vs. Steamship Pompey, 49 Phil.,
said Rule, however, in providing for the period within 117), yet this doctrine may not be held to be applicable
which such a motion may be filed, prescribes that: where fraud takes a part in the said transaction. In the
instant case, on plaintiff's charge that she was unaware of
the fact that the Philippine Fibers Producers Co., Inc., had
SEC. 3. WHEN PETITION FILED; CONTENTS AND no juridical personality, defendant Refuerzo gave no
VERIFICATION. — A petition provided for in either of confirmation or denial and the circumstances surrounding
the preceding sections of this rule must be verified, the execution of the contract lead to the inescapable
filed within sixty days after the petitioner learns of the conclusion that plaintiff Manuela T. Vda. de Salvatierra
judgment, order, or other proceeding to be set aside, was really made to believe that such corporation was duly
and not more than six months after such judgment or organized in accordance with law.
order was entered, or such proceeding was taken;
and must be must be accompanied with affidavit
showing the fraud, accident, mistake, or excusable There can be no question that a corporation with
negligence relied upon, and the facts constituting the registered has a juridical personality separate and distinct
from its component members or stockholders and officers of the blue, and for no apparent or given reason, this
such that a corporation cannot be held liable for the abrupt dismissal.
personal indebtedness of a stockholder even if he should
be its president (Walter A. Smith Co. vs. Ford, SC-G.R. Oh sued. She demanded separation pay, social security
No. 42420) and conversely, a stockholder or member benefits, salary differentials, maternity benefits and moral
cannot be held personally liable for any financial obligation and exemplary damages. 1 The original defendant was the
be, the corporation in excess of his unpaid subscription. Chiang Kai Shek School but when it filed a motion to
But this rule is understood to refer merely to registered dismiss on the ground that it could not be sued, the
corporations and cannot be made applicable to the liability complaint was amended. 2 Certain officials of the school
of members of an unincorporated association. The reason were also impleaded to make them solidarily liable with
behind this doctrine is obvious-since an organization the school.
which before the law is non-existent has no personality
and would be incompetent to act and appropriate for itself
the powers and attribute of a corporation as provided by The Court of First Instance of Sorsogon dismissed the
law; it cannot create agents or confer authority on another complaint. 3 On appeal, its decision was set aside by the
to act in its behalf; thus, those who act or purport to act as respondent court, which held the school suable and liable
its representatives or agents do so without authority and at while absolving the other defendants. 4 The motion for
their own risk. And as it is an elementary principle of law reconsideration having been denied, 5 the school then
that a person who acts as an agent without authority or came to this Court in this petition for review on certiorari.
without a principal is himself regarded as the principal,
possessed of all the rights and subject to all the liabilities The issues raised in the petition are:
of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence 1. Whether or not a school that has not been incorporated
assumes such privileges and obligations and comes may be sued by reason alone of its long continued
personally liable for contracts entered into or for other acts existence and recognition by the government,
performed as such, agent (Fay vs. Noble, 7 Cushing 2. Whether or not a complaint filed against persons
[Mass.] 188. Cited in II Tolentino's Commercial Laws of associated under a common name will justify a judgment
the Philippines, Fifth Ed., P. 689-690). Considering that against the association itself and not its individual
defendant Refuerzo, as president of the unregistered members.
corporation Philippine Fibers Producers Co., Inc., was the 3. Whether or not the collection of tuition fees and book
moving spirit behind the consummation of the lease rentals will make a school profit-making and not charitable.
agreement by acting as its representative, his liability 4. Whether or not the Termination Pay Law then in force
cannot be limited or restricted that imposed upon was available to the private respondent who was
corporate shareholders. In acting on behalf of a employed on a year-to-year basis.
corporation which he knew to be unregistered, he 5. Whether or not the awards made by the respondent
assumed the risk of reaping the consequential damages or court were warranted.
resultant rights, if any, arising out of such transaction.

We hold against the petitioner on the first question. It is


Wherefore, the order of the lower Court of March 21, true that Rule 3, Section 1, of the Rules of Court clearly
1956, amending its previous decision on this matter and provides that "only natural or juridical persons may be
ordering the Provincial Sheriff of Leyte to release any and parties in a civil action." It is also not denied that the
all properties of movant therein which might have been school has not been incorporated. However, this omission
attached in the execution of such judgment, is hereby set should not prejudice the private respondent in the
aside and nullified as if it had never been issued. With assertion of her claims against the school.
costs against respondent Segundino Refuerzo. It is so
ordered.
As a school, the petitioner was governed by Act No. 2706
as amended by C.A. No. 180, which provided as follows:

Unless exempted for special reasons by the Secretary


of Public Instruction, any private school or college
recognized by the government shall be incorporated
CHIANG KAI SHEK SCHOOL, petitioner, under the provisions of Act No. 1459 known as the
vs. Corporation Law, within 90 days after the date of
COURT OF APPEALS and FAUSTINA FRANCO recognition, and shall file with the Secretary of Public
OH, respondents. Instruction a copy of its incorporation papers and by-
G.R. No. L-58028 April 18, 1989 laws.

