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INTRODUCTION/CLASSIFICATION OF PRIVATE CORPORATIONS

[G.R. No. L-64013. November 28, 1983.]

UNION GLASS & CONTAINER CORPORATION and CARLOS PALANCA, JR., in his capacity as
President of Union Glass & Container Corporation, petitioner, vs. THE SECURITIES AND
EXCHANGE COMMISSION and CAROLINA HOFILEÑA, respondents

SYLLABUS

1. ADMINISTRATIVE LAW; ADMINISTRATIVE AGENCY; SEC; NATURE AND PRINCIPAL FUNCTION. — The jurisdiction
of the SEC is delineated by Section 5 of PD No. 902-A. This grant of jurisdiction must be viewed in the light of the nature
and function of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter "absolute jurisdiction, supervision,
and control over all corporations, partnerships or associations, who are grantees of primary franchise and/or license or
permit issued by the government to operate in the Philippines . . ." The principal function of the SEC is the supervision and
control over corporations, partnerships and associations with the end in view that investment in these entities may be
encouraged and protected, and their activities pursued for the promotion of economic development.
2. ID.; ID.; ID.; JURISDICTION OVER A CASE; WHEN COGNIZABLE. — In order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or
association and the public; (b)between the corporation, partnership or association and its stockholders, partners, members,
or officers; (c) between the corporation, partnership or association and the state in so far as its franchise, permit or license
to operate is concerned; and (d) among the stockholders, partners or associates themselves.
3. ID.; ID.; JURISDICTION OVER A CASE; WHERE ISSUES INVOLVED LACKED INTRA-CORPORATE RELATIONSHIP,
COGNIZABLE BY R.T.C. — The fact that the controversy at bar involves the rights of petitioner Union Glass who has no
intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC.
The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. This view is in accord
with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction and, as such,
could wield only such powers as are specifically granted to them by their enabling statutes.
4. REMEDIAL LAW; CIVIL PROCEDURE; SUPPLETORY APPLICATION OF THE RULES OF COURT IN PROCEEDINGS
BEFORE SEC SUBJECT TO RULES REGARDING JURISDICTION, VENUE AND JOINDER OF PARTIES. — Petitioner
Union Glass is involved only in the first cause of action of Hofileña's complaint in SEC Case No. 2035. While the Rules of
Court, which applies suppletorily to proceedings before the SEC, allows the joinder of causes of action in one complaint,
such procedure however is subject to the rules regarding jurisdiction, venue and joinder of parties. Since petitioner has no
intra-corporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would
violate the rule on jurisdiction.
5. ID.; ID.; PREJUDICIAL QUESTION; CASE AT BAR. — Hofileña's complaint against petitioner for cancellation of the sale
of the glass plant should therefore be brought separately before the regular court. But such action, if instituted, shall be
suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of the dacion en pago posed in the
last mentioned case is a prejudicial question, the resolution of which is a logical antecedent of the issue involved in the
action against petitioner Union Glass. Thus, Hofileña's complaint against the latter can only prosper if final judgment is
rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP.
TEEHANKEE, J., concurring:
1. REMEDIAL LAW; CIVIL PROCEDURE; JOINDER OF PARTIES; FOR LACK OF JURISDICTION, DISALLOWED. —
Justice Teehankee concurs in the Court's judgment setting aside the questioned orders of respondent SEC and ordering
that petitioner Union Glass be dropped from SEC Case No. 2035 for lack of SEC jurisdiction over it as a third party
purchaser of the glass plant acquired by the DBP by dacion en pago from Pioneer Glass, without prejudice to Hofileña filing
a separate suit in the regular courts of justice against Union Glass for recovery and cancellation of the said sale of the glass
plant in favor of Union Glass.
2. ID.; ACTION; VALIDITY OF THE "DACION EN PAGO" IN THE CASE AT BAR; A PREJUDICIAL QUESTION. — He
concurs also with the statement in the Court's opinion that the final outcome of SEC Case No. 2035 with regard to the
validity of the dacion en pago is a prejudicial case. If Hofileña's complaint against said dacion en pago fails in the SEC, then
it clearly has no cause of action against Union Glass for cancellation of DBP's sale of the plant to Union Glass.
3. ID.; ID.; FAVORABLE JUDGMENT SECURED FROM SEC NOT CERTAIN TO PROSPER IF BROUGHT BEFORE
REGULAR COURTS OF JUSTICE; CASE AT BAR. — A favorable judgment secured by Hofileña in SEC Case No. 2035
against the DBP and Pioneer Glass would not necessarily mean that its action against Union Glass in the regular courts of
justice for recovery and cancellation of the DBP sale of the glass plant to Union Glass would necessarily prosper. It must be
borne in mind that the SEC has no jurisdiction over Union Glass as an outsider. The suit in the regular courts of justice that
Hofileña might bring against Union Glass is of course subject to all defenses as to the validity of the sale of the glass plant
in its favor as a buyer in good faith and should it successfully substantiate such defenses, then Hofileña's action against it
for cancellation of the sale might fail as a consequence.
AQUINO, J., dissenting:
1. REMEDIAL LAW; ACTION; LACHES AND NON-EXHAUSTION OF REMEDY; PRESENT IN THE CASE AT BAR. —
Although a jurisdictional issue is raised and jurisdiction over the subject matter may be raised at any stage of the case,
nevertheless, the petitioners are guilty of laches and non exhaustion of the remedy of appeal with the Securities and
Exchange Commission en banc.
2. ID.; ID.; REVIEW OF THE DECISION OF THE SEC; COGNIZABLE BY THE IAC. — Section 9 of the Judiciary
Reorganization Law returned to the Intermediate Appellate Court the exclusive jurisdiction to review the ruling, order or
decision of the SEC as a quasi-judicial agency. The same Section 9 granted to the Appellate Court jurisdiction in certiorari
and prohibition cases over the SEC although not exclusive. In this case, the SEC seems to have adopted the orders of the
two hearing officers as its own orders as shown by the stand taken by the Solicitor General in defending the SEC. If that
were so, that is, if the orders of the hearing officers should be treated as the orders of the SEC itself en banc, this Court
would have no jurisdiction over this case. It should be the Appellate Court that should exercise the power of review.
3. ID.; ID.; JOINDER OF PARTIES, PROPER; SEC NOT DIVESTED OF JURISDICTION. — There is no question that the
SEC has jurisdiction over the intra-corporate dispute between Hofileña and the DBP. both stockholders of Pioneer Glass,
over the dacion en pago. Certainly, the joinder of Union Glass does not divest the SEC of jurisdiction over the case. The
joinder of Union Glass is necessary because the DBP, its transferor, is being sued regarding the dacion en pago. The
defenses of Union Glass are tied up with the defenses of the DBP in the intra-corporate dispute. Hofileña's cause of action
should not be split. It would not be judicious and expedient to require Hofileña to sue the DBP and Union Glass in the
Regional Trial Court. The SEC is more competent than the said court to decide the intra- corporate dispute. The SEC, as
the agency enforcing Presidential Decree No. 902-A, is in the best position to know the extent of its jurisdiction. Its
determination that it has jurisdiction in this case has persuasive weight.

DECISION

ESCOLIN, J p:

This petition for certiorari and prohibition seeks to annul and set aside the Order of the Securities and Exchange
Commission, dated September 25, 1981, upholding its jurisdiction in SEC Case No. 2035, entitled "Carolina Hofileña,
Complainant, versus Development Bank of the Philippines, et al., Respondents."
Private respondent Carolina Hofileña, complainant in SEC Case No. 2035, is a stockholder of Pioneer Glass Manufacturing
Corporation, Pioneer Glass for short, a domestic corporation engaged in the operation of silica mines and the manufacture
of glass and glassware. Since 1967, Pioneer Glass had obtained various loan accommodations from the Development Bank
of the Philippines [DBP], and also from other local and foreign sources which DBP guaranteed.
As security for said loan accommodations, Pioneer Glass mortgaged and/or assigned its assets, real and personal, to the
DBP, in addition to the mortgages executed by some of its corporate officers over their personal assets. The proceeds of
said financial exposure of the DBP were used in the construction of a glass plant in Rosario, Cavite, and the operation of
seven silica mining claims owned by the corporation.
It appears that through the conversion into equity of the accumulated unpaid interests on the various loans amounting to
P5.4 million as of January 1975, and subsequently increased by another P2.2 million in 1976, the DBP was able to gain
control of the outstanding shares of common stocks of Pioneer Glass, and to get two, later three, regular seats in the
corporation's board of directors. cdrep
Sometime in March, 1978, when Pioneer Glass suffered serious liquidity problems such that it could no longer meet its
financial obligations with DBP, it entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged
to DBP were ceded to the latter in full satisfaction of the corporation's obligations in the total amount of P59,000,000.00.
Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which DBP leased and subsequently sold
to herein petitioner Union Glass and Container Corporation, hereinafter referred to as Union Glass.

On April 1, 1981, Carolina Hofileña filed a complaint before the respondent Securities and Exchange Commission against
the DBP, Union Glass and Pioneer Glass, docketed as SEC Case No. 2035. Of the five causes of action pleaded therein,
only the first cause of action concerned petitioner Union Glass as transferee and possessor of the glass plant. Said first
cause of action was based on the alleged illegality of the aforesaid dacion en pago resulting from: [1] the supposed
unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the agreement; [2] the self-dealing
indulged in by DBP, having acted both as stockholder/director and secured creditor of Pioneer Glass; and 13] the wrongful
inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when the same had already been
converted into equity.
Thus, with respect to said first cause of action, respondent Hofileña prayed that the SEC issue an order:
"1. Holding that the so-called dacion en pago conveying all the assets of Pioneer Glass and the Hofileña
personal properties to Union Glass be declared null and void on the ground that the said conveyance
was tainted with.
"A. Self-dealing on the part of DBP which was acting both as a controlling
stockholder/director and as secured creditor of the Pioneer Glass, all to its advantage and to
that of Union Glass, and to the gross prejudice of the Pioneer Glass;
"B. That the dacion en pago is void because there was gross undervaluation of the
assets included in the so-called dacion en pago by more than 100% to the prejudice of
Pioneer Glass and to the undue advantage of DBP and Union Glass:
"C. That the DBP unduly favored Union Glass over another buyer, San Miguel
Corporation, notwithstanding the clearly advantageous terms offered by the latter to the
prejudice of Pioneer Glass, its other creditors and so-called 'minority stockholders.'
"2. Holding that the assets of the Pioneer Glass taken over by DBP and part of which was delivered to
Union Glass particularly the glass plant to be returned accordingly.
"3. That the DBP be ordered to accept and recognize the appraisal conducted by the Asian Appraisal Inc.
in 1975 and again in 1978 of the asset of Pioneer Glass." 1
In her common prayer, Hofileña asked that DBP be sentenced to pay Pioneer Glass actual, consequential, moral and
exemplary damages, for its alleged illegal acts and gross bad faith; and for DBP and Union Glass to pay her a reasonable
amount as attorney's fees. 2
On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981, petitioners moved for dismissal of the case on the
ground that the SEC had no jurisdiction over the subject matter or nature of the suit. Respondent Hofileña filed her
opposition to said motion, to which herein petitioners filed a rejoinder.
On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom the case was assigned, granted the motion to dismiss
for lack of jurisdiction. However, on September 25, 1981, upon motion for reconsideration filed by respondent Hofileña,
Hearing Officer Reyes reversed his original order by upholding the SEC's jurisdiction over the subject matter and over the
persons of petitioners. Unable to secure a reconsideration of the Order as well as to have the same reviewed by the
Commission En Banc, petitioners filed the instant petition for certiorari and prohibition to set aside the order of September
25, 1981, and to prevent respondent SEC from taking cognizance of SEC Case No. 2035. LLphil
The issue raised in the petition may be propounded thus: Is it the regular court or the SEC that has jurisdiction over the
case?
In upholding the SEC's jurisdiction over the case Hearing Officer Reyes rationalized his conclusion thus:
"As correctly pointed out by the complainant, the present action is in the form of a derivative suit instituted
by a stockholder for the benefit of the corporation, respondent Pioneer Glass and Manufacturing
Corporation, principally against another stockholder, respondent Development Bank of the Philippines,
for alleged illegal acts and gross bad faith which resulted in the dacion en pago arrangement now being
questioned by complainant. These alleged illegal acts and gross bad faith came about precisely by virtue
of respondent Development Bank of the Philippine's status as a stockholder of co-respondent Pioneer
Glass Manufacturing Corporation although its status as such stockholder, was gained as a result of its
being a creditor of the latter. The derivative nature of this instant action can also be gleaned from the
common prayer of the complainant which seeks for an order directing respondent Development Bank of
the Philippines to pay co-respondent Pioneer Glass Manufacturing Corporation damages for the alleged
illegal acts and gross bad faith as above-mentioned.
"As far as respondent Union Glass and Container Corporation is concerned, its inclusion as a party-
respondent by virtue of its being an indispensable party to the present action, it being in possession of
the assets subject of the dacion en pago and, therefore, situated in such a way that it will be affected by
any judgment thereon." 3
In the ordinary course of things, petitioner Union Glass, as transferee and possessor of the glass plant covered by the
dacion en pago agreement, should be joined as party-defendant under the general rule which requires the joinder of every
party who has an interest in or lien on the property subject matter of the dispute. 4 Such joinder of parties avoids multiplicity
of suits as well as ensures the convenient, speedy and orderly administration of justice.
But since petitioner Union Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as party-
defendant in SEC Case No. 2035 brings the cause of action asserted against it outside the jurisdiction of the respondent
SEC.
The jurisdiction of the SEC is delineated by Section 5 of PD No. 902-A as follows:
"Sec. 5. In addition to the regulatory and adjudicative function of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and devices, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
a] Devices and schemes employed by or any acts, of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of
the public and/or the stockholders, partners, members of associations or organizations registered with the
Commission;
b] Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members or associates; between any or all of them and the corporation, partnership, or association of
which they are stockholders, members or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concerns their individual franchise or right to exist as
such entity;
c] Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations."
This grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law. Section 3 of PD
No. 902-A confers upon the latter "absolute jurisdiction, supervision, and control over all corporations, partnerships or
associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the
Philippines . . .'" The principal function of the SEC is the supervision and control over corporations, partnerships and
associations with the end in view that investment in these entities may be encouraged and protected, and their activities
pursued for the promotion of economic development. 5
It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly specified and
delimited its jurisdiction to matters intrinsically connected with the regulation of corporations, partnerships and associations
and those dealing with the internal affairs of such corporations, partnerships or associations. llcd
Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following
relationships: [a] between the corporation, partnership or association and the public; [b] between the corporation,
partnership or association and its stockholders, partners, members, or officers; [c] between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned; and [d] among the
stockholders, partners or associates themselves.
The fact that the controversy at bar involves the rights of petitioner Union Glass who has no intra-corporate relation either
with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and
decided by the court of general jurisdiction, the Regional Trial Court. This view is in accord with the rudimentary principle
that administrative agencies, like the SEC, are tribunals of limited jurisdiction 6 and, as such, could wield only such powers
as are specifically granted to them by their enabling statutes. 7 As We held in Sunset View Condominium Corp. vs.
Campos, Jr.: 8
"Inasmuch as the private respondents are not shareholders of the petitioner condominium corporation,
the instant cases for collection cannot be a 'controversy arising out of intra-corporate or partnership
relations between and among stockholders, members or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or associates,
respectively,' which controversies are under the original and exclusive jurisdiction of the Securities &
Exchange Commission, pursuant to Section 5 [b] of PD. No. 902-A. . . ."

As heretofore pointed out, petitioner Union Glass is involved only in the first cause of action of Hofileña's complaint in SEC
Case No. 2035. While the Rules of Court, which applies suppletorily to proceedings before the SEC, allows the joinder of
causes of action in one complaint, such procedure however is subject to the rules regarding jurisdiction, venue and joinder
of parties. 9 Since petitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant
in said case as to do so would violate the rule or jurisdiction. Hofileña's complaint against petitioner for cancellation of the
sale of the glass plant should therefore be brought separately before the regular court. But such action, if instituted, shall be
suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of the dacion en pago posed in the
last mentioned case is a prejudicial question, the resolution of which is a logical antecedent of the issue involved in the
action against petitioner Union Glass. Thus, Hofileña's complaint against the latter can only prosper if final judgment is
rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP. LexLib
WHEREFORE, the instant petition is hereby granted, and the questioned Orders of respondent SEC, dated September 25,
1981, March 25, 1982 and May 28, 1982, are hereby set aside. Respondent Commission is ordered to drop petitioner Union
Glass from SEC Case No. 2035, without prejudice to the filing of a separate suit before the regular court of justice. No
pronouncement as to costs. SO ORDERED.
||
| (Union Glass & Container Corp. v. Securities and Exchange Commission, G.R. No. L-64013, [November 28, 1983], 211
PHIL 222-236)

[G.R. No. L-63558. May 19, 1987.]

SPOUSES JOSE ABEJO AND AURORA ABEJO, TELECTRONIC SYSTEMS, INC., petitioners, vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT (NATIONAL CAPITAL
JUDICIAL REGION, BRANCH CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA BRAGA,
VIRGILIO BRAGA AND NORBERTO BRAGA, respondents.

[G.R. Nos. L-68450-51. May 19, 1987.]

POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA, VIRGILIO T. BRAGA, NORBERTO


BRAGA, and VIRGINIA BRAGA, petitioners, vs. THE HONORABLE SECURITIES AND EXCHANGE
COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE ABEJO, JOSE LUIS SANTIAGO, SIMEON A.
MIRAVITE, SR., ANDRES T. VELARDE AND L. QUIDATO BANDOLINO, respondents.