An unpleasant surprise awaited Fausta F. Oh when she Having been recognized by the government, it was under
reported for work at the Chiang Kai Shek School in obligation to incorporate under the Corporation Law within
Sorsogon on the first week of July, 1968. She was told she 90 days from such recognition. It appears that it had not
had no assignment for the next semester. Oh was done so at the time the complaint was filed
shocked. She had been teaching in the school since 1932 notwithstanding that it had been in existence even earlier
for a continuous period of almost 33 years. And now, out than 1932. The petitioner cannot now invoke its own non-
compliance with the law to immunize it from the private notice then required by law had not been given, such
respondent's complaint. dismissal was invalid.

There should also be no question that having contracted The private respondent's position is no different from that
with the private respondent every year for thirty two years of the rank-and-file employees involved in Gregorio
and thus represented itself as possessed of juridical Araneta University Foundation v. NLRC, 9 of whom the Court
personality to do so, the petitioner is now estopped from had the following to say:
denying such personality to defeat her claim against it.
According to Article 1431 of the Civil Code, "through Undoubtedly, the private respondents' positions as
estoppel an admission or representation is rendered deans and department heads of the petitioner
conclusive upon the person making it and cannot be university are necessary in its usual business.
denied or disproved as against the person relying on it." Moreover, all the private respondents have been
serving the university from 18 to 28 years. All of them
As the school itself may be sued in its own name, there is rose from the ranks starting as instructors until they
no need to apply Rule 3, Section 15, under which the became deans and department heads of the
persons joined in an association without any juridical university. A person who has served the University for
personality may be sued with such association. Besides, it 28 years and who occupies a high administrative
has been shown that the individual members of the board position in addition to teaching duties could not
of trustees are not liable, having been appointed only after possibly be a temporary employee or a casual.
the private respondent's dismissal.
The applicable law is the Termination Pay Law, which
It is clear now that a charitable institution is covered by the provided:
labor laws 7 although the question was still unsettled when
this case arose in 1968. At any rate, there was no law SECTION 1. In cases of employment, without a
even then exempting such institutions from the operation definite period, in a commercial, industrial, or
of the labor laws (although they were exempted by the agricultural establishment or enterprise, the employer
Constitution from ad valorem taxes). Hence, even or the employee may terminate at any time the
assuming that the petitioner was a charitable institution as employment with just cause; or without just cause in
it claims, the private respondent was nonetheless still the case of an employee by serving written notice on
entitled to the protection of the Termination Pay Law, the employer at least one month in advance, or in the
which was then in force. case of an employer, by serving such notice to the
employee at least one month in advance or one-half
While it may be that the petitioner was engaged in month for every year of service of the employee,
charitable works, it would not necessarily follow that those whichever, is longer, a fraction of at least six months
in its employ were as generously motivated. Obviously, being considered as one whole year.
most of them would not have the means for such
charity. The private respondent herself was only a humble The employer, upon whom no such notice was served
school teacher receiving a meager salary of Pl80. 00 per in case of termination of employment without just
month. cause may hold the employee liable for damages.

At that, it has not been established that the petitioner is a The employee, upon whom no such notice was
charitable institution, considering especially that it charges served in case of termination of employment without
tuition fees and collects book rentals from its just cause shall be entitled to compensation from the
students. 8 While this alone may not indicate that it is date of termination of his employment in an I amount
profit-making, it does weaken its claim that it is a non-profit equivalent to his salaries or wages correspond to the
entity. required period of notice. ... .

The petitioner says the private respondent had not been The respondent court erred, however, in awarding her one
illegally dismissed because her teaching contract was on a month pay instead of only one-half month salary for every
yearly basis and the school was not required to rehire her year of service. The law is quite clear on this matter.
in 1968. The argument is that her services were Accordingly, the separation pay should be computed at
terminable at the end of each year at the discretion of the P90.00 times 32 months, for a total of P2,880.00.
school. Significantly, no explanation was given by the
petitioner, and no advance notice either, of her relief after Parenthetically, R.A. No. 4670, otherwise known as the
teaching year in and year out for all of thirty-two years, the Magna Carta for Public School Teachers, confers security
private respondent was simply told she could not teach of tenure on the teacher upon appointment as long as he
any more.
possesses the required qualification. 10 And under the
present policy of the Department of Education, Culture
The Court holds, after considering the particular and Sports, a teacher becomes permanent and
circumstance of Oh's employment, that she had become a automatically acquires security of tenure upon completion
permanent employee of the school and entitled to security of three years in the service. 11
of tenure at the time of her dismissal. Since no cause was
shown and established at an appropriate hearing, and the
While admittedly not applicable to the case at bar, these I ASIA BANKING CORPORATION, plaintiff-appellee,
rules nevertheless reflect the attitude of the government vs.
on the protection of the worker's security of tenure, which STANDARD PRODUCTS, CO., INC., defendant-
is now guaranteed by no less than the Constitution appellant.
itself. 12 G.R. No. 22106 September 11, 1924