DECISION

TEEHANKEE, C.J p:

These two cases, jointly heard, are jointly herein decided. They involve the question of who, between the
Regional Trial Court and the Securities and Exchange Commission (SEC), has original and exclusive jurisdiction over
the dispute between the principal stockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and
voice paging corporation," namely, the spouses Jose Abejo and Aurora Abejo (hereinafter referred to as the Abejos)
and the purchaser, Telectronic Systems, Inc. (hereinafter referred to as Telectronics) of their 133,000 minority
shareholdings (for P5 million) and of 63,000 shares registered in the name of Virginia Braga and covered by five stock
certificates endorsed in blank by her (for P1,674,450.00), and the spouses Agapito Braga and Virginia Braga
(hereinafter referred to as the Bragas), erstwhile majority stockholders. With the said purchases, Telectronics would
become the majority stockholder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell.
With the said purchases in 1982, Telectronics requested the corporate secretary of the corporation, Norberto
Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the
corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of
stock in its name and those of its nominees.
Norberto Braga, the corporate secretary and son of the Bragas, refused to register the aforesaid transfer of
shares in the corporate books, asserting that the Bragas claim pre-emptive rights over the 133,000 Abejo shares and
that Virginia Braga never transferred her 63,000 shares to Telectronics but had lost the five stock certificates
representing those shares.
This triggered off the series of intertwined actions between the protagonists, all centered on the question of
jurisdiction over the dispute, which were to culminate in the filing of the two cases at bar.
The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities
and Exchange Commission, while the Abejos claim the contrary. A summary of the actions resorted to by the parties
follows:
A. ABEJOS' ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's nominees, as new majority shareholders, filed SEC Cases Nos.
02379 and 02395 against the Bragas on December 17, 1982 and February 14, 1983, respectively.
2. In SEC Case No. 02379, they prayed for mandamus from the SEC ordering Norberto Braga, as corporate
secretary of Pocket Bell to register in their names the transfer and sale of the aforesaid 196,000 Pocket Bell shares (of
the Abejos 1 and Virginia Braga 2 , cancel the surrendered certificates as duly endorsed and to issue new certificates in
their names.
3. In SEC Case No. 02395, they prayed for injunction and a temporary restraining order that the SEC enjoin the
Bragas from disbursing or disposing funds and assets of Pocket Bell and from performing such other acts pertaining to
the functions of corporate officers.
4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion to Dismiss the mandamus case (SEC Case
No. 02379) contending that the SEC has no jurisdiction over the nature of the action since it does not involve an
intracorporate controversy between stockholders, the principal petitioners therein, Telectronics, not being a stockholder
of record of Pocket Bell.
5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay denied the motion. On January 14, 1983, the
corporate secretary filed a Motion for Reconsideration. On March 21, 1983, SEC Hearing Officer Joaquin Garaygay
issued an order granting Braga's motion for reconsideration and dismissed SEC Case No. 02379.
6. On February 11, 1983, the Bragas filed their Motion to Dismiss the injunction case, SEC Case No. 02395. On
April 8, 1985, the SEC Director, Eugenio Reyes, acting upon the Abejos' ex-parte motion, created a three-man
committee composed of Atty. Emmanuel Sison as Chairman and Attys. Alfredo Oca and Joaquin Garaygay as
members, to hear and decide the two SEC cases (Nos. 02379 and 02395).
7. On April 13, 1983, the SEC three-man committee issued an order reconsidering the aforesaid order of March
21, 1983 of the SEC Hearing Officer Garaygay (dismissing the mandamus petition SEC Case No. 02379) and directing
corporate secretary Norberto Braga to file his answer to the petitioner therein.
B. BRAGAS' ACTION IN SEC
8. On December 12, 1983, the Bragas filed a petition for certiorari, prohibition and mandamus with the SEC en
banc, SEC Case No. EB #049, seeking the dismissal of SEC Cases Nos. 02379 and 02395 for lack of jurisdiction of the
Commission and the setting aside of the various orders issued by the SEC three-man committee in the course of the
proceedings in the two SEC cases.
9. On May 15, 1984, the SEC en banc issued an order dismissing the Bragas' petition in SEC Case No. EB
#049 for lack of merit and at the same time ordering the SEC Hearing Committee to continue with the hearings of the
Abejos and Telectronics SEC Cases Nos. 02379 and 02395, ruling that the "issue is not the ownership of shares but
rather the non-performance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock
of the corporation of which he is secretary."
10. On May 15, 1984 the Bragas filed a motion for reconsideration but the SEC en banc denied the same on
August 9, 1984.
C. BRAGAS' ACTION IN CFI (NOW RTC)
11. On November 25, 1982, following the corporate secretary's refusal to register the transfer of the shares in
question, the Bragas filed a complaint against the Abejos and Telectronics in the Court of First Instance of Pasig,
Branch 21 (now the Regional Trial Court, Branch 160) docketed as Civil Case No. 48746 for: (a) rescission and
annulment of the sale of the shares of stock in Pocket Bell made by the Abejos in favor of Telectronics on the ground
that it violated the Bragas' alleged pre-emptive right over the Abejos' shareholdings and an alleged perfected contract
with the Abejos to sell the same shares in their (Bragas) favor, (1st cause of action); plus damages for bad faith; and (b)
declaration of nullity of any transfer, assignment or endorsement of Virginia Bragas' stock certificates for 63,000 shares
in Pocket Bell to Telectronics for want of consent and consideration, alleging that said stock certificates, which were
intended as security for a loan application and were thus endorsed by her in blank, had been lost (2nd cause of action).
12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint on the ground that it is the SEC that
is vested under PD 902-A with original and exclusive jurisdiction to hear and decide cases involving, among others,
controversies "between and among stockholders" and that the Bragas' suit is such a controversy as the issues involved
therein are the stockholders" alleged pre-emptive rights, the validity of the transfer and endorsement of certificates of
stock, the election of corporate officers and the management and control of the corporation's operations. The dismissal
motion was granted by Presiding Judge G. Pineda on January 14, 1983.
13. On January 24, 1983, the Bragas filed a motion for reconsideration. The Abejos opposed. Meanwhile,
respondent Judge Rafael de la Cruz was appointed presiding judge of the court (renamed Regional Trial Court) in place
of Judge G. Pineda.
14. On February 14, 1983, respondent Judge de la Cruz issued an order rescinding the January 14, 1983 order
and reviving the temporary restraining order previously issued on December 23, 1982 restraining Telectronics' agents
or representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and
from assuming control of the corporation and discharging their functions.
15. On March 2, 1983, the Abejos filed a motion for reconsideration, which motion was duly opposed by the
Bragas. On March 11, 1983, respondent Judge denied the motion for reconsideration.
D. ABEJOS' PETITION AT BAR
16. On March 26, 1983, the Abejos, alleging that the acts of respondent Judge in refusing to dismiss the
complaint despite clear lack of jurisdiction over the action and in refusing to reconsider his erroneous position were
performed without jurisdiction and with grave abuse of discretion, filed their herein Petition for Certiorari and Prohibition
with Preliminary Injunction. They prayed that the challenged orders of respondent Judge dated February 14, 1983 and
March 11, 1983 be set aside for lack of jurisdiction and that he be ordered to permanently desist from further
proceedings in Civil Case No. 48746. Respondent judge desisted from further proceedings in the case, dispensing with
the need of issuing any restraining order.
E. BRAGAS' PETITION AT BAR
17. On August 29, 1984, the Bragas, alleging in turn that the SEC has no jurisdiction over SEC Cases Nos.
02379 and 02395 and that it acted arbitrarily, whimsically and capriciously in dismissing their petition (in SEC Case No.
EB #049) for dismissal of the said cases, filed their herein Petition for Certiorari and Prohibition with Preliminary
Injunction or TRO. The petitioner seeks the reversal and/or setting aside of the SEC Order dated May 15, 1984
dismissing their petition in said SEC Case No. EB #049 and sustaining its jurisdiction over SEC Cases Nos. 02379 and
02395, filed by the Abejos. On September 24, 1984, this Court issued a temporary restraining order to maintain the
status quo and restrained the SEC and/or any of its officers or hearing committees from further proceeding with the
hearings in SEC Cases Nos. 02379 and 02395 and from enforcing any and all orders and or resolutions issued in
connection with the said cases.
The cases, having been given due course, were jointly heard by the Court on March 27, 1985 and the parties
thereafter filed on April 16, 1985 their respective memoranda in amplification of oral argument on the points of law that
were crystallized during the hearing.
The Court rules that the SEC has original and exclusive jurisdiction over the dispute between the principal
stockholders of the corporation Pocket Bell, namely, the Abejos and Telectronics, the purchasers of the 56% majority
stock (supra, at page 2) on the one hand, and the Bragas, erstwhile majority stockholders, on the other, and that the
SEC, through its en banc Resolution of May 15, 1984 correctly ruled in dismissing the Bragas' petition questioning its
jurisdiction, that "the issue is not the ownership of shares but rather the non-performance by the Corporate Secretary of
the ministerial duty of recording transfers of shares of stock of the Corporation of which he is secretary."
1. The SEC ruling upholding its primary and exclusive jurisdiction over the dispute is correctly premised on, and
fully supported by, the applicable provisions of P.D. No. 902-A which reorganized the SEC with additional powers "in
line with the government's policy of encouraging investments, both domestic and foreign, and more active public
participation in the affairs of private corporations and enterprises through which desirable activities may be pursued for
the promotion of economic development; and, to promote a wider and more meaningful equitable distribution of wealth,"
and accordingly provided that:
"SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations,
partnerships or associations, who are the grantees of primary franchise and/or a license or permit issued
by the government to operate in the Philippines; . . .
"SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
a) Devices or schemes employed by or any acts, of the board of directors, business
associations, its officers or partners, amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission.
b) Controversies arising out of intracorporate or partnership relations, between and
among stockholders, members, or associates; between any and/or all of them and the
corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations." 3
Section 6 further grants the SEC "in order to effectively exercise such jurisdiction," the power, inter alia, "to
issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has jurisdiction,
and in which cases the pertinent provisions of the Rules of Court shall apply."
2. Basically and indubitably, the dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen
between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate
secretary, backed up by his parents as erstwhile majority shareholders, to perform his "ministerial duty" to record the
transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor
of Telectronics as the purchaser thereof. Mandamus in the SEC to compel the corporate secretary to register the
transfers and issue new certificates in favor of Telectronics and its nominees was properly resorted to under Rule XXI,
Section 1 of the SEC's New Rules of Procedure, 4 which provides for the filing of such petitions with the SEC. Section 3
of said Rules further authorizes the SEC to "issue orders expediting the proceedings . . . and also [to] grant a
preliminary injunction for the preservation of the rights of the parties pending such proceedings."
The claims of the Bragas, which they assert in their complaint in the Regional Trial Court, praying for rescission
and annulment of the sale made by the Abejos in favor of Telectronics on the ground that they had an alleged perfected
pre-emptive right over the Abejos' shares as well as for annulment of sale to Telectronics of Virginia Braga's shares
covered by street certificates duly endorsed by her in blank, may in no way deprive the SEC of its primary and exclusive
jurisdiction to grant or not the writ of mandamus ordering the registration of the shares so transferred. The Bragas'
contention that the question of ordering the recording of the transfers ultimately hinges on the question of ownership or
right thereto over the shares notwithstanding, the jurisdiction over the dispute is clearly vested in the SEC.
3. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular
court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged pre-emptive
rights in the case of the Abejos' shares and alleged loss of the certificates and lack of consent and consideration in the
case of Virginia Braga's shares. Such dispute clearly involves controversies "between and among stockholders," as to
the Abejos' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia
Braga's shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling
shareholders of the corporation, with the right to elect the corporate officers and the management and control of its
operations. Such a dispute and case clearly fall within the original and exclusive jurisdiction of the SEC to decide, under
Section 5 of P.D. 902-A, above-quoted. The restraining order issued by the Regional Trial Court restraining Telectronics
agents and representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket
Bell and from assuming control of the corporation and discharging their functions patently encroached upon the SEC's
exclusive jurisdiction over such specialized corporate controversies calling for its special competence. As stressed by
the Solicitor General on behalf of the SEC, the Court has held that "Nowhere does the law [PD 902-A] empower any
Court of First Instance [now Regional Trial Court] to interfere with the orders of the Commission," 5 and consequently
"any ruling by the trial court on the issue of ownership of the shares of stock is not binding on the Commission" 6 for
want of jurisdiction.
4. The dispute therefore clearly falls within the general classification of cases within the SEC's original and
exclusive jurisdiction to hear and decide, under the aforequoted governing section 5 of the law. Insofar as the Bragas
and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the transfer of the 56% majority
shares to Telectronics may be deemed a device or scheme amounting to fraud and misrepresentation employed by
them to keep themselves in control of the corporation to the detriment of Telectronics (as buyer and substantial investor
in the corporate stock) and the Abejos (as substantial stockholders-sellers), the case falls under paragraph (a). The
dispute is likewise an intra-corporate controversy between and among the majority and minority stockholders as to the
transfer and disposition of the controlling shares of the corporation, falling under paragraph (b). As stressed by the
Court in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., 7 "Considering the announced policy of PD 902-A,
the expanded jurisdiction of the respondent Securities and Exchange Commission under said decree extends
exclusively to matters arising from contracts involving investments in private corporations, partnerships and
associations." The dispute also concerns the fundamental issue of whether the Bragas or Telectronics have the right to
elect the corporate directors and officers and manage its business and operations, which falls under paragraph (c).
5. Most of the cases that have come to this Court involve those under paragraph (b), i e. whether the
controversy is an intra-corporate one, arising "between and among stockholders" or "between any or all of them and the
corporation." The parties have focused their arguments on this question. The Bragas' contention in his field must
likewise fail. In Philex Mining Corp. v. Reyes, 8 the Court spelled out that "an intra-corporate controversy is one which
arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever.
The provision is broad and covers all kinds of controversies between stockholders and corporations. The issue of
whether or not a corporation is bound to replace a stockholder's lost certificate of stock is a matter purely between a
stockholder and the corporation. It is a typical intra-corporate dispute. The question of damages raised is merely
incidental to that main issue." The Court rejected the stockholders' theory of excluding his complaint (for replacement of
a lost stock [dividend] certificate which he claimed to have never received) from the classification of intra-corporate
controversies as one that "does not square with the intent of the law, which is to segregate from the general jurisdiction
of regular Courts controversies involving corporations and their stockholders and to bring them to the SEC for exclusive
resolution, in much the same way that labor disputes are now brought to the Ministry of Labor and Employment (MOLE)
and the National Labor Relations Commission (NLRC), and not to the Courts."
(a) The Bragas contend that Telectronics, as buyer-transferee of the 56% majority shares is not a
registered stockholder, because they, through their son the corporate secretary, appear to have refused
to perform "the ministerial duty of recording transfers of shares of stock of the corporation of which he is
the secretary," and that the dispute is therefore, not an intracorporate one. This contention begs the
question which must properly be resolved by the SEC, but which they would prevent by their own act,
through their son, of blocking the due recording of the transfer and cannot be sanctioned. It can be seen
from their very complaint in the regular courts that they with their two sons constituting the plaintiffs are all
stockholders while the defendants are the Abejos who are also stockholders whose sale of the shares to
Telectronics they would annul.
(b) There can be no question that the dispute between the Abejos and the Bragas as to the sale and
transfer of the former's shares to Telectronics for P5 million is an intracorporate one under section 5 (b),
prescinding from the applicability of section 5 (a) and (c), (supra, par. 4) It is the SEC which must resolve
the Bragas' claim in their own complaint in the court case filed by them of an alleged pre-emptive right to
buy the Abejos' shares by virtue of "on-going negotiations," which they may submit as their defense to
the mandamus petition to register the sale of the shares to Telectronics. But asserting such pre-emptive
rights and asking that the same be enforced is a far cry from the Bragas' claim that "the case relates to
questions of ownership" over the shares in question. 9 (Not to mention, as pointed out by the Abejos, that
the corporation is not a close corporation, and no restriction over the free transferability of the shares
appears in the Articles of Incorporation, as well as in the by-laws 10 and the certificates of stock
themselves, as required by law for the enforcement of such restriction. See Go Soc & Sons, etc. v. IAC,
G.R. No. 72342, Resolution of February 19, 1987.)
(c) The dispute between the Bragas and Telectronics as to the sale and transfer for P1,674,450.00 of
Virginia Braga's 63.000 shares covered by Street certificates duly endorsed in blank by her is within the
special competence and jurisdiction of the SEC, dealing as it does with the free transferability of
corporate shares, particularly street certificates, 11 as guaranteed by the Corporation Code and its
proclaimed policy of encouraging foreign and domestic investments in Philippine private corporations and
more active public participation therein for the promotion of economic development. Here again, Virginia
Braga's claim of loss of her street certificates or theft thereof (denounced by Telectronics as "perjurious"
12 ) must be pleaded by her as a defense against Telectronics' petition for mandamus and recognition
now as the controlling stockholder of the corporation in the light of the joint affidavit of General Cerefino
S. Carreon of the National Telecommunications Commission and private respondent Jose Luis Santiago
of Telectronics narrating the facts and circumstances of how the former sold and delivered to Telectronics
on behalf of his compadres, the Bragas, Virginia Braga's street certificates for 63,000 shares equivalent
to 18% of the corporation's outstanding stock and received the cash price thereof. 13 But as to the sale
and transfer of the Abejos' shares, the Bragas cannot oust the SEC of its original and exclusive
jurisdiction to hear and decide the case, by blocking through the corporate secretary, their son, the due
recording of the transfer and sale of the shares in question and claiming that Telectronics is not a
stockholder of the corporation — which is the very issue that the SEC is called upon to resolve. As the
SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in
order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his
rights as such stockholder." 14 This is because the SEC by express mandate has "absolute jurisdiction,
supervision and control over all corporations" and is called upon to enforce the provisions of the
Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in
his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in
securing the certificates of stock representing the investment made by the buyer must be expeditiously
dealt with through administrative mandamus proceedings with the SEC, rather than through the usual
tedious regular court procedure. Furthermore, as stated in the SEC order of April 13, 1983, notice given
to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to
registration: "Whether the refusal of the (corporation) to effect the same is valid or not is still subject to
the outcome of the hearing on the merits of the case." 15
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and
boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public
utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management
controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly
state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction ..the
courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative
tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to determine technical and intricate matters of fact, and a
uniformity of ruling is essential to comply with the purposes of the regulatory statute administered." 16
In this era of clogged court dockets, the need for specialized administrative boards or commissions with the
special knowledge, experience and capability to hear and determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh
indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court,
the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that
unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]'" 17 The Court in
the earlier case of Ebon vs. De Guzman, 18 noted that the lawmaking authority, in restoring to the labor arbiters and the
NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting
their jurisdiction with the regular courts, "evidently, . . . had second thoughts about depriving the Labor Arbiters and the
NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the
cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim."
7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC with the Rule
making power in the discharge of its task of implementing the provisions of the Code and particularly charges it with the
duty of preventing fraud and abuses on the part of controlling stockholders, directors and officers, as follows:
"SEC. 143. Rule-making power of the Securities and Exchange Commission. — The Securities and
Exchange Commission shall have the power and authority to implement the provisions of this Code, and
to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members,
directors, trustees or officers." (Emphasis supplied)
The dispute between the contending parties for control of the corporation manifestly falls within the primary and
exclusive jurisdiction of the SEC in whom the law has reserved such jurisdiction as an administrative agency of special
competence to deal promptly and expeditiously therewith.
As the Court stressed in Union Glass & Container Corp. v. SEC, 19 "This grant of jurisdiction [in Section 5]
must be viewed in the light of the nature and functions of the SEC under the law. Section 3 of PD No. 902-A confers
upon the latter 'absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who
are grantees of primary franchise and/or license or permit issued by the government to operate in the Philippines . . ..'
The principal function of the SEC is the supervision and control over corporations, partnerships and associations with
the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the
promotion of economic development.
"It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly
specified and delimited its jurisdiction to matters intrinsically connected with the regulation of
corporations, partnerships and associations and those dealing with the internal affairs of such
corporations, partnerships or associations.
"Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to
any of the following relationships: [a] between the corporation, partnership or association and the public;
[b] between the corporation, partnership or association and its stockholders, partners, members, or
officers; [c] between the corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; and [d] among the stockholders, partners or associates
themselves." 20