We find that the private respondent was arbitrarily treated This action is brought to recover the sum of P24,736.47,
by the petitioner, which has shown no cause for her the balance due on the following promissory note:
removal nor had it given her the notice required by the
Termination Pay Law. As the respondent court said, the P37,757.22
contention that she could not report one week before the MANILA, P. I., Nov. 28, 1921.
start of classes is a flimsy justification for replacing On demand, after date we promise to pay to the Asia
her. 13 She had been in its employ for all of thirty-two Banking Corporation, or order, the sum of thirty-seven
years. Her record was apparently unblemished. There is thousand seven hundred fifty-seven and 22/100 pesos at
no showing of any previous strained relations between her their office in Manila, for value received, together with
and the petitioner. Oh had every reason to assume, as interest at the rate of ten per cent per annum.
she had done in previous years, that she would continue No. ________ Due __________
teaching as usual.
THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER
It is easy to imagine the astonishment and hurt she felt
when she was flatly and without warning told she was
By President
dismissed. There was not even the amenity of a formal
notice of her replacement, with perhaps a graceful
expression of thanks for her past services. She was simply The court below rendered judgment in favor of the plaintiff
informed she was no longer in the teaching staff. To put it for the sum demanded in the complaint, with interest on
bluntly, she was fired. the sum of P24,147.34 from November 1, 1923, at the rate
of 10 per cent per annum, and the costs. From this
judgment the defendant appeals to this court.
For the wrongful act of the petitioner, the private
respondent is entitled to moral damages. 14 As a
proximate result of her illegal dismissal, she suffered At the trial of the case the plaintiff failed to prove
mental anguish, serious anxiety, wounded feelings and affirmatively the corporate existence of the parties and the
even besmirched reputation as an experienced teacher for appellant insists that under these circumstances the court
more than three decades. We also find that the erred in finding that the parties were corporations with
respondent court did not err in awarding her exemplary juridical personality and assigns same as reversible error.
damages because the petitioner acted in a wanton and
oppressive manner when it dismissed her. 15 There is no merit whatever in the appellant's contention.
The general rule is that in the absence of fraud a person
The Court takes this opportunity to pay a sincere tribute to who has contracted or otherwise dealt with an association
the grade school teachers, who are always at the forefront in such a way as to recognize and in effect admit its legal
in the battle against illiteracy and ignorance. If only existence as a corporate body is thereby estopped to deny
because it is they who open the minds of their pupils to an its corporate existence in any action leading out of or
unexplored world awash with the magic of letters and involving such contract or dealing, unless its existence is
numbers, which is an extraordinary feat indeed, these attacked for cause which have arisen since making the
humble mentors deserve all our respect and appreciation. contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations. (14
C. J., 227; Chinese Chamber of Commerce vs. Pua Te
WHEREFORE, the petition is DENIED. The appealed
Ching, 14 Phil., 222.)
decision is AFFIRMED except for the award of separation
pay, which is reduced to P2,880.00. All the other awards
are approved. Costs against the petitioner. The defendant having recognized the corporate existence
This decision is immediately executory. of the plaintiff by making a promissory note in its favor and
SO ORDERED. making partial payments on the same is therefore
estopped to deny said plaintiff's corporate existence. It is,
of course, also estopped from denying its own corporate
existence. Under these circumstances it was unnecessary
for the plaintiff to present other evidence of the corporate
existence of either of the parties. It may be noted that
there is no evidence showing circumstances taking the
case out of the rules stated.

The judgment appealed from is affirmed, with the costs


against the appellant. So ordered.
INTERNATIONAL EXPRESS TRAVEL & TOUR Defendant Henri Kahn would have been correct in his
SERVICES, INC., petitioner, contentions had it been duly established that defendant
vs. Federation is a corporation. The trouble, however, is that
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE neither the plaintiff nor the defendant Henri Kahn has
FOOTBALL FEDERATION, respondents. adduced any evidence proving the corporate existence of
G.R. No. 119002 October 19, 2000 the defendant Federation. In paragraph 2 of its complaint,
plaintiff asserted that "Defendant Philippine Football
DECISION Federation is a sports association xxx." This has not been
On June 30 1989, petitioner International Express Travel denied by defendant Henri Kahn in his Answer. Being the
and Tour Services, Inc., through its managing director, President of defendant Federation, its corporate existence
wrote a letter to the Philippine Football Federation is within the personal knowledge of defendant Henri Kahn.
(Federation), through its president private respondent He could have easily denied specifically the assertion of
Henri Kahn, wherein the former offered its services as a the plaintiff that it is a mere sports association, if it were a
travel agency to the latter. The offer was accepted.
1
domestic corporation. But he did not.
xxx
Petitioner secured the airline tickets for the trips of the A voluntary unincorporated association, like defendant
athletes and officials of the Federation to the South East Federation has no power to enter into, or to ratify, a
Asian Games in Kuala Lumpur as well as various other contract. The contract entered into by its officers or agents
trips to the People's Republic of China and Brisbane. The on behalf of such association is not binding on, or
total cost of the tickets amounted to P449,654.83. For the enforceable against it. The officers or agents are
tickets received, the Federation made two partial themselves personally liable.
payments, both in September of 1989, in the total amount xxx 9

of P176,467.50. 2
The dispositive portion of the trial court's decision reads:

On 4 October 1989, petitioner wrote the Federation, WHEREFORE, judgment is rendered ordering
through the private respondent a demand letter requesting defendant Henri Kahn to pay the plaintiff the principal
for the amount of P265,894.33. On 30 October 1989, the
3
sum of P207,524.20, plus the interest thereon at the
Federation, through the Project Gintong Alay, paid the legal rate computed from July 5, 1990, the date the
amount of P31,603.00. 4
complaint was filed, until the principal obligation is
fully liquidated; and another sum of P15,000.00 for
attorney's fees.
On 27 December 1989, Henri Kahn issued a personal
check in the amount of P50,000 as partial payment for the
outstanding balance of the Federation. Thereafter, no
5
The complaint of the plaintiff against the Philippine
further payments were made despite repeated demands. Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.
This prompted petitioner to file a civil case before the
Regional Trial Court of Manila. Petitioner sued Henri Kahn With the costs against defendant Henri Kahn. 10

in his personal capacity and as President of the


Federation and impleaded the Federation as an alternative Only Henri Kahn elevated the above decision to the Court
defendant. Petitioner sought to hold Henri Kahn liable for of Appeals. On 21 December 1994, the respondent court
the unpaid balance for the tickets purchased by the rendered a decision reversing the trial court, the decretal
Federation on the ground that Henri Kahn allegedly portion of said decision reads:
guaranteed the said obligation. 6