Parenthetically, the cited case of Union Glass illustrates by way of contrast what disputes do not fall within the
special jurisdiction of the SEC. In this case, the SEC had properly assumed jurisdiction over the dissenting
stockholders' complaint against the corporation Pioneer Glass questioning its dacion en pago of its glass plant and all
its assets in favor of the DBP which was clearly an intra-corporate controversy dealing with its internal affairs. But the
Court held that the SEC had no jurisdiction over petitioner Union Glass Corp., impleaded as third party purchaser of the
plant from DBP in the action to annul the dacion en pago. The Court held that such action for recovery of the glass plant
could be brought by the dissenting stockholder to the regular courts only if and when the SEC rendered final judgment
annulling the dacion en pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith.
Similarly, in the DMRC case, therein petitioner's complaint for collection of the amounts due to it as payment of rentals
for the lease of its heavy equipment in the form mainly of cash and part in shares of stock of the debtor-defendant
corporation was held to be not covered by the SEC's exclusive jurisdiction over intracorporate disputes, since "to pass
upon a money claim under a lease contract would be beyond the competence of the Securities and Exchange
Commission and to separate the claim for money from the claim for shares of stock would be splitting a single cause of
action resulting in a multiplicity of suits." 21 Such an action for collection of a debt does not involve enforcement of
rights and obligations under the Corporation Code nor the internal or intracorporate affairs of the debtor corporation. But
in all disputes affecting and dealing with the interests of the corporation and its stockholders, following the trend and
clear legislative intent of entrusting all disputes of a specialized nature to administrative agencies possessing the
requisite competence, special knowledge, experience and services and facilities to expeditiously resolve them and
determine the essential facts including technical and intricate matters, as in labor and public utilities rates disputes, the
SEC has been given "the original and exclusive jurisdiction to hear and decide" them (under Section 5 of P.D. 902-A) "in
addition to [its] regulatory and adjudicative functions" (under Section 3, vesting in it "absolute jurisdiction, supervision
and control over all corporations" and the Ruler-making power granted it in Section 143 of the Corporation Code,
supra). As stressed by the Court in the Philex case, supra, "(T)here is no distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations."
It only remains now to deal with the Order dated April 15, 1983 (Annex H, Petition) 22 of the SEC's three-
member Hearing Committee granting Telectronics' motion for creation of a receivership or management committee with
the ample powers therein enumerated for the preservation pendente lite of the corporation's assets and in discharge of
its "power and duty to preserve the rights of the parties, the stockholders, the public availing of the corporation's
services and the rights of creditors," as well as 'for reasons of equity and justice .. (and) to prevent possible paralization
of corporate business." The said Order has not been implemented notwithstanding its having been upheld per the SEC
en banc's Order of May 15, 1984 (Annex "V", Petition) dismissing for lack of merit the petition for certiorari, prohibition
and mandamus with prayer for restraining order or injunction filed by the Bragas seeking the disbandment of the
Hearing Committee and the setting aside of its Orders, and its Resolution of August 9, 1984, denying reconsideration
(Annex "X", Petition), due to the Bragas' filing of the petition at bar.
Prescinding from the great concern of damage and prejudice expressed by Telectronics due to the Bragas
having remained in control of the corporation and having allegedly committed acts of gross mismanagement and
misapplication of funds, the Court finds that under the facts and circumstances of record, it is but fair and just that the
SEC's order creating a receivership committee be implemented forthwith, in accordance with its terms, as follows:
"The three-man receivership committee shall be composed of a representative from the commission, in
the person of the Director, Examiners and Appraisers Department or his designated representative, and a
representative from the petitioners and a representative of the respondent.
"The petitioners and respondent are therefore directed to submit to the Commission the name of their
designated representative within three (3) days from receipt of this order. The Commission shall appoint
the other representatives if either or both parties fail to comply with the requirement within the stated
time."
ACCORDINGLY, judgment is hereby rendered:
(a) Granting the petition in G.R. No. 63558, annulling the challenged Orders of respondent Judge dated
February 14, 1983 and March 11, 1983 (Annexes "L" and "P" of the Abejos' petition) and prohibiting
respondent Judge from further proceeding in Civil Case No. 48746 filed in his Court other than to dismiss
the same for lack or jurisdiction over the subject-matter;
(b) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary restraining order issued on
September 24, 1984, effective immediately upon promulgation hereof;
(c) Directing the SEC through its Hearing Committee to proceed immediately with hearing and resolving
the pending mandamus petition for recording in the corporate books the transfer to Telectronics and its
nominees of the majority (56%) shares of stock of the corporation Pocket Bell pertaining to the Abejos
and Virginia Braga and all related issues, taking into consideration, without need of resubmittal to it, the
pleadings, annexes and exhibits filed by the contending parties in the cases at bar; and
(d) Likewise directing the SEC through its Hearing Committee to proceed immediately with the
implementation of its receivership or management committee Order of April 15, 1983 in SEC Case No.
2379 and for the purpose, the contending parties are ordered to submit to said Hearing Committee the
name of their designated representatives in the receivership/management committee within three (3)
days from receipt of this decision, on pain of forfeiture of such right in case of failure to comply herewith,
as provided in the said Order; and ordering the Bragas to perform only caretaker acts in the corporation
pending the organization of such receivership/management committee and assumption of its functions.
This decision shall be immediately executory upon its promulgation.
SO ORDERED.
||| (Spouses Abejo v. De la Cruz, G.R. No. L-63558, L-68450-51, [May 19, 1987], 233 PHIL 668-690)

[G.R. No. 87135. May 22, 1992.]

ALMA MAGALAD, petitioner, vs. PREMIERE FINANCING CORP., respondents.

SYLLABUS
1. COMMERCIAL LAW; SECURITIES AND EXCHANGE COMMISSION; HAS JURISDICTION OVER CASES INVOLVING
FRAUD COMMITTED BY CORPORATE OFFICIAL DETRIMENTAL TO THE INTEREST OF THE PUBLIC; CASE AT BAR.
— Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by
Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit
involves collection of sums of money paid to said corporation, the recovery of which would originally fall within the
jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a
category of relationship within the SEC jurisdiction. In this case, the recitals of the complaint sufficiently allege that devices
or schemes amounting to fraud and misrepresentation detrimental to the interest of the public have been resorted to by
Premiere Corporation. It can not but be conceded, therefore, that the SEC may exercise its adjudicative powers pursuant to
Sec. 5(a) of Pres. Decree No. 902-A (Supra).
2. ID.; ID.; CONTROVERSIES WITHIN THE EXCLUSIVE JURISDICTION THEREOF; RULE. — In order that the SEC can
take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation,
partnership or association and the public; (b) between the corporation, partnership or association and its stockholders,
partners, members or officers; (c) between the corporation, partnership or association and the state so far as its franchise,
permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves (Union Glass
& Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).
3. ID.; ID.; HAS JURISDICTION OVER CORPORATION UNDER THE MANAGEMENT OF A REHABILITATION
RECEIVER. — Bolstering the jurisdiction of the SEC in this case is the fact that said agency had already appointed a
Rehabilitation Receiver for Premiere and has directed all proceedings or claims against it be suspended. This, pursuant to
Sec. 6(c) of pres. Decree No. 902-A providing that "upon appointment of . . . rehabilitation receiver . . . all actions for claims
against corporations . . . under receivership pending before any court, tribunal, board or body shall be suspended
accordingly." By doing so, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving: "a)
petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where
the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility
of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities but is under the management of a Rehabilitation Receiver or Management of a
Rehabilitation Receiver or Management Committee created pursuant to this Decree." (Section 5(d) of Pres. Decree No.
902-A as added by Pres. Decree 1758).

DECISION

PARAS, J p:

This is an appeal originally filed with the Court of Appeals but certified to this court for disposition since it involves purely
questions of law from the decision of the Regional Trial Court (RTC), Branch LXXXV, Quezon City, dated May 22, 1984, in
Civil Case No. Q-40392, ordering the defendant-appellant Premiere Financing Corporation (Premiere for short) to pay to the
plaintiff-appellee Alma Magalad (Magalad for short) the sum of: (a) P50,000.00, the principal obligation, plus interest at the
legal rate from September 12, 1983, until the full amount is paid; (b) P10,000.00, both for moral and exemplary damages;
(c) P5,000.00, for and as attorney's fees and (d) the costs of suit.
The antecedent facts of the case are as follows:
Premiere is a financing company engaged in soliciting and accepting money market placements or deposits (Original
Record, p. 29). LexLib
On September 12, 1983 with expired permit to issue commercial papers (Ibid., p. 8) and with intention not to pay or defraud
its creditors, Premiere induced and misled Magalad into making a money market placement of P50,000.00 at 22% interest
per annum for which it issued a receipt (Ibid., Exh. "B", p. 8). Aside from the receipt, Premier likewise issued two (2) post-
dated checks in the total sum of P51,079.00 (Ibid., Exh. "C". p. 9) and assigned to Magalad its receivable from a certain
David Saman for the same amount (Ibid., Exh. "C", p. 10).
When the said checks were presented for payment on their due dates, the drawee bank dishonored the checks for lack of
sufficient funds to cover the amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12). Despite demands by Magalad for the replacement
of said checks with cash, Premiere, for no valid reason, failed and refused to honor such demands and due to fraudulent
acts of Premiere, Magalad suffered sleepless nights, mental anguish, fright, serious anxiety, considering the fact that the
money she invested is blood money and is the only source of support for her family (Ibid., p. 4).
Magalad in order to seek redress and retrieve her blood money, availed of the service of counsel for which she agreed to
pay twenty percent (20%) of the amount due as and for attorney's fees (Ibid.).
On January 10, 1984, Magalad filed a complaint for damages with prayer for writ of preliminary attachment with the RTC,
Branch LXXXV, Quezon City, docketed as Civil Case No. Q-40392 against herein Premiere (Ibid., pp. 3-6).
Premiere having failed to file an answer and acting on Magalad's motion, the lower court declared Premiere in default by
virtue of an order dated April 5, 1984 allowing Magalad to present evidence ex-parte (Ibid., pp. 21; 22). Cdpr
On May 22, 1984 the lower court rendered a default judgment against Premiere, the dispositive portion of which reads:
"From the foregoing evidence, the court finds that plaintiff has fully established her claim that defendant
had indeed acted fraudulently in incurring the obligation and considering that no evidence has been
adduced by the defendant to contradict the same, judgment is hereby rendered ordering the defendant to
pay plaintiff as follows:
"(a) P50,000.00, the principal obligation, plus interest at the legal rate from September
12, 1983 until the full amount is paid;"
"(b) P10,000.00 both for moral and exemplary damages;"
"(c) P5,000.00 for and as attorney's fees; and"
"(d) the costs of suit.
"SO ORDERED." (Ibid., p. 30)
Premiere filed a motion for reconsideration of the foregoing decision, based principally on a question of law alleging that the
Securities and Exchange Commission (SEC) has exclusive and original jurisdiction over a corporation under a state of
suspension of payments (Ibid., pp. 32-41).
Magalad filed an opposition to the motion for reconsideration on January 8, 1985 alleging among others that the regular
court has jurisdiction over the case to the exclusion of the SEC (Ibid., pp. 51-53).
On May 28, 1986 the lower court issued an order denying the motion for reconsideration (Ibid., p. 61).
On June 11, 1986 Premiere filed his notice of appeal which led to the issuance of the order of the lower court dated July 29,
1986 elevating the case to the Court of Appeals (CA) (Ibid., pp. 62; 63).
The Court of Appeals in its resolution dated September 8, 1987 dismissed the case for failure of Premiere to file its brief
despite the ninety-day extension granted to it, which expired on June 10, 1987 (Rollo, p. 16).
An omnibus motion for reconsideration and admission of late filing of Premiere's brief was filed on September 22, 1987
(Rollo, pp. 17-19; 32).
On September 30, 1987 the Court of Appeals issued a resolution which reconsidered its previous resolution dated
September 5, 1987 and admitted the Premiere's brief (Rollo, p. 26). prcd
On January 31, 1989 the Court of Appeals issued a resolution certifying the instant case to this Court on the ground that the
case involves a question of law, the dispositive part of which stating:
"ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the Judiciary Act of 1948, Sec. 17, par. 4(3)
(4), the appeal in this case is hereby certified to the Supreme Court on the ground that the only issue
raised concerns the jurisdiction of the trial court and only a question of law." (Rollo, p. 33)
Hence, this appeal.
The pivotal issue in this case is whether or not the court a quo had jurisdiction to try the instant case.
At the very core of this appeal assailing the aforesaid pronouncement of the lower court, and around which revolve the
arguments of the parties, is the applicability of Presidential Decree No. 902-A (Reorganization of the SEC with Additional
Powers), as amended by Presidential Decrees Nos. 1653, 1758 and 1799. Magalad submits that the legal suit which she
has brought against Premiere is an ordinary action for damages with the preliminary attachment cognizable solely by the
RTC. Premiere, on the other hand, espouses the original and exclusive jurisdiction of the Securities and Exchange
Commission.
Presidential Decree No. 902-A, Section 3, provides:
"SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or permit
issued by the government to operate in the Philippines; and in the exercise of its authority, it shall have
the power to enlist the aid and support of and to deputize any and all enforcement agencies of the
government, civil or military as well as any private institution, corporation, firm, association or person."
(As amended by Presidential Decree No. 1758)
Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with Sec. 5 of the same law, providing:
"SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:

'a) Devises or schemes employed by or any acts of the Board of Directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental to
the public and/or to the stockholders, partners, members of associations or organizations
registered with the Commission.'"(Emphasis supplied)
Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by
Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit
involves collection of sums of money paid to said corporation, the recovery of which would originally fall within the
jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a
category of relationship within the SEC jurisdiction.
Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following
relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation,
partnership or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or
association and the state so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders,
partners or associates themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz,
149 SCRA 654, 1987). prLL
In this case, the recitals of the complaint sufficiently allege that devices or schemes amounting to fraud and
misrepresentation detrimental to the interest of the public have been resorted to by Premiere Corporation. It can not but be
conceded therefore, that the SEC may exercise its adjudicative powers pursuant to Sec. 5 (a) of Pres. Decree No. 902-A
(Supra).
The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its
original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the interest of
the investing public. That Magalad's money placements were in the nature of investments in Premiere can not be gainsaid.
Magalad had reasonably expected to receive returns from moneys she had paid to Premiere. Unfortunately, however, she
was the victim of alleged fraud and misrepresentation.
Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 SCRA 293) and Union Glass & Container Corp. v. SEC
(126 SCRA 31), where the jurisdiction of the ordinary Courts was upheld, is misplaced for, as explicitly stated in those
cases, nowhere in the complaints therein is found any averment of fraud of misrepresentation committed by the respective
corporations involved. The causes of action, therefore, were nothing more than simple money claims.
Further bolstering the jurisdiction of the SEC in this case is the fact that said agency already appointed a Rehabilitation
Receiver for Premiere and has directed all proceedings or claims against it be suspended. This, pursuant to Sec. 6(c) of
Pres. Decree No. 902-A providing that "upon appointment of a . . . rehabilitation receiver . . . all actions for claims against
corporations . . . under receivership pending before any court, tribunal, board or body shall be suspended accordingly."
By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving:
"a) Petitions of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership of association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in
cases where the corporation, partnership or association has no sufficient assets to cover its liabilities but
is under the management of a Rehabilitation Receiver or Management of a Rehabilitation Receiver or
Management Committee created pursuant to this Decree." (Section 5(d) of Pres. Decree No. 902-A as
added by Pres. Decree 1758).
In fine, the adjudicative powers of the SEC being clearly defined by law, its jurisdiction over this case has to be upheld.
PREMISES CONSIDERED, the instant appeal is GRANTED, and the order of the Presiding Judge of the Regional Trial
court, Quezon City, Branch LXXXV dated May 22, 1984, in Civil Case No. Q-40392 is REVERSED and SET ASIDE, without
prejudice to the filing by Alma Magalad of the appropriate complaint against Premiere Financing Corporation with the
Securities and Exchange Commission.
SO ORDERED.
||| (Magalad v. Premiere Financing Corp., G.R. No. 87135, [May 22, 1992], 284-A PHIL 728-735)

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. THE CLUB FILIPINO, INC. DE CEBU,
respondent.
SYLLABUS

1. TAXATION; PERCENTAGE TAX; BAR AND RESTAURANT; WHEN OPERATOR NOT ENGAGED IN
BUSINESS. — The liability for fixed and percentage taxes as provided by Section 182, 183 and 191 of the Tax Code
does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the
operator thereof must be engaged in the business as a barkeeper and restauranteur.
2. ID.; WORDS AND PHRASES; "BUSINESS" MEANING OF. — The plain and ordinary meaning of a business
is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when
used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or
livelihood.
3. ID.; CLUB FILIPINO INC. DE CEBU; NOT ENGAGED IN BAR AND RESTAURANT. — The Club Filipino Inc.
de Cebu was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and
entertainment of its stockholders and members; that upon its dissolution, its remaining assets after paying debts shall
be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership
fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no
cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was
used to defray its overall overhead expenses and to improve its golf course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the business of an operator of bar and restaurant.

DECISION

PAREDES, J p:

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of
Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu," the sum of P12,068.84 as
fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation
organized under the laws of the Philippines, with an original authorized capital stock of P22,000.00, which was
subsequently increased to P200,000.00, among others, to "proporcionar, operar, y mantener un campo de golf, tenis,
gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos
por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera
para el recreo y entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club
Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution,
although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a
charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government),
and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their
guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is
operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its
overhead expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising from the re-valuation
of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash
dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid
percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9 (a) and B-7 licenses. In a
letter dated December 22, 1952, the Collector of Internal Revenue assessed against and demanded from the Club, the
following sums:—

As percentage tax on its gross receipts during the

taxyears 1946 to 1951 P9,599.07


Surcharge therein 2,399.77

As fixed tax for the years 1946 to 1952 70.00

Compromise penalty 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the
Club filed the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of P12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax
Code, under which the assessment was made, in connection with the operation of its bar
and restaurant, during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states "Unless otherwise provided, every person engaging in a business on which
the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof
in which such person shall engage in said business." Section 183 provides in general that "the percentage taxes on
business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted
during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants,
refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bars and cafes where
wines or liquors are served, five per centum of their gross receipts . . ." It has been held that the liability for fixed and
percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar
and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and
restauranteur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose
or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and
ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. vs. Manila Lodge No. 761 of the
BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word
"business"; Coll. of Int. Rev. vs. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the
facts of which are similar to ones at bar; Manila Polo Club v. B.L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution,
its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated
mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its
members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was
derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-
course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar
and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not
necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts' of the Club to
foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and
cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes
some profit, does not make it a profit-making club. As has been remarked, a club should always strive, whenever
possible, to have a surplus (Jesus Sacred Heart College vs. Collector of Int. Revenue, G.R. No. L-6807, May 24, 1954;
Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23 1956).
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock
corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does
not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant.
What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its
articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the
commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the
method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the
business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock
divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus
profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, while the respondent Club's, capital
stock is divided into shares, nowhere in its articles of incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation,
within the contemplation of the corporation law.
"A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, non-stock
organizations, unless the intent to the contrary is manifest and patent" (Collector vs. BPOE Elks Club, et al., supra),
which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar
and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty,
much less of a compromise penalty.
WHEREFORE, the decision appealed from, is affirmed, without costs.
||| (Collector of Internal Revenue v. Club Filipino, Inc., de Cebu, G.R. No. L-12719, [May 31, 1962], 115 PHIL 310-315)

[G.R. No. 91889. August 27, 1993.]

MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO REDOVAN,


petitioners, vs. THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES,
JR., MARIA THERESA V. VELOSO and CASTRENSE C. VELOSO, respondents.

Virgilio E. Dulay for petitioners.


Torres, Tobias, Azura & Jocson for private respondents.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION; CLOSE CORPORATION; BOARD MEETING WITHOUT PROPER NOTICE;
CORPORATE ACTION; DEEMED RATIFIED BY ABSENT DIRECTOR UNLESS PROMPTLY OBJECTED. — Petitioner
corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the
subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken
at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the
latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which,
in this case, petitioner Virgilio Dulay failed to do. Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed
without the knowledge and consent of the other members of the board of directors cannot be sustained. The sale of the
subject property to private respondents by Manuel Dulay is valid and binding.
2. ID.; ID.; PIERCING THE VEIL OF CORPORATE ENTITY; WHEN RESORTED TO. — Although a corporation is an entity
which has a personality distinct and separate from its individual stockholders or members, the veil of corporate fiction may
be pierced when it is used to defeat public convenience, justify wrong, protect fraud or defend crime. The privilege of being
treated as an entity distinct and separate from its stockholders or members is therefore confined to its legitimate uses and is
subject to certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used
merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person. The
Supreme Court had repeatedly disregarded the separate personality of the corporation where the corporate entity was used
to annul a valid contract executed by one of its members.
3. REMEDIAL LAW; EVIDENCE; FINDINGS OF TRIAL COURT, RESPECTED. — The appellate courts will not disturb the
findings of the trial judge unless he has plainly overlooked certain facts of substance and value that, if considered, might
affect the result of the case, which is not present in the instant case.
4. CIVIL LAW; SPECIAL CONTRACTS; SALES; OBLIGATIONS OF THE VENDOR; DELIVERY OF THE THING SOLD;
WHEN SALE EXECUTED IN PUBLIC INSTRUMENT. — Paragraph 1, Article 1498 of the New Civil Code provides: "When
the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is
the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred." Under the
aforementioned article, the mere execution of the deed of sale in a public document is equivalent to the delivery of the
property. Likewise, this Court had held that: "It is settled that the buyer in a foreclosure sale becomes the absolute owner of
the property purchased if it is not redeemed during the period of one year after the registration of the sale. As such, he is
entitled to the possession of the said property and can demand it at any time following the consolidation of ownership in his
name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of the land
even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3133 as
amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then
becomes an absolute right of the purchaser as confirmed owner." Therefore, prior physical delivery or possession is not
legally required since the execution of the Deed of Sale is deemed equivalent to delivery.
5. REMEDIAL LAW; CIVIL PROCEDURE; MOTION FOR RECONSIDERATION; DENIAL DESPITE FAILURE TO SUBMIT
COMMENT THEREOF, PROPER. — The respondent appellate court did not err in denying petitioner's motion for
reconsideration despite the fact that private respondents failed to submit their comment to said motion as required by the
respondent appellate court. There is nothing in the Revised Rules of Court which prohibits the respondent appellate court
from resolving petitioners' motion for reconsideration without the comment of the private respondent which was required
merely to aid the court in the disposition of the motion. The courts are as much interested as the parties in the early
disposition of cases before them. To require otherwise would unnecessarily clog the courts' dockets.

DECISION

NOCON, J p:

This is a petition for review on certiorari to annul and set aside the decision 1 of the Court of Appeals affirming the decision
2 of the Regional Trial Court of Pasay, Branch 114 in Civil Cases Nos. 8198-P, 8278-P and 2880-P, the dispositive portion
of which reads, as follows:
"WHEREFORE, in view of all the foregoing considerations, this Court hereby renders judgment, as
follows:
"In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay for
annulment or declaration of nullity of the decision of the Metropolitan Trial Court, Branch 46, Pasay City,
in its Civil Case No. 38-81 entitled `Edgardo D. Pabalan, et al., vs. Spouses Florentino Manalastas, et al.,
' is dismissed for lack of merit;
"In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay Enterprises, Inc. for cancellation of title
of Manuel A. Torres, Jr. (TCT No. 24799 of the Register of Deeds of Pasay City) and reconveyance, is
dismissed for lack of merit; and,
"In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay are
ordered to surrender and deliver possession of the parcel of land, together with all the improvements
thereon, described in Transfer Certificate of Title No. 24799 of the Register of Deeds of Pasay City, in
favor of therein plaintiffs Manuel A. Torres, Jr. as owner and Edgardo D. Pabalan as real estate
administrator of said Manuel A. Torres, Jr.; to account for and return to said plaintiffs the rentals from
dwelling unit No. 8-A of the apartment building (Dulay Apartment) from June 1980 up to the present; to
indemnify plaintiffs, jointly and severally, expenses of litigation in the amount of P4,000.00 and attorney's
fees in the sum of P6,000.00, for all the three (3) cases. Co-defendant Nepomuceno Redovan is ordered
to pay the current and subsequent rentals on the premises leased by him to plaintiffs.
"The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay Enterprises, Inc. and N. Redovan,
is dismissed for lack of merit. With costs against the three (3) aforenamed defendants." 3
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc., a domestic corporation with the following as members of its Board of Directors:
Manuel R. Dulay with 19,960 shares and designated as president, treasurer and general manager; Atty. Virgilio E. Dulay
with 10 shares and designated as vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and
Atty. Plaridel C. Jose with 10 shares and designated as secretary, owned a property covered by TCT No. 17880 4 and
known as Dulay Apartment consisting of sixteen (16) apartment units on a six hundred eighty-nine (689) square meter lot,
more or less, located at Seventh Street (now Buendia Extension) and F.B. Harrison Street, Pasay City. LLpr
Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its hotel project,
Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to
continue the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the
subject property since 1973 while at the same time managing the Dulay Apartment as his shareholdings in the corporation
was subsequently increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board Resolution No. 18 6 of petitioner corporation sold the subject
property to private respondents spouses Maria Theresa and Castrense Veloso in the amount of P300,000.00 as evidenced
by the Deed of Absolute Sale. 7 Thereafter, TCT No. 17880 was cancelled and TCT No. 23225 was issued to private
respondent Maria Theresa Veloso. 8 Subsequently, Manuel Dulay and private respondents spouses Veloso executed a
Memorandum to the Deed of Absolute Sale of December 23, 1976 9 dated December 9, 1977 giving Manuel Dulay within
two (2) years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was, however, not
annotated either in TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject
property to private respondent Manuel A. Torres for a loan of P250,000.00 which was duly annotated as Entry No. 68139 in
TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the subject property was sold on April
5, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure sale as evidenced by the
Certificate of Sheriff's Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem 12 in
favor of Manuel Dulay assigning her right to repurchase the subject property from private respondent Torres as a result of
the extrajudicial sale held on April 25, 1978.

As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject property within
the one year statutory period for redemption, private respondent Torres filed an Affidavit of Consolidation of Ownership 13
with the Registry of Deeds of Pasay City and TCT No. 24799 14 was subsequently issued to private respondent Manuel
Torres on April 23, 1979.
On October 1, 1979, private respondent Torres filed a petition for the issuance of a writ of possession against private
respondents spouses Veloso and Manuel Dulay in LRC Case No. 1742-P. However, when petitioner Virgilio Dulay
appeared in court to intervene in said case alleging that Manuel Dulay was never authorized by the petitioner corporation to
sell or mortgage the subject property, the trial court ordered private respondent Torres to implead petitioner corporation as
an indispensable party but the latter moved for the dismissal of his petition which was granted in an Order dated April 8,
1980. cdphil
On June 20, 1980, private respondent Torres and Edgardo Pabalan, real estate administrator of Torres, filed an action
against petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a tenant of Dulay Apartment Unit No. 8-A for the
recovery of possession, sum of money and damages with preliminary injunction in Civil Case No. 8198-P with the then
Court of First Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against private respondents spouses Veloso and Torres for the
cancellation of the Certificate of Sheriff's Sale and TCT No. 24799 in Civil Case No. 8278-P with the then Court of First
Instance of Rizal.
On January 29, 1981, private respondents Pabalan and Torres filed an action against spouses Florentino and Elvira
Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with petitioner corporation as intervenor for ejectment in Civil Case
No. 38-81 with the Metropolitan Trial Court of Pasay City which rendered a decision on April 25, 1985, the dispositive
portion of which reads, as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff (herein private
respondents) and against the defendants:
"1. Ordering the defendants and all persons claiming possession under them to vacate the
premises;
"2. Ordering the defendants to pay the rents in the sum of P500.00 a month from May,
1979 until they shall have vacated the premises with interest at the legal rate;
"3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00 and P1,000.00
as other expenses of litigation and for them to pay the costs of the suit." 15
Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed an action against the presiding judge of the
Metropolitan Trial Court of Pasay City, private respondents Pabalan and Torres for the annulment of said decision with the
Regional Trial Court of Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and the trial court rendered a decision in favor of private respondents.
Not satisfied with said decision, petitioners appealed to the Court of Appeals which rendered a decision on October 23,
1989, the dispositive portion of which reads, as follows:
"PREMISES CONSIDERED, the decision being appealed should be as it is hereby
AFFIRMED in full." 16
On November 8, 1989, petitioners filed a Motion for Reconsideration which was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent Torres died on April 3, 1991 as shown in his death certificate 17
and named Torres-Pabalan Realty & Development Corporation as his heir in his holographic will 18 dated October 31,
1986.
Petitioners contend that the respondent court had acted with grave abuse of discretion when it applied the doctrine of
piercing the veil of corporate entity in the instant case considering that the sale of the subject property between private
respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner corporation as Board Resolution No. 18
which authorized the sale of the subject property was resolved without the approval of all the members of the board of
directors and said Board Resolution was prepared by a person not designated by the corporation to be its secretary. LLjur
We do not agree.
Section 101 of the Corporation Code of the Philippines provides:
"Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws
provide otherwise, any action by the directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
"1. Before or after such action is taken, written consent thereto is signed by all the
directors; or
"2. All the stockholders have actual or implied knowledge of the action and make no
prompt objection thereto in writing; or
"3. The directors are accustomed to take informal action with the express or implied
acquiesce of all the stockholders; or
"4. All the directors have express or implied knowledge of the action in question and none
of them makes prompt objection thereto in writing.
"If a directors' meeting is held without proper call or notice, an action taken therein within
the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files
his written objection with the secretary of the corporation after having knowledge thereof."
In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its
president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is
deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the
corporation after having knowledge of the meeting which, in this case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a personality distinct and separate from its individual
stockholders or members, 19 the veil of corporate fiction may be pierced when it is used to defeat public convenience,
justify wrong, protect fraud or defend crime. 20 The privilege of being treated as an entity distinct and separate from its
stockholders or members is therefore confined to its legitimate uses and is subject to certain limitations to prevent the
commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business conduit of
a person, the law will regard the corporation as the act of that person. 21 The Supreme Court had repeatedly disregarded
the separate personality of the corporation where the corporate entity was used to annul a valid contract executed by one of
its members.
Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents spouses
Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and consent of the other
members of the board of directors cannot be sustained. As correctly pointed out by the respondent Court of Appeals:
"Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never participated
nor was even aware of any meeting or resolution authorizing the mortgage or sale of the subject
premises (see par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21") is difficult to
believe. On the contrary, he is very much privy to the transactions involved. To begin with, he is an
incorporator and one of the board of directors designated at the time of the organization of Manuel R.
Dulay Enterprises, Inc. In ordinary parlance, the said entity is loosely referred to as a 'family corporation'.
The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is
typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father
whose name identifies their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc.,
Exh. "31-A")." 22
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit 23 that he was a signatory witness to
the execution of the post-dated Deed of Absolute Sale of the subject property in favor of private respondent Torres indicates
that he was aware of the transaction executed between his father and private respondents and had, therefore, adequate
knowledge about the sale of the subject property to private respondents. LLpr
Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private
respondents by Manuel Dulay is valid and binding. As stated by the trial court:
". . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa
V. Veloso and Castrense C. Veloso, was a corporate act of the former and not a personal
transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and
treasurer but also the general manager of the corporation. The corporation was a closed family
corporation and the only non-relative in the board of directors was Atty. Plaridel C. Jose who
appeared on paper as the secretary. There is no denying the fact, however, that Maria Socorro R.
Dulay at times acted as secretary. . . . , the Court can not lose sight of the fact that the Manuel R.
Dulay Enterprises, Inc. is a closed family corporation where the incorporators and directors belong
to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and
general manager almost had absolute control over the business and affairs of the corporation." 24
Moreover, the appellate courts will not disturb the findings of the trial judge unless he has plainly overlooked certain facts of
substance and value that, if considered, might affect the result of the case, 25 which is not present in the instant case.

Petitioners' contention that private respondent Torres never acquired ownership over the subject property since the latter
was never in actual possession of the subject property nor was the property ever delivered to him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
"When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from the deed the
contrary does not appear or cannot clearly be inferred."
Under the aforementioned article, the mere execution of the deed of sale in a public document is equivalent to the delivery
of the property. Likewise, this Court had held that:
"It is settled that the buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of one year after the registration of the
sale. As such, he is entitled to the possession of the said property and can demand it at any time
following the consolidation of ownership in his name and the issuance to him of a new transfer
certificate of title. The buyer can in fact demand possession of the land even during the redemption
period except that he has to post a bond in accordance with Section 7 of Act No. 3133 as
amended. No such bond is required after the redemption period if the property is not redeemed.
Possession of the land then becomes an absolute right of the purchaser as confirmed owner." 26
Therefore, prior physical delivery or possession is not legally required since the execution of the Deed of Sale is deemed
equivalent to delivery. LLpr
Finally, we hold that the respondent appellate court did not err in denying petitioner's motion for reconsideration despite the
fact that private respondents failed to submit their comment to said motion as required by the respondent appellate court.
There is nothing in the Revised Rules of Court which prohibits the respondent appellate court from resolving petitioners'
motion for reconsideration without the comment of the private respondent which was required merely to aid the court in the
disposition of the motion. The courts are as much interested as the parties in the early disposition of cases before them. To
require otherwise would unnecessarily clog the courts' dockets.
WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED. SO ORDERED.
||| (Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, G.R. No. 91889, [August 27, 1993])

[G.R. Nos. 84132-33. December 10, 1990.]


NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., petitioners, vs. PHILIPPINE
VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as
Deputy Sheriff of Calamba, Laguna, respondents.

Vicente Pascual, Jr. and Lope E. Feble for Philippine Veterans Bank.

DECISION

CRUZ, J p:

This case involves the constitutionality of a presidential decree which, like all other issuances of President Marcos during his
regime, was at that time regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the
touchstone of the fundamental law that even then was supposed to limit presidential action. cdrep
The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of
Companies to be administered mainly by the National Development Company. The law outlined the procedure for filing
claims against the Agrix companies and created a Claims Committee to process these claims. Especially relevant to this
case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages and other liens presently attaching to any of
the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real
estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baños, Laguna. During the existence of
the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other Agrix companies that
the aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit.
In the meantime, the New Agrix, Inc. and the National Development Company, petitioners herein, invoking Sec. 4 (1) of the
decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in favor of
the private respondent. For its part, the private respondent took steps to extrajudicially foreclose the mortgage, prompting
the petitioners to file a second case with the same court to stop the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge
Francisco Ma. Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on
the grounds that: (1) the presidential exercise of legislative power was a violation of the principle of separation of powers;
(2) the law impaired the obligation of contracts; and (3) the decree violated the equal protection clause. The motion for
reconsideration of this decision having been denied, the present petition was filed. cdrep
The petition was originally assigned to the Third Division of this Court but because of the constitutional questions involved it
was transferred to the Court en banc. On August 30, 1988, the Court granted the petitioner's prayer for a temporary
restraining order and instructed the respondents to cease and desist from conducting a public auction sale of the lands in
question. After the Solicitor General and the private respondent had filed their comments and the petitioners their reply, the
Court gave due course to the petition and ordered the parties to file simultaneous memoranda. Upon compliance by the
parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the validity of the decree. In support of
this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No.
1717 was also raised but not resolved. The Court, after noting that the petitioners had already filed their claims with the
AGRIX Claims Committee created by the decree, had simply dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres. Decree No. 1717 by
filing a claim with the AGRIX Claims Committee. Failing to get results, it sought to foreclose the real estate mortgage
executed by AGRIX in its favor, which had been extinguished by the decree. It was only when the petitioners challenged the
foreclosure on the basis of Sec. 4 (1) of the decree, that the private respondent attacked the validity of the provision. At that
stage, however, consistent with Mendoza, the private respondent was already estopped from questioning the
constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It must
be noted, however, that this was done in 1980, when President Marcos was the absolute ruler of this country and his
decrees were the absolute law. Any judicial challenge to them would have been futile, not to say foolhardy. The private
respondent, no less than the rest of the nation, was aware of that reality and knew it had no choice under the circumstances
but to conform. cdll
It is true that there were a few venturesome souls who dared to question the dictator's decisions before the courts of justice
then. The record will show, however, that not a single act or issuance of President Marcos was ever declared
unconstitutional, not even by the highest court, as long as he was in power. To rule now that the private respondent is
estopped for having abided with the decree instead of boldly assailing it is to close our eyes to a cynical fact of life during
that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX Claims
Committee, received in settlement thereof shares of stock valued at P40,000.00 without protest or reservation. The herein
private respondent has not been paid a single centavo on its claim, which was kept pending for more than seven years for
alleged lack of supporting papers. Significantly, the validity of that claim was not questioned by the petitioner when it sought
to restrain the extrajudicial foreclosure of the mortgage by the private respondent. The petitioner limited itself to the
argument that the private respondent was estopped from questioning the decree because of its earlier compliance with its
provisions.
Independently of these observations, there is the consideration that an affront to the Constitution cannot be allowed to
continue existing simply because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and other liens
attaching to the assets of AGRIX. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all
"unsecured obligations shall not bear interest" and in Subsection (iii) that "all accrued interests, penalties or charges as of
date hereof pertaining to the obligations, whether secured or unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person shall be
deprived of life, liberty or property without due course of law nor shall any person be denied the equal protection of the law"
and in Section 10 that "no law impairing the obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation under the police
power for the promotion of the common welfare. The contention is that this inherent power of the state may be exercised at
any time for this purpose so long as the taking of the property right, even if based on contract, is done with due process of
law.
This argument is an over-simplification of the problem before us. The police power is not a panacea for all constitutional
maladies. Neither does its mere invocation conjure an instant and automatic justification for every act of the government
depriving a person of his life, liberty or property.
A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more
familiar words, a) the interests of the public generally, as distinguished from those of a particular class, should justify the
interference of the state; and b) the means employed are reasonably necessary for the accomplishment of the purpose and
not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently involved
to warrant the interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the
"public, particularly the small investors," who would be prejudiced if the corporation were not to be assisted. However, the
record does not state how many there are of such investors, and who they are, and why they are being preferred to the
private respondent and other creditors of AGRIX with vested property rights. Cdpr
The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the New
Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole, as
distinguished from those of a particular class, would be promoted or protected. The indispensable link to the welfare of the
greater number has not been established. On the contrary, it would appear that the decree was issued only to favor a
special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far
short of the requirement that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree.
The right to property in all mortgages, liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily
destroyed. No consideration is paid for the extinction of the mortgage rights. The accrued interests and other charges are
simply rejected by the decree. The right to property is dissolved by legislative fiat without regard to the private interest
violated and, worse, in favor of another private interest.