WHEREFORE, premises considered, the judgment


Henri Kahn filed his answer with counterclaim. While not appealed from is hereby REVERSED and SET ASIDE
denying the allegation that the Federation owed the and another one is rendered dismissing the complaint
amount P207,524.20, representing the unpaid balance for against defendant Henri S. Kahn.
the plane tickets, he averred that the petitioner has no
cause of action against him either in his personal capacity In finding for Henri Kahn, the Court of Appeals recognized
or in his official capacity as president of the Federation. He the juridical existence of the Federation. It rationalized that
maintained that he did not guarantee payment but merely since petitioner failed to prove that Henri Kahn guaranteed
acted as an agent of the Federation which has a separate the obligation of the Federation, he should not be held
and distinct juridical personality. 7
liable for the same as said entity has a separate and
distinct personality from its officers.
On the other hand, the Federation failed to file its answer,
hence, was declared in default by the trial court.8
Petitioner filed a motion for reconsideration and as an
alternative prayer pleaded that the Federation be held
In due course, the trial court rendered judgment and ruled liable for the unpaid obligation. The same was denied by
in favor of the petitioner and declared Henri Kahn the appellate court in its resolution of 8 February 1995,
personally liable for the unpaid obligation of the where it stated that:
Federation. In arriving at the said ruling, the trial court
rationalized: As to the alternative prayer for the Modification of the
Decision by expressly declaring in the dispositive portion
thereof the Philippine Football Federation (PFF) as liable 1. To adopt a constitution and by-laws for their
for the unpaid obligation, it should be remembered that the internal organization and government;
trial court dismissed the complaint against the Philippine 2. To raise funds by donations, benefits, and other
Football Federation, and the plaintiff did not appeal from means for their purposes.
this decision. Hence, the Philippine Football Federation is 3. To purchase, sell, lease or otherwise encumber
not a party to this appeal and consequently, no judgment property both real and personal, for the
may be pronounced by this Court against the PFF without accomplishment of their purpose;
violating the due process clause, let alone the fact that the 4. To affiliate with international or regional sports'
judgment dismissing the complaint against it, had already Associations after due consultation with the executive
become final by virtue of the plaintiff's failure to appeal committee;
therefrom. The alternative prayer is therefore similarly xxx
DENIED. 13. To perform such other acts as may be necessary
for the proper accomplishment of their purposes and
Petitioner now seeks recourse to this Court and alleges not inconsistent with this Act.
that the respondent court committed the following
assigned errors:13
Section 8 of P.D. 604, grants similar functions to these
sports associations:
A. THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THAT PETITIONER HAD DEALT WITH SEC. 8. Functions, Powers, and Duties of National Sports
THE PHILIPPINE FOOTBALL FEDERATION (PFF) Association. - The National sports associations shall have
AS A CORPORATE ENTITY AND IN NOT HOLDING the following functions, powers, and duties:
THAT PRIVATE RESPONDENT HENRI KAHN WAS
THE ONE WHO REPRESENTED THE PFF AS 1. Adopt a Constitution and By-Laws for their internal
HAVING A CORPORATE PERSONALITY. organization and government which shall be
submitted to the Department and any amendment
B. THE HONORABLE COURT OF APPEALS ERRED thereto shall take effect upon approval by the
IN NOT HOLDING PRIVATE RESPONDENT HENRI Department: Provided, however, That no team,
KAHN PERSONALLY LIABLE FOR THE school, club, organization, or entity shall be admitted
OBLIGATION OF THE UNINCORPORATED PFF, as a voting member of an association unless 60 per
HAVING NEGOTIATED WITH PETITIONER AND cent of the athletes composing said team, school,
CONTRACTED THE OBLIGATION IN BEHALF OF club, organization, or entity are Filipino citizens;
THE PFF, MADE A PARTIAL PAYMENT AND 2. Raise funds by donations, benefits, and other
ASSURED PETITIONER OF FULLY SETTLING THE means for their purpose subject to the approval of the
OBLIGATION. Department;
3. Purchase, sell, lease, or otherwise encumber
C. ASSUMING ARGUENDO THAT PRIVATE property, both real and personal, for the
RESPONDENT KAHN IS NOT PERSONALLY accomplishment of their purpose;
LIABLE, THE HONORABLE COURT OF APPEALS 4. Conduct local, interport, and international
ERRED IN NOT EXPRESSLY DECLARING IN ITS competitions, other than the Olympic and Asian
DECISION THAT THE PFF IS SOLELY LIABLE FOR Games, for the promotion of their sport;
THE OBLIGATION. 5. Affiliate with international or regional sports
associations after due consultation with the
Department;
The resolution of the case at bar hinges on the xxx
determination of the existence of the Philippine Football 13. Perform such other functions as may be provided
Federation as a juridical person. In the assailed decision, by law.
the appellate court recognized the existence of the
Federation. In support of this, the CA cited Republic Act
3135, otherwise known as the Revised Charter of the The above powers and functions granted to national
Philippine Amateur Athletic Federation, and Presidential sports associations clearly indicate that these entities may
Decree No. 604 as the laws from which said Federation acquire a juridical personality. The power to purchase,
derives its existence. sell, lease and encumber property are acts which may
only be done by persons, whether natural or artificial, with
juridical capacity. However, while we agree with the
As correctly observed by the appellate court, both R.A. appellate court that national sports associations may be
3135 and P.D. No. 604 recognized the juridical existence accorded corporate status, such does not automatically
of national sports associations. This may be gleaned from take place by the mere passage of these laws.
the powers and functions granted to these associations.
Section 14 of R.A. 3135 provides:
It is a basic postulate that before a corporation may
acquire juridical personality, the State must give its
SEC. 14. Functions, powers and duties of Associations. - consent either in the form of a special law or a general
The National Sports' Association shall have the following enabling act. We cannot agree with the view of the
functions, powers and duties: appellate court and the private respondent that the
Philippine Football Federation came into existence upon
the passage of these laws. Nowhere can it be found in
R.A. 3135 or P.D. 604 any provision creating the
Philippine Football Federation. These laws merely organization, the Philippine Amateur Athletic Federation
recognized the existence of national sports associations under R.A. 3135, and the Department of Youth and Sports
and provided the manner by which these entities may Development under P.D. 604. This fact of recognition,
acquire juridical personality. Section 11 of R.A. 3135 however, Henri Kahn failed to substantiate. In attempting
provides: to prove the juridical existence of the Federation, Henri
Kahn attached to his motion for reconsideration before the
SEC. 11. National Sports' Association; organization and trial court a copy of the constitution and by-laws of the
recognition. - A National Association shall be organized for Philippine Football Federation. Unfortunately, the same
each individual sports in the Philippines in the manner does not prove that said Federation has indeed been
hereinafter provided to constitute the Philippine Amateur recognized and accredited by either the Philippine
Athletic Federation. Applications for recognition as a Amateur Athletic Federation or the Department of Youth
National Sports' Association shall be filed with the and Sports Development. Accordingly, we rule that the
executive committee together with, among others, a copy Philippine Football Federation is not a national sports
of the constitution and by-laws and a list of the members association within the purview of the aforementioned laws
of the proposed association, and a filing fee of ten pesos. and does not have corporate existence of its own.