A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do
interests on loans, as well as penalties and charges, which are also vested rights once they accrue. Private property cannot
simply be taken by law from one person and given to another without compensation and any known public purpose. This is
plain arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other liens, the
decree lumps the secured creditors with the unsecured creditors and places them on the same level in the prosecution of
their respective claims. In this respect, all of them are considered unsecured creditors. The only concession given to the
secured creditors is that their loans are allowed to earn interest from the date of the decree, but that still does not justify the
cancellation of the interests earned before that date. Such interests, whether due to the secured or the unsecured creditors,
are all extinguished by the decree. Even assuming such cancellation to be valid, we still cannot see why all kinds of
creditors, regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges
conferred and the obligations imposed. Conversely, all persons or things differently situated should be treated differently. In
the case at bar, persons differently situated are similarly treated, in disregard of the principle that there should be equality
only among equals. llcd
One may also well wonder why AGRIX was singled out for government help, among other corporations where the
stockholders or investors were also swindled. It is not clear why other companies entitled to similar concern were not
similarly treated. And surely, the stockholders of the private respondent, whose mortgage lien had been cancelled and
legitimate claims to accrued interests rejected, were no less deserving of protection, which they did not get. The decree
operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of
the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned or controlled by
the Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely
required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would
undertake the management of the corporation, but with the obligation of making periodic reports to the Agrix board of
directors. After payment of the loan, the said board can then appoint its own management. The stocks of the new
corporation are to be issued to the old investors and stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely private and so should have
been organized under the Corporation Law in accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent
without justification. While it is true that the police power is superior to the impairment clause, the principle will apply only
where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the
legislature in the interest of the greater number. 5 Most present-day contracts are of that nature. But as already observed,
the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be
affected with public interest. There was therefore no warrant to amend their provisions and deprive the private respondent of
its vested property rights.
It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we sustained the
preference in payment of a mortgage creditor as against the argument that the claims of laborers should take precedence
over all other claims, including those of the government. In arriving at this ruling, the Court recognized the mortgage lien as
a property right protected by the due process and contract clauses notwithstanding the argument that the amendment in
Section 110 of the Labor Code was a proper exercise of the police power. prcd
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the
traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the
interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and
this is compounded by the reduction of the secured creditors to the category of unsecured creditors in violation of the equal
protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government, should have been
created only by general and not special law. And insofar as the decree also interferes with purely private agreements
without any demonstrated connection with the public interest, there is likewise an impairment of the obligation of the
contract.
With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to promulgate
Pres. Decree No. 1717 under Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree must
fall just the same because of its violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The temporary
restraining order dated August 30, 1988, is LIFTED. Costs against the petitioners. llcdSO ORDERED.
||| (National Development Co. v. Philippine Veterans Bank, G.R. Nos. 84132-33, [December 10, 1990], 270 PHIL 349-360)

[G.R. No. 84197. July 28, 1989.]

PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS,
BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA
and JACOB S. LIM, respondents.

[G.R. No. 84157. July 28, 1989.]

JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC., FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.


Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

SYLLABUS

1. CIVIL LAW; DAMAGES; INSURANCE; AN INSURER IS SURROGATED TO THE RIGHTS OF THE


INSURED AGAINST THE WRONGDOER UPON RECEIPT OF THE INDEMNITY. — The petitioner's argument that the
respondents had no interest in the reinsurance contract as this is strictly between the petitioner as insured and the
reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis. Under the
provisions of Article 2207 of the Civil Code if a property is insured and the owner receives the indemnity from the
insurer, the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by
the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not
the insured. (PAL v. Heald Lumber Co., 101 Phil. 1031; Manila Mahogany Manufacturing Corporation v. Court of
Appeals, 154 SCRA 650 [1987]
2. REMEDIAL LAW; ACTIONS; PARTIES; ONLY THE REISURER OF THE INSURER ACTING AS AN
ATTORNEY-IN-FACT OF THE REINSURER CAN COLLECT AGAINST THE INDEMNITY AGREEMENT. — The
appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for
the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.
3. ID.; EVIDENCE; FINDINGS OF FACT OF THE TRIAL COURT UPHELD ON APPEAL. — We find the trial
court's findings on the matter replete with evidence to substantiate its finding that the counter-indemnitors are not liable
to the petitioner. Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity
agreement was ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they make payments to the latter. (Articles 2067 and
2080, New Civil Code)
4. CIVIL LAW; CONTRACTS; A DE FACTO PARTNERSHIP IS CREATED WHERE PERSONS ASSOCIATE
THEMSELVES BUT FAILED TO FORM A CORPORATION. — Where persons associate themselves together under
articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A 268, 109 Me.
555; Whipple v. Parker, 29 Mich. 369).
5. ID.; ID.; ID.; DOCTRINE NOT APPLICABLE WHERE THERE WAS REALLY NO INVENTION TO FORM A
CORPORATION; PARTIES NEED NOT SHARE IN LOSSES; CASE AT BAR. — The petitioner never had the intention
to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims
of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their agreement. Applying the principles of law
earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the
airplanes and spare parts.

DECISION

GUTIERREZ, JR., J p:
The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiff's
complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in
all other respects the trial court's decision was affirmed. LLpr
The dispositive portion of the trial court's decision reads as follows:
"WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring him to pay
plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly;
plus 15% of the amount awarded to plaintiff as attorney's fees from July 2, 1966, until full payment is
made; plus P70,000.00 moral and exemplary damages.
"It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from P151,000.00, making a total of P184,878.74. Defendant Jacob S. Lim is further
required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half,
the amount of P184,878.74 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of
the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.
"Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and
another P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
"WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to
indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's
fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is
paid.
"Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00
as attorney's fees and costs.
"No moral or exemplary damages is awarded against plaintiff for this action was filed in good
faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When
a man tries to protect his rights, he should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that
ordered it, in the exercise of its discretion.
"No damage is decided against Malayan Insurance Company, Inc., the third-party defendant,
for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be
liable for damages in performing an act which is clearly within its power and which is the reason for its
being, then nobody would engage in the insurance business. No further claim or counter-claim for or
against anybody is declared by this Court." (Rollo — G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales
contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts
for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7, 1965 while the other aircraft, arrived in Manila on July 18, 1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety
executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance
price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the
purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation
proposed by Lim to expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1
and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly
and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs,
damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in
consequence of having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives should or may pay or cause to
be paid or become liable to pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed
of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer
and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of
Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the
Civil Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of
Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the
aircrafts.
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana. cdll
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they
were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all
the defendants was dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE
APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA
AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo — G.R. No. 84197, p.
10)
The petitioner questions the following findings of the appellate court:
"We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk
of liability under the surety bond in favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiff's instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant
action as it does not stand to be benefited or injured by the judgment.
"Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an action for
and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action
must be prosecuted, he must appear to be the present real owner of the right sought to be enforced
(Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155.). It has been held that the real party
in interest is the party who would be benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is
meant a present substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine
Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germana, 1 NW 2d 424; Weber v. City of Cheye, 97 P.
2d 667, 669, quoting 47 C.V. 35).
"Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of defendants'
alleged obligation to Pioneer.
"In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and its spare
engine, realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the
sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to
JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in
excess of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by the
reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at
the expense of another (Article 22, New Civil Code)." (Rollo-84197, pp. 24-25).
The petitioner contends that — (1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in
their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since the
reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3)
pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana;
and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would recover from the
co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the
parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
"1. Has Pioneer a cause of action against defendants with respect to so much of its obligations
to JDA as has been paid with reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
"It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in
favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the
said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this
score it no longer has any right to collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants
for the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: 'The reinsurers opted instead that the Pioneer Insurance & Surety Corporation
shall pursue alone the case.' '. . . . Pioneer Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers
Pioneer is suing defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer is suing
as attorney-in-fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled
that an action brought by an attorney-in-fact in his own name instead of that of the principal will not
prosper, and this is so even where the name of the principal is disclosed in the complaint.
"'Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
prosecuted in the name of the real party in interest.' This provision is mandatory. The real party
in interest is the party who would be benefited or injured by the judgment or is the party entitled
to the avails of the suit.
"'This Court has held in various cases that an attorney-in-fact is not a real party in
interest, that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinas Industrial Corporation v. San Diego G.R. No. L-22347, 1968, 23 SCRA 706, 710-714.'"
"The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming
that the indemnity agreement is still valid and effective. But since the amount realized from the sale of
the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a
total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim
against defendants."' (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this
admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner.
Therefore, the petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly
between the petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the
Insurance Code has no basis.
"In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).
"The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330, 126
GA. 380, 7 Ann. Con. 1134)".
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
"Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury."
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil.
1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154
SCRA 650 [1987]):.
"Note that if a property is insured and the owner receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed subrogated to the rights of the insured against the
wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party
is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in
interest with regard to the portion of the indemnity paid is the insurer and not the insured." (Emphasis
supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as
against the respondents for the reason that the petitioner was not the real party in interest in the complaint and,
therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been
dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It
does not, however, cite any grounds except its allegation that respondent "Maglana's defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:
"Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.
"Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
"Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to
issue the bond provided that the same would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts
were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and
this indemnity agreement would be cancelled.
"The following is averred under oath by Pioneer in the original complaint:
"'The various conflicting claims over the mortgaged properties have impaired and
rendered insufficient the security under the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.'"
"This is judicial admission and aside from the chattel mortgage there is no other security for the
claim sought to be enforced by this action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised
Rules of Court.
"Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes
and spare parts, no longer has any further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure
of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the
right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code
of the Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of foreclosure
precludes any further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned provisions,
Pioneer 'shall have no further action against the purchaser to recover any unpaid balance and any
agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L-24772,
May 27, 1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the contention that
Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the application of the provision be validly opposed
on the ground that these defendants and defendant Maglana are not the vendee but indemnitors.
Pascual, et al. v. Universal Motors Corporation, G.R. No. L-27862, Nov. 20, 1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the maturity
dates of the obligations of Lim, or SAL, extinguished the original obligations thru novations, thus
discharging the indemnitors.
"'The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the remainder of
which . . . shall be due and payable on the 26th day . . . of each succeeding three months and
the last of which shall be due and payable 26th May 1967.'"
"However, at the trial of this case, Pioneer produced a memorandum executed by SAL, or Lim
and JDA, modifying the maturity dates of the obligations, as follows:
"'The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the remainder of
which . . . shall be due and payable on the 4th day . . . of each succeeding months and the last of
which shall be due and payable 4th June 1967.'"
"Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates
different from that fixed in the aforesaid memorandum; the due date of the first installment appears as
October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three months,
that of the last installment being July 15, 1967.
"These restructuring of the obligations with regard to their maturity dates, effected twice, were
done without the knowledge, much less, would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel, would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But if that were so, there would
have been the corresponding documents in the form of a written notice to as well as written conformity
of these defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the indemnity agreement which
was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case
of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon
David, 45 Phil. 532, 538.
"'Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of time
referred to herein, (New Civil Code).'"
"Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.
"Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as supposed
indemnitors what it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment,
released Pioneer from liability from the claim.
"Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.
"'Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or became illegal.'"
"These defendants are entitled to recover damages and attorney's fees from Pioneer and its
surety by reason of the filing of the instant case against them and the attachment and garnishment of
their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana." (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
"1. What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations where their contributions to the
intended 'corporation' were invested not through the corporate form? This Petition presents these
fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA')."
(Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among
them was created, and that as a consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings ordering him
to reimburse certain amounts given by the respondents to the petitioner as their contributions to the intended
corporation, to wit:
"However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the
total amount of P184,878.74 as correctly found by the trial court, with the interest from the filing of the
cross-claims until the amount is fully paid. Defendants Lim should pay one-half of the said amount to
Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of P151,000.00 from defendants Bormaheco
and Maglana representing the latter's participation in the ownership of the subject airplanes and spare
parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total
sum of P184,878.74."
We first state the principles.
"While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and the laws of the
state relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy a position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate
themselves together under articles to purchase property to carry on a business, and their organization
is so defective as to come short of creating a corporation within the statute, they become in legal effect
partners inter se, and their rights as members of the company to the property acquired by the company
will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A 268, 109 Me. 555; Whipple v. Parker,
29 Mich. 369). So, where certain persons associated themselves as a corporation for the development
of land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted
to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was
ever issued in the corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between themselves, when their purpose is that
no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S. Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in a proposed corporation which is never legally formed
does not become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership
and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders
and other stockholders, who were also directors, will not be implied in the absence of an agreement, so
as to make the former liable to contribute for payment of debts illegally contracted by the latter (Heald
v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Emphasis supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during
the pre-trial despite notification. In his answer, the petitioner denied having received any amount from respondents
Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58,
that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco and Atty.
Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that defendant
Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses. LexLib
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite
his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because
the petitioner reneged on their agreement. Maglana alleged in his cross-claim:
". . . that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim
which Cervantes did and Lim acknowledged receipt thereof Cervantes, likewise, delivered his share of
the undertaking. Lim in an undertaking sometime on or about August 9, 1965, promised to incorporate
his airline in accordance with their agreement and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the
corporation or return the money of Maglana."
(Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party
complaint:
"Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their lawful
contribution and participation in the proposed corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down payments were advanced by defendants
Bormaheco and the Cervanteses and Constancio Maglana (Exh. E-1). Contrary to the agreement
among the defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the
SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the
other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim,
thereby forcing them to file an adverse claim in the form of third party claim. Notwithstanding repeated
oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the
possession of the two planes and their accessories and or return the amount advanced by the former
amounting to an aggregate sum of P178,997.14 as evidenced by a statement of accounts, the latter
ignored, omitted and refused to comply with them." (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership
was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the
proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-
be incorporators in transacting the sale of the airplanes and spare parts. LLjur
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED. SO ORDERED.
||| (Pioneer Insurance & Surety Corp. v. Court of Appeals, G.R. Nos. 84197 & 84157, [July 28, 1989], 256 PHIL 1061-1078)

FORMATION AND ORGANIZATION OF CORPORATION

[G.R. No. 96161. February 21, 1992.]

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., petitioners, vs. COURT OF APPEALS, SECURITIES & EXCHANGE
COMMISSION and STANDARD PHILIPS CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.


Narciso A. Manantan for private respondent.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION CODE; SECTION 18 THEREOF APPLICABLE ONLY WHEN CORPORATE
NAMES ARE IDENTICAL. — Section 18 of the Corporation Code is applicable only when the corporate names in question
are identical. In the instant case, there is no confusing similarity between Petitioners' and Private Respondent's corporate
names as those of the Petitioners contain at least two words different from that of the Respondent.
2. ID.; CORPORATION; RIGHT TO USE ITS CORPORATE AND TRADE NAME, A PROPERTY RIGHT. — As early as
Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a corporation's right to use its
corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain
extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another
corporation in the same field (Red Line Transportation Co. vs. Rural Transit co., September 6, 1934, 60 Phil. 549).
3. ID.; ID.; IMPORTANCE OF CORPORATE NAME. — A name is peculiarly important as necessary to the very existence of
a corporation. Its name is one of its attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm Ed],
pp. 3-4). The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued
and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name
of an individual designates the person (Cincinnati Cooperage Co. vs. Bate, 96 Ky 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
other privilege granted.
4. ID.; ID.; CORPORATE NAME DISTINGUISHED FROM INDIVIDUAL'S NAME. — A corporation acquires its name by
choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an
individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d
973, 977). A corporation can no more use a corporate name in violation of the rights of others that an individual can use his
name legally acquired so as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109, 42 A 308).
5. ID.; ID.; ID.; STATUTORY PROHIBITION PROVIDED IN SEC. 18 OF CORPORATION CODE; REQUISITES. — Our
own Corporation Code, in its Section 18, expressly provides that: "No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing law.
Where a change in the corporate name is approved, the commission shall issue an amended certificate of incorporation
under the amended name." (Emphasis supplied) The statutory prohibition cannot be any clearer. To come within its scope,
two requisites must be proven, namely: (1) that the complainant corporation acquired a prior right over the use of such
corporate name; and (2) the proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to
existing law.
6. ID.; ID.; ID.; RIGHT TO EXCLUSIVE USE OF CORPORATE NAME DETERMINED BY PRIORITY OF ADOPTION;
APPLIED IN CASE AT BAR. — The right to the exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption (1 Thompson, p.80 citing Munn v. Americana Co., 82 N., Eq. 63 88 Atl. 30;
San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to
Petitioners' prior adoption of the name "PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips
Industrial were incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was
issued a Certificate of Registration on 19 April 1982, twenty-six (26) years later (Rollo, p.16). Petitioner PEBV has also used
the trademark "PHILIPS" on electrical lamps of all types and their accessories since 30 September 1922, as evidenced by
Certificate of Registration No. 1651.
7. ID.; ID.; ID.; TEST IN DETERMINING EXISTENCE OF CONFUSING SIMILARITY; PROOF OF ACTUAL CONFUSION
NOT NECESSARY. — In determining the existence of confusing similarity in corporate names, the test is whether the
similarity is such as to mislead a person using ordinary care and discrimination. In so doing, the Court must look to the
record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). It is settled, however,
that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6 Fletcher [Perm
Ed], pp. 107-108, enumerating a long line of cases).
8. ID.; ID.; ID.; INTENT OF SUBSEQUENT APPROPRIATOR OF NAME. — Petitioners pointed out that "[p]rivate
respondent's choice of 'PHILIPS' as part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show
said respondent's intention to ride on the popularity and established goodwill of said petitioner's business throughout the
world." The subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a
free ride on another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269,
191 F 2d 488).
9. ID.; ID.; ID.; RULE ON PROPOSED NAME. — True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or
partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company,
the proposed name must contain two other words different from the company already registered." It is then pointed out that
Petitioners Philips Electrical and Philips Industrial have two words different from that of Private Respondent's name.
10. ID.; ID.; ID.; CORPORATION HAS EXCLUSIVE RIGHT TO THE USE OF ITS NAME WHICH MAY BE PROTECTED
BY INJUNCTION; BASIS FOR SUCH PRINCIPLE. — 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). Such principle proceeds upon the theory that it is a fraud on the corporation which has
acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same
name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are
dealing with the corporation which has given a reputation to the name (6 Fletcher [Perm Ed.], pp. 39-40, citing Borden Ice
Cream Co. v. Borden's Condensed Milk Co., 210 F 510).