The Executive Committee shall give the recognition Thus being said, it follows that private respondent Henry
applied for if it is satisfied that said association will Kahn should be held liable for the unpaid obligations of the
promote the purposes of this Act and particularly section unincorporated Philippine Football Federation. It is a
three thereof. No application shall be held pending for settled principal in corporation law that any person acting
more than three months after the filing thereof without any or purporting to act on behalf of a corporation which has
action having been taken thereon by the executive no valid existence assumes such privileges and becomes
committee. Should the application be rejected, the personally liable for contract entered into or for other acts
reasons for such rejection shall be clearly stated in a performed as such agent. As president of the Federation,
14

written communication to the applicant. Failure to specify Henri Kahn is presumed to have known about the
the reasons for the rejection shall not affect the application corporate existence or non-existence of the Federation.
which shall be considered as unacted upon: Provided, We cannot subscribe to the position taken by the appellate
however, That until the executive committee herein court that even assuming that the Federation was
provided shall have been formed, applications for defectively incorporated, the petitioner cannot deny the
recognition shall be passed upon by the duly elected corporate existence of the Federation because it had
members of the present executive committee of the contracted and dealt with the Federation in such a manner
Philippine Amateur Athletic Federation. The said executive as to recognize and in effect admit its existence. The
15

committee shall be dissolved upon the organization of the doctrine of corporation by estoppel is mistakenly applied
executive committee herein provided: Provided, further, by the respondent court to the petitioner. The application
That the functioning executive committee is charged with of the doctrine applies to a third party only when he tries to
the responsibility of seeing to it that the National Sports' escape liability on a contract from which he has benefited
Associations are formed and organized within six months on the irrelevant ground of defective incorporation. In the
16

from and after the passage of this Act. case at bar, the petitioner is not trying to escape liability
from the contract but rather is the one claiming from the
contract.
Section 7 of P.D. 604, similarly provides:
WHEREFORE, the decision appealed from is REVERSED
SEC. 7. National Sports Associations. - Application for and SET ASIDE. The decision of the Regional Trial Court
accreditation or recognition as a national sports of Manila, Branch 35, in Civil Case No. 90-53595 is hereby
association for each individual sport in the Philippines REINSTATED. SO ORDERED.
shall be filed with the Department together with, among
others, a copy of the Constitution and By-Laws and a list
of the members of the proposed association.

The Department shall give the recognition applied for if it GEORG GROTJAHN GMBH & CO., petitioner,
is satisfied that the national sports association to be vs.
organized will promote the objectives of this Decree and HON. LUCIA VIOLAGO ISNANI, Presiding Judge,
has substantially complied with the rules and regulations Regional Trial Court, Makati, Br. 59; ROMANA R.
of the Department: Provided, That the Department may LANCHINEBRE; and TEOFILO A.
withdraw accreditation or recognition for violation of this LANCHINEBRE, respondents.
Decree and such rules and regulations formulated by it. G.R. No. 109272 August 10, 1994

The Department shall supervise the national sports Petitioner impugns the dismissal of its Complaint for a sum
association: Provided, That the latter shall have exclusive of money by the respondent judge for lack of jurisdiction
technical control over the development and promotion of and lack of capacity to sue.
the particular sport for which they are organized.
The records show that petitioner is a multinational
Clearly the above cited provisions require that before an company organized and existing under the laws of the
entity may be considered as a national sports association, Federal Republic of Germany. On July 6, 1983, petitioner
such entity must be recognized by the accrediting
filed an application, dated July 2, 1983, with the
1
pesos (P5,000.00) regardless of whether or not
Securities and Exchange Commission (SEC) for the accompanied with a claim for reinstatement.
establishment of a regional or area headquarters in the
Philippines, pursuant to Presidential Decree No. 218. The In its complaint, the plaintiff (petitioner herein) seeks
application was approved by the Board of Investments to recover alleged cash advances made by defendant
(BOI) on September 6, 1983. Consequently, on (private respondent herein) Romana Lanchinebre
September 20, 1983, the SEC issued a Certificate of while the latter was in the employ of the former.
Registration and License to petitioner.2
Obviously the said cash advances were made
pursuant to the employer-employee relationship
Private respondent Romana R. Lanchinebre was a sales between the (petitioner) and the said (private
representative of petitioner from 1983 to mid-1992. On respondent) and as such, within the original and
March 12, 1992, she secured a loan of twenty-five exclusive jurisdiction of the National Labor Relations
thousand pesos (P25,000.00) from petitioner. On March Commission.
26 and June 10, 1992, she made additional cash
advances in the sum of ten thousand pesos (P10,000.00). Again, it is not disputed that the Certificate of
Of the total amount, twelve thousand one hundred seventy Registration and License issued to the (petitioner) by
pesos and thirty-seven centavos (P12,170.37) remained the Securities and Exchange Commission was merely
unpaid. Despite demand, private respondent Romana "for the establishment of a regional or area
failed to settle her obligation with petitioner. headquarters in the Philippines, pursuant to
Presidential Decree No. 218 and its implementing
On July 22, 1992, private respondent Romana rules and regulations." It does not include a license to
Lanchinebre filed with the Arbitration Branch of the do business in the Philippines. There is no allegation
National Labor Relations Commission (NLRC) in Manila, a in the complaint moreover that (petitioner) is suing
Complaint for illegal suspension, dismissal and non- under an isolated transaction. It must be considered
payment of commissions against petitioner. On August 18, that under Section 4, Rule 8 of the Revised Rules of
1992, petitioner in turn filed against private respondent a Court, facts showing the capacity of a party to sue or
Complaint for damages amounting to one hundred twenty be sued or the authority of a party to sue or be sued
thousand pesos (P120,000.00) also with the NLRC in a representative capacity or the legal existence of
Arbitration Branch (Manila). The two cases were
3
an organized association of persons that is made a
consolidated. party must be averred. There is no averment in the
complaint regarding (petitioner's) capacity to sue or
On September 2, 1992, petitioner filed another Complaint be sued.
for collection of sum of money against private respondents
spouses Romana and Teofilo Lanchinebre which was Finally, (petitioner's) claim being clearly incidental to
docketed as Civil Case No. 92-2486 and raffled to the sala the occupation or exercise of (respondent) Romana
of respondent judge. Instead of filing their Answer, private Lanchinebre's profession, (respondent) husband
respondents moved to dismiss the Complaint. This was should not be joined as party defendant. 4

opposed by petitioner.
On March 8, 1993, the respondent judge issued a minute
On December 21, 1992, respondent judge issued the first Order denying petitioner's Motion for Reconsideration.
impugned Order, granting the motion to dismiss. She
held, viz: Petitioner now raises the following assignments of errors:

Jurisdiction over the subject matter or nature of the I


action is conferred by law and not subject to the THE TRIAL COURT GRAVELY ERRED IN HOLDING
whims and caprices of the parties. THAT THE REGULAR COURTS HAVE NO
JURISDICTION OVER DISPUTES BETWEEN AN
Under Article 217 of the Labor Code of the EMPLOYER AND AN EMPLOYEE INVOLVING THE
Philippines, the Labor Arbiters shall have original and APPLICATION PURELY OF THE GENERAL CIVIL LAW.
exclusive jurisdiction to hear and decide, within thirty II
(30) calendar days after the submission of the case THE TRIAL COURT GRAVELY ERRED IN HOLDING
by the parties for decision, the following cases THAT PETITIONER HAS NO CAPACITY TO SUE AND
involving all workers, whether agricultural or non- BE SUED IN THE PHILIPPINES DESPITE THE FACT
agricultural: THAT PETITIONER IS DULY LICENSED BY THE
SECURITIES AND EXCHANGE COMMISSION TO SET
(4) claims for actual, moral, exemplary and other UP AND OPERATE A REGIONAL OR AREA
forms of damages arising from an employer-employee HEADQUARTERS IN THE COUNTRY AND THAT IT HAS
relations. CONTINUOUSLY OPERATED AS SUCH FOR THE LAST
xxx xxx xxx NINE (9) YEARS.
(6) Except claims for employees compensation, social III
security, medicare and maternity benefits, all other THE TRIAL COURT GRAVELY ERRED IN HOLDING
claims arising from employer-employee relations, THAT THE ERRONEOUS INCLUSION OF THE
including those of persons in domestic or household HUSBAND IN A COMPLAINT IS A FATAL DEFECT THAT
service, involving an amount exceeding five thousand
SHALL RESULT IN THE OUTRIGHT DISMISSAL OF In San Miguel Corporation vs. NLRC, 161 SCRA 719
THE COMPLAINT. (1988), we crystallized the doctrines set forth in
IV the Medina, Singapore Airlines, and Molave Motors cases,
THE TRIAL COURT GRAVELY ERRED IN HOLDING thus:
THAT THE HUSBAND IS NOT REQUIRED BY THE . . . The important principle that runs through these
RULES TO BE JOINED AS A DEFENDANT IN A three (3) cases is that where the claim to the principal
COMPLAINT AGAINST THE WIFE. relief sought is to be resolved not by reference to the
Labor Code or other labor relations statute or a
There is merit to the petition. collective bargaining agreement but by the general
civil law, the jurisdiction over the dispute belongs to
the regular courts of justice and not to the Labor
Firstly, the trial court should not have held itself without Arbiter and the NLRC. In such situations, resolutions
jurisdiction over Civil Case No. 92-2486. It is true that the of the dispute requires expertise, not in labor
loan and cash advances sought to be recovered by management relations nor in wage structures and
petitioner were contracted by private respondent Romana other terms and conditions of employment, but rather
Lanchinebre while she was still in the employ of petitioner. in the application of the general civil law. Clearly, such
Nonetheless, it does not follow that Article 217 of the claims fall outside the area of competence or
Labor Code covers their relationship. expertise ordinarily ascribed to Labor Arbiters and the
NLRC and the rationale for granting jurisdiction over
Not every dispute between an employer and employee such claims to these agencies disappears.
involves matters that only labor arbiters and the NLRC can
resolve in the exercise of their adjudicatory or quasi- Civil Case No. 92-2486 is a simple collection of a sum of
judicial powers. The jurisdiction of labor arbiters and the money brought by petitioner, as creditor, against private
NLRC under Article 217 of the Labor Code is limited to respondent Romana Lanchinebre, as debtor. The fact that
disputes arising from an employer-employee relationship they were employer and employee at the time of the
which can only be resolved by reference to the Labor transaction does not negate the civil jurisdiction of the trial
Code, other labor statutes, or their collective bargaining court. The case does not involve adjudication of a labor
agreement. In this regard, we held in the earlier case dispute but recovery of a sum of money based on our civil
of Molave Motor Sales, Inc. vs. Laron, 129 SCRA 485 laws on obligation and contract.
(1984), viz:
Secondly, the trial court erred in holding that petitioner
Before the enactment of BP Blg. 227 on June 1, 1982, does not have capacity to sue in the Philippines. It is clear
Labor Arbiters, under paragraph 5 of Article 217 of the that petitioner is a foreign corporation doing business in
Labor Code had jurisdiction over "all other cases the Philippines. Petitioner is covered by the Omnibus
arising from employer-employee relation, unless Investment Code of 1987. Said law defines "doing
expressly excluded by this Code." Even then, the business," as follows:
principal followed by this Court was that, although a . . . shall include soliciting orders, purchases, service
controversy is between an employer and an contracts, opening offices, whether called "liaison"
employee, the Labor Arbiters have no jurisdiction if offices or branches; appointing representatives or
the Labor Code is not involved. In Medina vs. Castro- distributors who are domiciled in the Philippines or
Bartolome, 116 SCRA 597, 604 in negating who in any calendar year stay in the Philippines for a
jurisdiction of the Labor Arbiter, although the parties period or periods totalling one hundred eighty (180)
were an employer and two employees, Mr. Justice days or more; participating in the management,
Abad Santos stated: supervision or control of any domestic business firm,
entity or corporation in the Philippines, and any other
The pivotal question to Our mind is whether or not the act or acts that imply a continuity of commercial
Labor Code has any relevance to the reliefs sought by dealings or arrangements and contemplate to that
plaintiffs. For if the Labor Code has no relevance, any extent the performance of acts or works, or the
discussion concerning the statutes amending it and exercise of some of the functions normally incident to,
whether or not they have retroactive effect is and in progressive prosecution of, commercial gain or
unnecessary. of the purpose and object of the business
xxx xxx xxx organization. 5