DECISION

MELENCIO-HERRERA, J p:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the
Order of the Securities and Exchange Commission, dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners'
prayer for the cancellation or removal of the word "PHILIPS" for private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands, although not
engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM under
Certificate of Registration Nos. R-1641 and R-1674, respectively issued by the Philippine Patent Office (presently known as
the Bureau of Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips Electrical,
for brevity) and Philips Industrial Development, Inc. (Philips Industrial, for short), authorized users of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25 may 1956, respectively. All
petitioner corporations belong to the PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of Registration by
respondent Commission on 19 May 1982.
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 Respondent's corporate name in view of the prior registration with the
Bureau of Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner PEBV,
and the previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the SEC, on 6
February 1985, a Petition (SEC Case No. 2743), praying for the issuance of a Writ of Preliminary Injunction, alleging,
among others, that Private Respondent's use of the word PHILIPS amounts to an infringement and clear violation of
Petitioner's exclusive right to use the same considering that both parties engage in the same business.
In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal capacity to sue; that its
use of its corporate name is not at all similar to Petitioners' trademark PHILIPS when considered in its entirety; and that its
products consisting of chain rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction, the SEC Hearing Officer, on 27 September 1985, ruled
against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the latter declared that
inasmuch as the SEC found no sufficient ground for the granting of injunctive relief on the basis of the testimonial and
documentary evidence presented, it cannot order the removal or cancellation of the word "PHILIPS" from Private
Respondent's corporate name on the basis of the same evidence adopted in toto during trial on the merits. Besides, Section
18 of the Corporation Code (infra) is applicable only when the corporate names in question are identical. Here, there is no
confusing similarity between Petitioners' and Private Respondent's corporate names as those of the Petitioners contain at
least two words different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17
June 1987. LibLex
On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and Private
Respondent hardly breed confusion inasmuch as each contains at least two different words and, therefore, rules out any
possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on Certiorari before this Court,
which Petition was later referred to the Court of Appeals in a Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of Appeals 1 swept aside Petitioners' claim that following the
ruling in Converse Rubber Corporation v. Universal Converse Rubber Products, Inc., et al, (G.R. No. L-27906, January 8,
1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same
constitutes a dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed that the Converse
case is not four-square with the present case inasmuch as the contending parties in Converse are engaged in a similar
business, that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded that "private
respondent's products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-competing with
petitioners' products i.e. electrical lamps such that consumers would not in any probability mistake one as the source or
origin of the product of the other."
The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this Petition which was
given due course on 22 April 1991, after which the parties were required to submit their memoranda, the latest of which was
received on 2 July 1991. In December 1991, the SEC was also required to elevate its records for the perusal of this Court,
the same not having been apparently before respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a corporation's right
to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in
the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a
certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another
corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co., September 6, 1934, 60 Phil 549).
A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries vs.
Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs.
Huntington Distilling Co, 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of its existence, and
essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must
have name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the
corporation in the same manner as the name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate, 96
Ky 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 other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or
375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36). Cdpr
A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated
by a senior corporation while an individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard
Oil Co. of California, 56 F 2d 973, 977). A corporation can no more use a corporate name in violation of the rights of others
than an individual can use his name legally acquired so as to mislead the public and injure another (Armington vs. Palmer,
21 RI 109, 42 A 308).
Our own Corporation Code, in its Section 18, expressly provides that:
"No corporate name may be allowed by the Securities and Exchange Commission if the proposed name
is identical or deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing law. Where a change
in the corporate name is approved, the commission shall issue an amended certificate of incorporation
under the amended name." (Emphasis supplied).
The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either:
(a) identical or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of
adoption (1 Thomson, p.80 citing Munn v. Americana Co., 82 N., Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich,
75 Wash, 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners' prior adoption of the name
"PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29 August
1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 19 April
1982, twenty-six (26) years later (Rollo, p.16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps
of all types and their accessories since 30 September 1922, as evidenced by Certificate of Registration No. 1651.
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 as to mislead a person using ordinary care and discrimination. In so doing, the Court
must look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298).
While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate
names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT,
INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or
associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of
Companies. cdll
Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or deception of the
public much less a single purchaser or their product who has been deceived or confused or showed any likelihood of
confusion. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or
likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).
It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like while petitioners deal
principally with electrical products. It is significant to note, however, that even the Director of Patents had denied Private
Respondent's application for registration of the trademarks "Standard Philips & Device" for chains, rollers, belts, bearings
and cutting saw. That 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, bearings and cutting saw, the goods in connection
with which Respondent is seeking to register "STANDARD PHILIPS . . . also belong" (Inter Partes Case No. 2010, June 17,
1988, SEC Rollo).
Furthermore, the records show that among Private Respondent's primary purposes in its Articles of Incorporation (Annex D,
Petition; p. 37, Rollo) are the following:
"To buy, sell, barter, trade, manufacture, import, export or otherwise acquire, dispose of, and deal in and
deal with any kind of goods, wares, and merchandise such as but not limited to plastics, carbon products,
office stationery and supplies, hardware parts, electrical wiring devices, electrical component parts and/or
complement of industrial, agricultural or commercial machineries, constructive supplies, electrical
supplies and other merchandise which are or may become articles of commerce except food, drugs, and
cosmetics and to carry on such business as manufacturer, distributor, dealer, indentor, factor,
manufacturer's representative capacity for domestic or foreign companies." (emphasis ours).
For its part, Philips Electrical also includes, among its primary purposes, the following:

"To develop, manufacture and deal in electrical products, including electronic, mechanical and other
similar products . . . ." (p. 30, Record of SEC Case No. 2743)
Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing in the same line of
business of electrical devices, products or supplies which fall under its primary purposes. Besides, there is showing that
Private Respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate 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, 1985). As aptly pointed out by Petitioners, "[p]rivate respondent's choice of 'PHILIPS' as part of its
corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on the
popularity and established goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The subsequent
appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a free ride on another's
goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488). prLL
In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate names of
Petitioners PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two
words different from that of the corporate name of respondent STANDARD PHILIPS CORPORATION, which words will
readily identify Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed
name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a
word already used as part of the firm name or style of a registered company, the proposed name must contain two other
words different from the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips
Electrical and Philips Industrial have two words different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a 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). Such principle proceeds
upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its
business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a
way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation
to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510).
Notably, too, Private Respondents' name actually contains only a single word, that is, "STANDARD", different from that of
Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the purpose of distinguishing the
corporation from partnerships and other business organizations.
The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of their
corporate names is no defense and does not warrant the use by Private Respondent of such word which constitutes an
essential feature of Petitioners' corporate name previously adopted and registered and having acquired the status of a well-
known mark in the Philippines and internationally, as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988, SEC
Records).
In support of its application for the registration of its Articles of Incorporation with the SEC, Private Respondent had
submitted an undertaking "manifesting its willingness to change its corporate name in the event another person, firm or
entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it." Private
Respondent must now be held to its undertaking. cdll
"As a general rule, parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonbusiness or nonprofit
organization if misleading and likely to injure it in the exercise of its corporate functions, regardless of
intent, may be prevented by the corporation having the prior right, by a suit for injunction against the new
corporation to prevent the use of the name (American Gold Star Mothers, Inc. v. National Gold Star
Mothers, Inc. 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948)."
WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20 November 1990, are
SET ASIDE and a new one entered ENJOINING private respondent from using "PHILIPS" as a feature of its corporate
name, and ORDERING the Securities and Exchange Commission to amend private respondent's Articles of Incorporation
by deleting the word PHILIPS from the corporate name of private respondent.
No costs. SO ORDERED.
||| (Philips Export B.V. v. Court of Appeals, G.R. No. 96161, [February 21, 1992], 283 PHIL 371-383)

[G.R. No. 101897. March 5, 1993.]


LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI,
LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM
OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN
PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM,
INC., respondents.

Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH IS IDENTICAL OR


CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION
EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". — The
Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. Section 18 of the
Corporation Code establishes a restrictive rule insofar as corporate names are concerned: "Section 18. Corporate name. —
No corporate name may be allowed by the Securities an Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name." The policy underlying the
prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar"
to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and supervision over corporations. We do not
consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar"
to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY.
— It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner
with the result that word, although originally a generic, has become appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its
application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of
others is based upon the same principle which underlies the right to use a particular trademark or tradename. In Philippine
Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms: " . . . a
word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because
geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer
with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to
mean that the article was his product." The question which arises, therefore, is whether or not the use by petitioner of
"Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or
identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which
has to do with schools). The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine of
secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the
market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by
one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase
has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of
the same for a considerable period of time. . . . No evidence was ever presented in the hearing before the Commission
which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there
was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of
time. . . . In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of
time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the
appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no
evidence presented to prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." 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 applicability of the doctrine of secondary
meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan
Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the
SEC because they have not adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE CONFUSINGLY OR
DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. — petitioner institution is not entitled to a legally
enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as
part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively
similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both
names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each
other.

DECISION

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange Commission ("SEC").
When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum of the Philippines, Inc.
and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents,
which are also educational institutions, to delete the word "Lyceum" from their corporate names and permanently to
enjoin them from using "Lyceum" as part of their respective names. prLL
Some of the private respondents actively participated in the proceedings before the SEC. These are the
following, the dates of their original SEC registration being set out below opposite their respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in default for failure to file an answer despite service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of Marbel, for
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 "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before commenced in the
SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its corporate name
and to adopt another name not "similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977,
Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the geographical
location of the campus being the only word which distinguished one from the other corporate name. The SEC also
noted that petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered
the latter to change its name to another name "not similar or identical [with]" the names of previously registered entities.
cdrep

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as
G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for Review for lack of
merit. Entry of judgment in that case was made on 21 October 1977. 2
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 corporate name, and advised them to discontinue such
use of "Lyceum." When, with the passage of time, it became clear that this recourse had failed, petitioner instituted
before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The
SEC hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word "Lyceum."
The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that
the word "Lyceum" was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the
use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was
reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified with
petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools
concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of
geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially in
view of the fact that the campuses of petitioner and those of the private respondents were physically quite remote from
each other. 3
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 Banc. 4 Petitioner filed a motion for reconsideration, without
success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-
46595 did not constitute stare decisis as to apply to this case and in not holding that said Resolution
bound subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated
by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting that the
Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in respect of the case at bar,
since there is no identity of parties. Neither is stare decisis pertinent, if only because the SEC En Banc itself has re-
examined Associate Commissioner Sulit's ruling in 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.
The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. 6
Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:
"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law or is patently deceptive, confusing
or contrary to existing laws. When a change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration
and supervision over corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private
respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending
of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the
Lyceum of the Philippines. LLphil
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on
the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains and
buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally
refers to a school or an institution of learning. While the Latin word "lyceum" has been incorporated into the English
language, the word is also found in Spanish (liceo) and in French (lycee). As the Court of Appeals noted in its Decision,
Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo
de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the name of the
petitioner, "Lyceum" appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or
"Lycee" frequently denotes a secondary school or a 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," but it is clear
that a not inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate
names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to
petitioner with the result that that word, although originally a generic, has become appropriable by petitioner to the
exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been
extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same
principle which underlies the right to use a particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v.
Standard Brands, Inc., 11 the doctrine of secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been used so
long and so exclusively by one producer with reference to his article that, in that trade and to that branch
of the purchasing public, the word or phrase has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name
has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner
institution in the mind of the general public (or at least that portion of the general public which has to do with schools).
The Court of Appeals recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by one producer with reference to this
article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. Consequently, the same doctrine or principle
cannot be made to apply where the evidence did not prove that the business (of the plaintiff) has
continued for so long a time that it has become of consequence and acquired a good will of considerable
value such that its articles and produce have acquired a well-known reputation, and confusion will result
by the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc.,
92 Phil. 448). llcd
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there
was any of this kind, the same 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
established or proven as in fact the evidence tend to convey that the cross-claimant was already using
the word 'Lyceum' seventeen (17) years prior to the date the appellant started using the same word in its
corporate name. Furthermore, educational institutions of the Roman Catholic Church had been using the
same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,'
'Liceo de Albay' long before appellant started using the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with its educational institution that confusion will surely
arise in the minds of the public if the same word were to be used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word 'Lyceum' for
a long period of time, this fact alone did not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had been using the same word all by
itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will
surely arise if the same word were to be used by other educational institutions. Consequently, the
allegations of the appellant in its first two assigned errors must necessarily fail." 13 (Emphasis 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 applicability
of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner registered its
own corporate name with the SEC and began using the word "Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than
the petitioner institution. cdphil
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its
records before the SEC in accordance with the provisions of R.A. No. 62, which records had been destroyed during
World War II, Western Pangasinan Lyceum should be deemed to have lost all rights it may have acquired by virtue of its
past registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after
petitioner had filed its own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must
be deemed to have lost its rights under its original 1933 registration, appears to us to be quite secondary in importance;
we refer to this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither
the first use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent
institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other
schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the
corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use
the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names.
To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents,
they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the public respondent
Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of the Court of Appeals dated 28
June 1991 is hereby AFFIRMED. No pronouncement as to costs. LexLibSO ORDERED.
||| (Lyceum of the Philippines, Inc. v. Court of Appeals, G.R. No. 101897, [March 5, 1993])

[G.R. No. 129552. June 29, 2005.]

P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and ROSALINA F. JAVIER, petitioners, vs.
HON. COURT OF APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC., SHERIFFS GRACE
BELVIS, SOFRONIO VILLARIN, PIO MARTINEZ and NICANOR BLANCO, respondents.

DECISION

CHICO-NAZARIO, J p:

Before Us is an appeal by certiorari under Rule 45 of the Rules of Court which seeks to set aside the decision 1 of
the Court of Appeals dated 31 January 1997 which affirmed in toto the decision of Branch 62 of the Regional Trial Court
(RTC) of Makati City, dismissing the complaint for Annulment of Mortgage and Foreclosure with Preliminary Injunction,
Prohibition and Damages filed by petitioners, and its Resolution 2 dated 20 June 1997 denying petitioners' motion for
reconsideration.
A complaint 3 for Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition and Damages
was filed by petitioners P.C. Javier & Sons, Inc. and spouses Pablo C. Javier, Sr. and Rosalina F. Javier against PAIC
Savings & Mortgage Bank, Inc., Grace S. Belvis, Acting Ex Officio Regional Sheriff of Pasig, Metro Manila and Sofronio M.
Villarin, Deputy Sheriff-in-Charge, before Branch 62 of the RTC of Makati City, on 07 May 1984. The case was docketed as
Civil Case No. 7184.
On 10 May 1984, a Supplemental Complaint 4 was filed to include additional defendants, namely: Pio Martinez,
Acting Ex Officio Regional Sheriff of Antipolo, Rizal, and Nicanor D. Blanco, Deputy Sheriff-in-Charge.
The facts that gave rise to the aforesaid complaint, as found by Branch 62 of the RTC of Makati City, and adopted
by the respondent court, are as follows:
In February, 1981, Plaintiff P.C. Javier and Sons Services, Inc., Plaintiff Corporation, for short,
applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings and Mortgage
Bank, Defendant Bank, for short, for a loan accommodation under the Industrial Guarantee Loan Fund
(IGLF) for P1.5 Million. On March 21, 1981, Plaintiff Corporation through Plaintiff Pablo C. Javier, Plaintiff
Javier for short, was advised that its loan application was approved and that the same shall be forwarded
to the Central Bank (CB) for processing and release (Exhibit A also Exhibit 8). THAICD
The CB released the loan to Defendant Bank in two (2) tranches of P750,000 each. The first
tranche was released to the Plaintiff Corporation on May 18, 1981 in the amount of P750,000.00 and the
second tranche was released to Plaintiff Corporation on November 21, 1981 in the amount of
P750,000.00. From the second tranche release, the amount of P250,000.00 was deducted and deposited
in the name of Plaintiff Corporation under a time deposit.
Plaintiffs claim that the loan releases were delayed; that the amount of P250,000.00 was
deducted from the IGLF loan of P1.5 Million and placed under time deposit; that Plaintiffs were never
allowed to withdraw the proceeds of the time deposit because Defendant Bank intended this time deposit
as automatic payments on the accrued principal and interest due on the loan. Defendant Bank, however,
claims that only the final proceeds of the loan in the amount of P750,000.00 was delayed the same
having been released to Plaintiff Corporation only on November 20, 1981, but this was because of the
shortfall in the collateral cover of Plaintiff's loan; that this second tranche of the loan was precisely
released after a firm commitment was made by Plaintiff Corporation to cover the collateral deficiency
through the opening of a time deposit using a portion of the loan proceeds in the amount of P250,000.00
for the purpose; that in compliance with their commitment to submit additional security and open time
deposit, Plaintiff Javier in fact opened a time deposit for P250,000.00 and on February 15, 1983,
executed a chattel mortgage over some machineries in favor of Defendant Bank; that thereafter, Plaintiff
Corporation defaulted in the payment of its IGLF loan with Defendant Bank hence Defendant Bank sent a
demand letter dated November 22, 1983, reminding Plaintiff Javier to make payments because their
accounts have been long overdue; that on May 2, 1984, Defendant Bank sent another demand letter to
Plaintiff spouses informing them that since they have defaulted in paying their obligation, their mortgage
will now be foreclosed; that when Plaintiffs still failed to pay, Defendant Bank initiated extrajudicial
foreclosure of the real estate mortgage executed by Plaintiff spouses and accordingly the auction sale of
the property covered by TCT No. 473216 was scheduled by the Ex-Officio Sheriff on May 9, 1984. 5
The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land covered by Transfer
Certificate of Title (TCT) No. 473216 6 mortgaged by petitioner corporation in favor of First Summa Savings and Mortgage
Bank which bank was later renamed as PAIC Savings and Mortgage Bank, Inc. 7 It likewise asked for the nullification of the
Real Estate Mortgages it entered into with First Summa Savings and Mortgage Bank. The supplemental complaint added
several defendants who scheduled for public auction other real estate properties contained in the same real estate
mortgages and covered by TCTs No. N-5510, No. 426872, No. 506346 and Original Certificate of Title No. 10146. 8
Several extrajudicial foreclosures of the mortgaged properties were scheduled but were temporarily restrained by
the RTC notwithstanding the denial 9 of petitioners' prayer for a writ of preliminary injunction. In an Order 10 dated 10
December 1990, the RTC ordered respondents-sheriffs to maintain the status quo and to desist from further proceeding with
the extrajudicial foreclosure of the mortgaged properties. IDAESH
Among the issues raised by petitioners at the RTC are whether or not First Summa Savings and Mortgage Bank
and PAIC Savings and Mortgage Bank, Inc. are one and the same entity, and whether or not their obligation is already due
and demandable at the time respondent bank commenced to extrajudicially foreclose petitioners' properties in April 1984.
The RTC declared that First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are
one and the same entity and that petitioner corporation is liable to respondent bank for the unpaid balance of its Industrial
Guarantee Loan Fund (IGLF) loans. The RTC further ruled that respondent bank was justified in extrajudicially foreclosing
the real estate mortgages executed by petitioner corporation in its favor because the loans were already due and
demandable when it commenced foreclosure proceedings in April 1984.
In its decision dated 06 July 1993, the RTC disposed of the case as follows:
Premises considered, judgment is hereby rendered dismissing the Complaint against Defendant
Bank and ordering Plaintiffs to pay Defendant Bank jointly and severally, the following:
1. The principal amount of P700,453.45 under P.N. No. 713 plus all the accrued interests,
liquidated damages and other fees due thereon from March 18, 1983 until fully paid as provided in said
PN;
2. The principal amount of P749,879.38 under P.N. No. 841 plus all the accrued interests,
liquidated damages and other fees due thereon from September 1, 1982 until fully paid as provided in
such PN;
3. The amount of P40,000.00 as actual damages;
4. The amount of P30,000.00 as exemplary damages;
5. The amount of P50,000.00 as attorney's fees; plus
6. Cost of suit. 11
Petitioners filed a Motion for Reconsideration 12 which was opposed 13 by respondent bank. The motion was
denied in an Order dated 11 May 1994.
Petitioners appealed the decision to the Court of Appeals. The latter affirmed in toto the decision of the lower court.
It also denied petitioners' motion for reconsideration. ISDHcT
Hence, this appeal by certiorari.
Petitioners assigned the following as errors:
a. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DISMISSAL
OF PETITIONERS' COMPLAINT AND IN AFFIRMING THE RIGHT OF THE RESPONDENT BANK TO
COLLECT THE IGLF LOANS IN LIEU OF FIRST SUMMA SAVINGS AND MORTGAGE BANK WHICH
ORIGINALLY GRANTED SAID LOANS.
COROLLARY TO THE ABOVE ARGUMENT, THE PUBLIC RESPONDENT COURT ALSO
GRAVELY ERRED WHEN IT RULED THAT THE PETITIONERS CANNOT WITHHOLD THEIR
PAYMENT TO THE RESPONDENT BANK NOTWITHSTANDING THE ADMITTED INABILITY OF THE
RESPONDENT BANK TO FURNISH THE PETITIONERS THE SAID REQUESTED DOCUMENTS.
b. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE
COLLECTION OF THE ENTIRE PROCEEDS OF THE IGLF LOANS OF P1,500,000.00 DESPITE THE
FACT THAT THE P250,000.00 OF THIS LOAN WAS WITHHELD BY THE FIRST SUMMA SAVINGS
AND MORTGAGE BANK TO BECOME PART OF THE COLLATERALS TO THE SAID P1,500,000.00
LOAN.
c. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DAMAGES
AWARDED TO THE RESPONDENT BANK DESPITE THE ABSENCE OF MALICE OR BAD FAITH ON
THE PART OF THE PETITIONERS IN FILING THIS CASE AGAINST THE RESPONDENT BANK.
On the first assigned error, petitioners argue that they are legally justified to withhold their amortized payments to
the respondent bank until such time they would have been properly notified of the change in the corporate name of First
Summa Savings and Mortgage Bank. They claim that they have never received any formal notice of the alleged change of
corporate name of First Summa Savings and Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. They further claim that
the only and first time they received formal evidence of a change in the corporate name of First Summa Savings and
Mortgage Bank surfaced when respondent bank presented its witness, Michael Caguioa, on 03 April 1990, where he
presented the Securities and Exchange Commission (SEC) Certificate of Filing of the Amended Articles of Incorporation of
First Summa Savings and Mortgage Bank, 14 the Central Bank (CB) Certificate of Authority 15 to change the name of First
Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., and the CB Circular Letter 16 dated 27
June 1983.

Their argument does not hold water. Their defense that they should first be formally notified of the change of
corporate name of First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., before they will
continue paying their loan obligations to respondent bank presupposes that there exists a requirement under a law or
regulation ordering a bank that changes its corporate name to formally notify all its debtors. After going over the Corporation
Code and Banking Laws, as well as the regulations and circulars of both the SEC and the Bangko Sentral ng Pilipinas
(BSP), we find that there is no such requirement. This being the case, this Court cannot impose on a bank that changes its
corporate name to notify a debtor of such change absent any law, circular or regulation requiring it. Such act would be
judicial legislation. The formal notification is, therefore, discretionary on the bank. Unless there is a law, regulation or circular
from the SEC or BSP requiring the formal notification of all debtors of banks of any change in corporate name, such
notification remains to be a mere internal policy that banks may or may not adopt.
In the case at bar, though there was no evidence showing that petitioners were furnished copies of official
documents showing the First Summa Savings and Mortgage Bank's change of corporate name to PAIC Savings and
Mortgage Bank, Inc., evidence abound that they had notice or knowledge thereof. Several documents establish this fact.
First, letter 17 dated 16 July 1983 signed by Raymundo V. Blanco, Accountant of petitioner corporation, addressed to PAIC
Savings and Mortgage Bank, Inc. Part of said letter reads: "In connection with your inquiry as to the utilization of funds we
obtained from the former First Summa Savings and Mortgage Bank, . . ." Second, Board Resolution 18 of petitioner
corporation signed by Pablo C. Javier, Sr. on 24 August 1983 authorizing him to execute a Chattel Mortgage over certain
machinery in favor of PAIC Savings and Mortgage Bank, Inc. Third, Secretary's Certificate 19 signed by Fortunato E.
Gabriel, Corporate Secretary of petitioner corporation, on 01 September 1983, certifying that a board resolution was passed
authorizing Mr. Pablo C. Javier, Sr. to execute a chattel mortgage on the corporation's equipment that will serve as
collateral to cover the IGLF loan with PAIC Savings and Mortgage Bank, Inc. Fourth, undated letter 20 signed by Pablo C.
Javier, Sr. and addressed to PAIC Savings and Mortgage Bank, Inc., authorizing Mr. Victor F. Javier, General Manager of
petitioner corporation, to secure from PAIC Savings and Mortgage Bank, Inc. certain documents for his signature. DCcIaE
From the foregoing documents, it cannot be denied that petitioner corporation was aware of First Summa Savings
and Mortgage Bank's change of corporate name to PAIC Savings and Mortgage Bank, Inc. Knowing fully well of such
change, petitioner corporation has no valid reason not to pay because the IGLF loans were applied with and obtained from
First Summa Savings and Mortgage Bank. First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage
Bank, Inc., are one and the same bank to which petitioner corporation is indebted. A change in the corporate name does not
make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the
corporation, or on its property, rights, or liabilities. 21 The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character
is in no respect changed. 22
Anent the second assigned error, this Court rules that respondent court did not err when it sustained the collection
of the entire proceeds of the IGLF loans amounting to P1,500,000.00 despite the withholding of P250,000.00 to become
part of the collaterals to the said P1,500,000.00 IGLF loan.
Petitioners contend that the collaterals they submitted were more than sufficient to cover the P1,500,000.00 IGLF
loan. Such contention is untenable. Petitioner corporation was required to place P250,000.00 in a time deposit with
respondent bank for the simple reason that the collateral it put up was insufficient to cover the IGLF loans it has received. It
admitted the shortfall of its collateral when it authorized petitioner Pablo C. Javier, Sr., via a board resolution, 23 to execute
a chattel mortgage over certain machinery in favor of PAIC Savings and Mortgage Bank, Inc. which was certified by its
corporate secretary. 24 If the collateral it put up was sufficient, why then did it execute another chattel mortgage?
In his order dated 07 September 1984, Hon. Rafael T. Mendoza found that the loanable value of the lands,
buildings, machinery and equipment amounted only to P934,000.00. The order reads in part:
The terms and conditions of the IGLF loan extended to plaintiff corporation are governed by the
loan and security documents evidencing said loan. Although the loan agreement was approved by the
defendant bank, the same has to be processed and be finally approved by the Central Bank of the
Philippines, in pursuance to the IGLF program, of which the defendant bank is an accredited participant.
The defendant had to await Central Bank's advise (sic) regarding the final approval of the loan before the
release of the proceeds thereof. The proceeds of the loan was released to the plaintiff on 6 April and
November 20, 1981, and the final proceeds was released only on November 20, 1981, on account of
short fall in the collateral covered by the lands and buildings as well as the machineries and equipment
then subject of the existing mortgages in favor of the defendant bank, having only a loanable value of
P934,000.00, and only after a firm commitment made by plaintiff corporation to the defendant bank to
correct the collateral deficiency thru the execution of a chattel mortgage on additional machineries,
equipment and tools and thru the opening of a time deposit with PAIC Bank using a portion of the loan
proceeds in the amount of P250,000.00 to answer for its obligation to the defendant bank under the IGLF
loan was the final proceeds of the loan released in favor of the plaintiffs. The delay in the release of the
final proceeds of the IGLF loan was due to the aforestated collateral deficiency. 25
As declared by the respondent court, the finding in said order was not disputed in the appeal before it. It said that
what was contained in petitioners' brief was that "their loans were 'overcollateralized,' and fail to specify why or in what
manner it was so." 26 Having failed to raise this issue before the respondent court, petitioners thus cannot raise this issue
before this Court. Moreover, since the issue of whether or not the collateral put up by petitioners is sufficient is factual, the
same is not proper for this Court's consideration. The basic rule is that factual questions are beyond the province of the
Supreme Court in a petition for review. 27
Petitioners maintain that to collect the P250,000.00 from them would be a clear case of unjust enrichment because
they have not availed or used said amount for the same was unlawfully withheld from them.
We do not agree. The fundamental doctrine of unjust enrichment is the transfer of value without just cause or
consideration. The elements of this doctrine are: enrichment on the part of the defendant; impoverishment on the part of the
plaintiff; and lack of cause. The main objective is to prevent one to enrich himself at the expense of another. 28 It is
commonly accepted that this doctrine simply means that a person shall not be allowed to profit or enrich himself inequitably
at another's expense. 29 In the instant case, there is no unjust enrichment to speak of. The amount of P225,905.79 was
applied as payment for petitioner corporation's loan which was taken from the P250,000.00, together with its accrued
interest, that was placed in time deposit with First Summa Savings and Mortgage Bank. The use of said amount as payment
was approved by petitioner Pablo C. Javier, Sr. on 17 March 1983. 30 As further found by the RTC in its decision, the
balance of the time deposit was withdrawn by petitioners. 31
Petitioner corporation faults respondent bank, then known as First Summa Savings and Mortgage Bank, for
requiring it to put up as additional collateral the amount of P250,000.00 inasmuch as the CB never required it to do so. It
added that respondent bank took advantage of its urgent and immediate need at the time for the proceeds of the IGLF loans
that it had no choice but to comply with respondent bank's requirement to put in time deposits the said amount as additional
collateral.
We agree with respondent court that the questioning of the propriety of the placing of the P250,000.00 in time
deposits 32 with respondent bank as additional collateral was belatedly made. As above-discussed, the requirement to give
additional collateral was warranted because the collateral petitioner corporation put up failed to cover its IGLF loans. If
petitioner corporation was really bent on questioning the reasonableness of putting up the aforementioned amount as
additional collateral, it should have done immediately after it made the time deposits on 26 November 1981. This, it did not
do. It questioned the placing of the time deposits only on 08 February 1984 33 or long after defendant bank had already
demanded full payment of the loans, then amounting to P2,045,401.79 as of 22 November 1983. It is too late in the day for
petitioner corporation to question the placing of the P250,000.00 in time deposits after it failed to pay its loan obligations as
scheduled, making them due and demandable, and after a demand for full payment has been made. We will not allow
petitioner corporation to have one's cake and eat it too.

As regards the payments made by petitioner corporation, respondent court has this to say:
The trial court held, based on plaintiffs' own exhibits, that plaintiff[s] made the following
payments:
On Promissory Note No. 713:
Date Actual Date of Amount

(Per PN Schedule) Payment

July 6, 1981 August 3, 1981 P28,125.00

October 6, 1981 October 28, 1981 28,836.13

January 6, 1982 January 22, 1982 29,227.38

March 17, 1983 225,905.79

––––––––––

TOTAL P312,094.30

And on Promissory Note No. 841:


Date Actual Date of Amount

(Per PN Schedule) Payment

February 20, 1982 April 13, 1982 P28,569.30

May 20, 1982 July 7, 1982 29,254.31

August 20, 1982 August 31, 1982 36,795.44

–––––––––

TOTAL P94,619.05

Plaintiff-appellant[s] does not dispute the finding, which is obvious from the foregoing summary,
that plaintiff[s] stopped payments on March 17, 1983 on Promissory Note No. 713, and on August 31,
1982 on Promissory Note No. 841. TIcEDC
By simply looking at the amortization schedule attached to the two promissory notes, it is clear
that plaintiff[s] already defaulted on its loan obligations when the defendant Bank gave notice of the
foreclosure proceedings on April 28, 1984. On amortization payments alone, plaintiff[s] should have paid
a total of P459,339 as of April 6, 1984 on Promissory [Note] No. 713, and a total of P328,173.00 as of
February 20, 1984 on Promissory Note [No.] 841. No extended computation is necessary to demonstrate
that, even without imputing the liquidated damages equivalent to 2% a month on the delayed payments
(see second paragraph of the promissory notes), the plaintiffs were grossly deficient in amortization
payments, and already in default when the foreclosure proceedings were commenced. Further, we note
that under the terms of the promissory note, "failure to pay an installment when due shall entitle the bank
or its assign to declare all the obligations as immediately due and payable" (second paragraph). 34
As to the third assigned error, petitioners argue that there being no malice or bad faith on their part when they filed
the instant case, no damages should have been awarded to respondent bank.
We cannot sustain such argument. The presence of malice or bad faith is very evident in the case before us. By the
documents it executed, petitioner corporation was well aware that First Summa Savings and Mortgage Bank changed its
corporate name to PAIC Savings and Mortgage Bank, Inc. Despite knowledge that First Summa Savings and Mortgage
Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same entity, it pretended otherwise. It used this
purported ignorance as an excuse to renege on its obligation to pay its loans after they became due and after demands for
payment were made, claiming that it never obtained the loans from respondent bank.
No good faith was shown by petitioner corporation. If it were in good faith in complying with its loan obligations
since it believed that respondent bank had no right to the payment, it should have made a valid consignation in court. This, it
did not do. If petitioner corporation were at a loss as to who should receive the payment, it could have easily taken steps
and inquired from the SEC, CB of the Philippines or from the bank itself from which it received the loans and to where it
made previous payments. Further, the fact that it was respondent bank that was demanding payment for loans already due
and demandable and not First Summa Savings and Mortgage Bank is sufficient to make petitioner corporation wonder why
this is so. It never took any initiative to clear the matter. Instead, it paid no attention to the valid demands of respondent
bank.
The awarding of actual and compensatory damages, as well as attorney's fees, is justified under the circumstances.
We quote with approval the reasons given by the RTC for the grant of the same:
Considering that Defendant Bank had been prevented at least four (4) times from foreclosing the
mortgages (i.e., Temporary Restraining Orders of May 9 and 19 and October 22, 1984 and status quo
order of December 10, 1990 enjoining the extrajudicial foreclosure sales of May 9 and 16 and October
23, 1984 and December 20, 1990, respectively), it is proper that Defendant Bank be reimbursed its actual
expenses. The amount of P40,000.00 is reasonable reimbursement for the publication and other
expenses incurred in the four (4) extrajudicial foreclosures which were enjoined by the Court. Considering
the wanton and reckless filing of this clearly unfounded and baseless legal action and the fact that
Defendant Bank had to defend itself against such suit, attorney's fees in the amount of P50,000.00
should be paid by the Plaintiffs to the Defendant Bank. Defendant Bank failed to adduce indubitable proof
on the moral and exemplary damages that it seeks. Nevertheless, since such proof is not absolutely
necessary and primarily as an example for the public good to deter others from filing a similar clearly
unfounded legal action, Defendant Bank should be entitled to an award of exemplary damages. 35
This Court finds that petitioners failed to comply with what is incumbent upon them — to pay their loans when they
became due. The lame excuse they belatedly advanced for their non-payment cannot and should not prevent respondent
bank from exercising its right to foreclose the real estate mortgages executed in its favor.
WHEREFORE, premises considered, the Court of Appeals decision dated 31 January 1997 and its resolution dated
20 June 1997 are hereby AFFIRMED in toto. Costs against petitioners. SO ORDERED.
||| (P.C. Javier & Sons Inc. v. Court of Appeals, G.R. No. 129552, [June 29, 2005], 500 PHIL 419-437)

[G.R. No. L-26370. July 31, 1970.]

PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-appellant, vs. MARIA CARMEN


HARTIGAN, CGH, and O. ENGKEE, defendants-appellees.

Bausa, Ampil & Suarez for plaintiff-appellant.


Nicasio E. Martin for defendants-appellees.