And in Singapore Airlines Limited vs. Paño, 122


SCRA 671, 677, the following was said: There is no general rule or governing principle as to what
Stated differently, petitioner seeks protection under constitutes "doing" or "engaging in" or "transacting"
the civil laws and claims no benefits under the Labor business in the Philippines. Each case must be judged in
Code. The primary relief sought is for liquidated the light of its peculiar circumstances. In the case at
6

damages for breach of a contractual obligation. The bench, petitioner does not engage in commercial dealings
other items demanded are not labor benefits or activities in the country because it is precluded from
demanded by workers generally taken cognizance of doing so by P.D. No. 218, under which it was
in labor disputes, such as payment of wages, established. Nonetheless, it has been continuously, since
7

overtime compensation or separation pay. The items 1983, acting as a supervision, communications and
claimed are the natural consequences flowing from coordination center for its home office's affiliates in
breach of an obligation, intrinsically a civil dispute. Singapore, and in the process has named its local agent
xxx xxx xxx and has employed Philippine nationals like private
respondent Romana Lanchinebre. From this uninterrupted
performance by petitioner of acts pursuant to its primary
purposes and functions as a regional/area headquarters
for its home office, it is clear that petitioner is doing
business in the country. Moreover, private respondents
are estopped from assailing the personality of petitioner.
So we held in Merrill Lynch Futures, Inc. vs. Court of
Appeals, 211 SCRA 824, 837 (1992):

The rule is that a party is estopped to challenge the


personality of a corporation after having
acknowledged the same by entering into a contract
with it. And the "doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic
corporations;" "one who has dealth with a corporation
of foreign origin as a corporate entity is estopped to
deny its corporate existence and capacity." The
principle "will be applied to prevent a person
contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes
chiefly in cases where such person has received the
benefits of the contract, . . . (Citations omitted.)

Finally, the trial court erred when it dismissed Civil Case


No. 92-2486 on what it found to be the misjoinder of
private respondent Teofilo Lanchinebre as party
defendant. It is a basic rule that "(m)isjoinder or parties is
not ground for dismissal of an action." Moreover, the
8

Order of the trial court is based on Section 4(h), Rule 3 of


the Revised Rules of Court, which provides:

A married woman may not . . . be sued alone without


joining her husband, except . . . if the litigation is
incidental to the profession, occupation or business in
which she is engaged,

Whether or not the subject loan was incurred by private


respondent as an incident to her profession, occupation or
business is a question of fact. In the absence of relevant
evidence, the issue cannot be resolved in a motion to
dismiss.

IN VIEW WHEREOF, the instant Petition is GRANTED.


The Orders, dated December 21, 1992 and March 8,
1993, in Civil Case No. 92-2486 are REVERSED AND
SET ASIDE. The RTC of Makati, Br. 59, is hereby ordered
to hear the reinstated case on its merits. No costs.
SO ORDERED.