DECISION

BARREDO, J p:
Appeal from the decision dated 6 October 1962 of the Court of First Instance of Manila — dismissing the action
in its Civil Case No. 48925 — brought by the herein plaintiff-appellant Philippine First Insurance Co., Inc. to the Court of
Appeals which could, upon finding that the said appeal raises purely questions of law, declared itself without jurisdiction
to entertain the same and, in its resolution dated 15 July 1966, certified the records thereof to this Court for proper
determination.
The antecedent facts are set forth in the pertinent portions of the resolution of the Court of Appeals referred to
as follows:
"According to the complaint, plaintiff was originally organized as an insurance corporation
under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.' The articles of
incorporation originally presented before the Securities and Exchange Commissioner and
acknowledged before Notary Public Mr. E. D. Ignacio on June 1, 1953 state that the name of the
corporation was 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.'.' On May 26, 1961 the
articles of incorporation were amended pursuant to a certificate of the Board of Directors dated
March 8, 1961 changing the name of the corporation to 'Philippine First Insurance Co., Inc.'
"The complaint alleges that the plaintiff Philippine First Insurance Co., Inc., doing business
under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Lt.' signed as co-maker
together with defendant Maria Carmen Hartigan, CGH, a promissory note for P5,000.00 in favor of
the China Banking Corporation payable within 30 days after the date of the promissory note with
the usual banking interest; that the plaintiff agreed to act as such co-maker of the promissory note
upon the application of the defendant Maria Carmen Hartigan, CGH, who together with Antonio F.
Chua and Chang Ka Fu, signed an indemnity agreement in favor of the plaintiff, undertaking jointly
and severally, to pay the plaintiff damages, losses or expenses of whatever kind or nature,
including attorney's fees and legal costs, which the plaintiff may sustain as a result of the execution
by the plaintiff as co-maker of Maria Carmen Hartigan, CGH, of the promissory note above referred
to; that as a result of the execution of the promissory note by the plaintiff and Maria Carmen
Hartigan, CGH, the China Banking Corporation delivered to the defendant Maria Carmen Hartigan,
CGH, the sum of P5,000.00 which said defendant failed to pay in full, such that on August 31,
1961 the same was renewed and as of November 27, 1961 there was due on account of the
promissory note the sum of P4,559.50 including interest. The complaint ends with a prayer for
judgment against the defendants, jointly and severally, for the sum of P4,559.50 with interest at the
rate of 12% per annum from November 23, 1961 plus P911.90 by way of attorney's fees and costs.
"Although O. Engkee was made as party defendant in the caption of the complaint, his
name is not mentioned in the body of said complaint. However, his name appears in the Annex A
attached to the complaint which is the counter indemnity agreement supposed to have been
signed according to the complaint by Maria Carmen Hartigan, CGH, Antonio F. Chua and Chang
Ka Fu.
"In their answer the defendants deny the allegation that the plaintiff formerly conducted
business under the name and style of 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.',
They admit the execution of the indemnity agreement but they claim that they signed said
agreement in favor of the 'Yek Tong Lin Fire and Marine Insurance Co., Ltd.' and not in favor of the
plaintiff. They likewise admit that they failed to pay the promissory note when it fell due but they
allege that since their obligation with the China Banking Corporation based on the promissory note
still subsists, the surety who co-signed the promissory note is not entitled to collect the value
thereof from the defendants otherwise they will be liable for double amount of their obligation, there
being no allegation that the surety has paid the obligation to the creditor.
"By way of special defense, defendants claim that there is no privity of contract between
the plaintiff and the defendants and consequently, the plaintiff has no cause of action against them,
considering that the complaint does not allege that the plaintiff and the 'Yek Tong Lin Fire and
Marine Insurance Co., Ltd.' are one and the same or that the plaintiff has acquired the rights of the
latter. The parties after the admission of Exhibit A which is the amended articles of incorporation
and Exhibit 1 which is a demand letter dated August 16, 1962 signed by the manager of the loans
and discount department of the China Banking Corporation showing that the promissory note up to
said date in the sum of P4,500.00 was still unpaid, submitted the case for decision based on the
pleadings."
Under date of 6 October 1962, the Court of First Instance of Manila rendered the decision appealed. It
dismissed the action with costs against the plaintiff Philippine First Insurance Co., Inc., reasoning as follows:
". . . With these undisputed facts in mind, the parties correctly concluded that the issues for
resolution by this Court are as follows:
"(a) Whether or not the plaintiff is the real party in interest that may validly sue on
the indemnity agreement signed by the defendants and the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. (Annex A to plaintiff's complaint); and
"(b) Whether or not a suit for indemnity or reimbursement may under said
indemnity agreement prosper without plaintiff having yet paid the amount due under said
promissory note.
"In the first place, the change of name of the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd. to the Philippine First Insurance Co., Inc. is of dubious validity. Such change of name in effect
dissolved the original corporation by a process of dissolution not authorized by our corporation law
(see Secs. 62 and 67, inclusive, of our Corporation Law). Moreover, said change of name,
amounting to a dissolution of the Yek Tong Lin Fire & Marine Insurance Co., Ltd., does not appear
to have been effected with the written note or assent of stockholders representing at least two-
thirds of the subscribed capital stock of the corporation, a voting proportion required not only for
the dissolution of a corporation but also for any amendment of its articles of incorporation (Secs.
18 and 62, Corporation Law). Furthermore, such change of corporate name appears to be against
public policy and may be effected only by express authority of law (Red Line Transportation Co. v.
Rural Transit Co., Ltd., 60 Phil. 549, 555; Cincinnati Cooperage Co., Ltd. vs. Vate, 26 SW 538,
539; Pilsen Brewing Co. vs. Wallace, 125 NE 714), but there is nothing in our corporation law
authorizing the change of corporate name in this jurisdiction.
"In the second place, assuming that the change of name of the Yek Tong Lin Fire &
Marine Insurance Co., Ltd., to Philippine First Insurance Co., Inc., as accomplished on March 8,
1961, is valid, that would mean that the original corporation; the Yek Tong Lin Fire & Marine
Insurance Co., Ltd., became dissolved and of no further existence since March 8, 1961, 80 that on
May 15, 1961, the date the indemnity agreement, Annex A, was executed, said original corporation
had no more power to enter into any agreement with the defendants, and the agreement entered
into by it was ineffective for lack of capacity of said dissolved corporation to enter into said
agreement. At any rate, even if we hold that said change of name is valid, the fact remains that
there is no evidence showing that the new city entity, the Philippine First Insurance Co., Inc. has,
with the consent of the original parties, assumed the obligations or was assigned the rights of
action in the original corporation, the Yek Tong Lin Fire & Marine Insurance Co., Ltd. In other
words, there is no evidence of conventional subrogation of the plaintiffs in the rights of the Yek
Tong Lin Fire & Marine Insurance Co., Ltd. under said indemnity agreement (Arts. 1300 1301, New
Civil Code). Without such subrogation, or assignment of rights, the herein plaintiff has no cause of
action against the defendants, and is, therefore, not the right party in interest as plaintiff.
"Last, but not least, assuming that the said change of name was legal and operated to
dissolve the original corporation, the dissolved corporation, must pursuant to Sec. 77 of our
corporation law, be deemed as continuing as a body corporate for three (3) years from March 8,
1961 for the purpose of prosecuting and defending suits. It is, therefore, the Yek Tong Lin Fire &
Marine Insurance Co., Ltd. that is the proper party to sue the defendants under said indemnity
agreement up to March 8, 1964.
"Having arrived at the foregoing conclusions, this Court need not squarely pass upon issue
(b) formulated above.
"WHEREFORE, plaintiff's action is hereby dismissed, with costs against the plaintiff."
In due time, the Philippine First Insurance Company, Inc. moved for reconsideration of the decision aforesaid,
but said motion was denied on December 3, 1962 in an order worded thus:
"The motion for reconsideration, dated November 8, 1962, raises no new issue that we
failed to consider in rendering our decision of October 6, 1962. However, it gives us an opportunity
to amplify our decision as regards the question of change of name of a corporation in this
jurisdiction.
"We find nothing in our Corporation Law authorizing a change of name of a corporation
organized pursuant to its provisions. Sec. 18 of the Corporation law authorizes, in our opinion,
amendment to the Articles of Incorporation of a corporation only as to matters other than its
corporate name. Once a corporation is organized in this jurisdiction by the execution and
registration of its Articles of Incorporation, it shall continue to exist under its corporate name for the
lifetime of its corporate existence fixed in its Articles of Incorporation, unless sooner legally
dissolved (Sec. 11, Corp. Law). Significantly, change of name is not one of the methods of
dissolution of corporations expressly authorized by our Corporation Law. Also significant is the fact
that the power to change its corporate name is not one of the general powers conferred on
corporations in this jurisdiction (Sec. 13, Corp. Law). The enumeration of corporate powers made
in our Corporation Law implies the exclusion of all others (Thomas v. West Jersey R. Co., 101 U.S.
71, 25 L. ed. 950). It is obvious, in this connection, that change of name is not one of the powers
necessary to the exercise of the powers conferred on Corporations by said Sec. 13 (see Sec. 14,
Corp. Law).
"To rule that Sec. 18 of our Corporation Law authorizes the change of name of a
corporation by amendment of its Articles of Incorporation is to indulge in judicial legislation. We
have examined the cases cited in Volume 13 of American Jurisprudence in support of the
proposition that the general power to alter or amend the charter of a corporation necessarily
includes the power to alter the name of a corporation, and find no justification for said conclusion
arrived at by the editors of American Jurisprudence. On the contrary, the annotations in favor of
plaintiff's view appear to have been based on decisions in cases where the statute itself expressly
authorizes change of corporate name by amendment of its Articles of Incorporation. The correct
rule in harmony with the provisions of our Corporation Law is well expressed in an English case as
follows:
'After a company has been completely registered without defect or omission, so as
to be incorporated by the name set forth in the deed of settlement, such incorporated
company has not the power to change its name . . . Although the King by his prerogative
might incorporate by a new name, and the newly named corporation might retain former
rights, and sometimes its former name also, . . . it never appears to be such an act as the
corporation could do by itself, but required the same power as created the corporation.
(Reg. v. Registrar of Joint Stock Cos. 10 Q.B. 839, 59 E.C.L. 839).'
The contrary view appears to represent the minority doctrine, judging from the annotations on
decided cases on the matter.
"The movant invokes as persuasive precedent the action of the Securities Commissioner
in tacitly approving the Amended Articles of Incorporation on May 26, 1961. We regret that we
cannot in good conscience lend approval to this action of the Securities and Exchange
Commissioner. We find no justification, legal, moral, or practical, for adhering to the view taken by
the Securities and Exchange Commissioner that the name of a corporation in the Philippines may
be changed by mere amendment of its Articles of Incorporation as to its corporate name. A change
of corporate name would serve no useful purpose, but on the contrary would most probably cause
confusion. Only a dubious purpose could inspire a change of a corporate name which, unlike a
natural person's name, was chosen by the incorporators themselves; and our Courts should not
lend their assistance to the accomplishment of dubious purposes.
"WHEREFORE, we hereby deny plaintiff's motion for reconsideration, dated November 8,
1962, for lack of merit."
In this appeal appellant contends that —
"I
"THE TRIAL COURT ERRED IN HOLDING THAT IN THIS JURISDICTION, THERE IS
NOTHING IN OUR CORPORATION LAW AUTHORIZING THE CHANGE OF CORPORATE
NAME;
"II
"THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF CORPORATE
NAME APPEARS TO BE AGAINST PUBLIC POLICY;
"III
"THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF CORPORATE NAME
HAS THE LEGAL EFFECT OF DISSOLVING THE ORIGINAL CORPORATION;
"IV
"THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF NAME OF THE YEK
TONG LIN FIRE & MARINE INSURANCE CO., LTD. IS OF DUBIOUS VALIDITY;
"V
"THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT HEREIN IS NOT
THE RIGHT PARTY IN INTEREST TO SUE DEFENDANTS-APPELLEES;
"VI
"THE TRIAL COURT FINALLY ERRED IN DISMISSING THE COMPLAINT."
Appellant's position is correct; all the above assignments of error are well taken. The whole case, however,
revolves around only one question. May a Philippine corporation change its name and still retain its original personality
and individuality as such?
The answer is not difficult to find. True, under Section 6 of the Corporation Law, the first thing required to be
stated in the Articles of Incorporation of any corporation is its name, but it is only one among many matters equally if not
more important, that must be stated therein. Thus, it is also required, for example, to state the number and names of
and residences of the incorporators and the residence or location of the principal office of the corporation, its term of
existence, the amount of its capital stock and the number of shares into which it is divided, etc., etc.
On the other hand, Section 18 explicitly permits the articles of incorporation to be amended thus:
"Sec. 18. — Any corporation may for legitimate corporate purpose or purposes, amend its
articles of incorporation by a majority vote of its board of directors or trustees and the vote or
written assent of two-thirds of its members, if it be a nonstock corporation or, if it be a stock
corporation, by the vote or written assent of the stockholders representing at least two thirds of the
subscribed capital stock of the corporation: Provided, however, That if such amendment to the
articles of incorporation should consist in extending the corporate existence or in any change in the
rights of holders of shares of any class, or would authorize shares with preferences in any respect
superior to those of outstanding shares of any class, or would restrict the rights of any stockholder,
then any stockholder who did not vote for such corporate action may, within forty days after the
date upon which such action was authorized, object thereto in writing and demand payment for his
shares. If, after such a demand by a stockholder. the corporation and the stockholder cannot agree
upon the value of his share or shares at the time such corporate action was authorized, such value
shall be ascertained by three disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The findings of the
appraisers shall be final, and if their award is not paid by the corporation within thirty days after it is
made, it may be recovered in an action by the stockholder against the corporation. Upon payment
by the corporation to the stockholder of the agreed or awarded price of his share or shares, the
stockholder shall forthwith transfer and assign the share or shares held by him as directed by the
Corporation: Provided, however, That their own shares of stock purchased or otherwise acquired
by banks, trust companies, and insurance companies, should be disposed of within six months
after acquiring title thereto.
"Unless and until such amendment to the articles of incorporation shall have been
abandoned or the action rescinded, the stockholder making such demand in writing shall cease to
be a stockholder and shall have no rights with respect to such shares, except the right to receive
payment therefor as aforesaid.
"A stockholder shall not be entitled to payment for his shares under the provisions of this
section unless the value of the corporate assets which would remain after such payment would be
at least equal to the aggregate amount of its debts and liabilities and the aggregate par value
and/or issued value of the remaining subscribed capital stock.
"A copy of the articles of incorporation as amended, duly certified to be correct by the
president and the secretary of the corporation and a majority of the board of directors or trustees,
shall be filed with the Securities and Exchange Commissioner, who shall attach the same to the
original articles of incorporation, on file in his office. From the time of filing such copy of the
amended articles of incorporation, the corporation shall have the same powers and it and the
members and stockholders thereof shall thereafter be subject to the same liabilities as if such
amendment had been embraced in the original articles of incorporation: Provided, however, That
should the amendment consist in extending the corporate life, the extension shall not exceed 50
years in any one instance. Provided, further, That the original articles and amended articles
together shall contain all provisions required by law to be set out in the articles of incorporation:
And provided, further, That nothing in this section shall be construed to authorize any corporation
to increase or diminish its capital stock or so as to effect any rights or actions which accrued to
others between the time of filing the original articles of incorporation and the filing of the amended
articles.
"The Securities and Exchange Commissioner shall be entitled to collect and receive the
sum of ten pesos for filing said copy of the amended articles of incorporation. Provided, however,
That when the amendment consists in extending the term of corporate existence, the Securities
and Exchange Commissioner shall be entitled to collect and receive for the filing of its amended
articles of incorporation the same fees collectible under existing law for the filing of articles of
incorporation. The Securities & Exchange Commissioner shall not hereafter file any amendment to
the articles of incorporation of any bank, banking institution, or building and loan association unless
accompanied by a certificate of the Monetary Board (of the Central sank) to the effect that such
amendment is in accordance with law. (As further amended by Act No. 3610, Sec. 2 and Sec. 9.
R.A. No. 337 and R.A. No. 3531.)"
It can be gleaned at once that this section does not only authorize corporations to amend their charter; it also
lays down the procedure for such amendment; and, what is more relevant to the present discussion, it contains provisos
restricting the power to amend when it comes to the term of their existence and the increase or decrease of the capital
stock. There is no prohibition therein against the change of name. The inference is clear that such a change is allowed,
for if the legislature had intended to enjoin corporations from changing names, it would have expressly stated so in this
section or in any other provision of the law.
No doubt, "(the) name (of a corporation) is peculiarly important as necessary to the very existence of a
corporation. The general rule as to corporations is that each corporation shall have a name by which it is to sue and be
sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as
the name of an individual designates the person." 1 Since an individual has the right to change his name under certain
conditions, there is no Compelling reason why a corporation may not enjoy the same right. There is nothing sacrosanct
in a name when it comes to artificial beings, The sentimental considerations which individuals attach to their names are
not present in corporations and partnerships. Of course, as in the case of an individual, such change may not be made
exclusively by the corporation's own act. It has to follow the procedure prescribed by law for the purpose; and this is
what is important and indispensably prescribed — strict adherence to such procedure.
Local well known corporation law commentators are unanimous in the view that a corporation may change its
name by merely amending its charter in the manner prescribed by law. 2 American authorities which have persuasive
force here in this regard because our corporation law is of American origin, the same being a sort of codification of
American corporate law, 3 are of the same opinion.
"A general power to alter or amend the charter of a corporation necessarily includes the
power to alter the name of the corporation. Ft. Pitt Bldg., etc., Assoc. v. Model Plan Bldg., etc.,
Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity Mut. Aid Assoc., 12 W.N.C. (Pa.) 271; Excelsior
Oil Co., 3 Pa. Co. Ct. 184; Wetherill Steel Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
"Under the General Laws of Rhode Island, c 176, sec. 7, relating to an increase of the
capital stock of a corporation, it is provided that 'such agreement may be amended in and other
particular, excepting as provided in the following section', which relates to a decrease of the capital
stock. This section has been held to authorize a change in the name of a corporation. Armington v.
Palmer, 21 R.I. 109, 42 Atl. 308, 48 L.R.A. 95, 79 Am St. Rep. 786." (Vol. 19, American and
English Annotated Cases, p. 1239.)
Fletcher, a standard authority on American and English corporation law also says:
"Statutes are to be found in the various jurisdictions dealing with the matter of change in
corporate names. Such statutes have been subjected to judicial construction and have, in the
main, been upheld as constitutional. In direct terms or by necessary implication, they authorize
corporations to adopt new names and prescribe the mode of procedure for that purpose. The same
steps must be taken under some statutes to effect a change in a corporate name, as when any
other amendment of the corporate charter is sought . . . When the general law thus deals with the
subject, a corporation can change its name only in the manner provided." (6 Fletcher, Cyclopedia
of the Law of Private Corporations, 1968 Revised Volume, pp. 212213.) (Italic Ours)
The learned trial judge held that the above-quoted propositions are not supported by the weight of authority
because they are based on decisions in cases where the statutes expressly authorize change of corporate name by
amendment of the articles of incorporation. We have carefully examined these authorities and We are satisfied of their
relevance. Even Lord Denman who has been quoted by His Honor from In Reg. v. Registrar of Joint Stock Cos. 10,
Q.B., 59 E.C.L. maintains merely that the change of its name "never appears to be such an act as the corporation could
do for itself, but required the same power as created a corporation." What seems to have been overlooked, therefore, is
that the procedure prescribed by Section 18 of our Corporation Law for the amendment of corporate charters is
practically identical with that for the incorporation itself of a corporation.
In the appealed order of dismissal, the trial court made the observation that, according to this Court in Red Line
Transportation Co. v. Rural Transit Co., Ltd., 60 Phil. 549, 555, change of name of a corporation is against public policy.
We must clarify that such is not the import of Our said decision. What this Court held in that case is simply that:
"We know of no law that empowers the Public Service Commission or any court in this
jurisdiction to authorize one corporation to assume the name of another corporation as a trade
name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine
corporations and the very law of their creation and continued existence requires each to adopt and
certify a distinctive name. The incorporators 'constitute a body politic and corporate under the
name stated in the certificate.' (Section 11, Act No. 1459, as amended.) A corporation has
the ,power 'of succession by its corporate name.' (Section 13, ibid.) The name of a corporation is
therefore essential to its existence. It cannot change its name except in the manner provided by
the statute. By that name alone is it authorized to transact business. The law gives a corporation
no express or implied authority to assume another name that is unappropriated; still less that of
another corporation, which is expressly set apart for it and protected by the law. If any corporation
could assume at pleasure as an unregistered trade name the name of another corporation, this
practice would result in confusion and open the door to frauds and evasions and difficulties of
administration and supervision. The policy of the law as expressed in our corporation statute and
the Code of Commerce is clearly against such a practice. (Cf. Scarsdale Pub. Co. — Colonial
Press vs. Carter, 116 New York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn.,
205 Illinois [Appellate Courts], 428, 434.)"
In other words, what We have held to be contrary to public policy is the use by one corporation of the name of
another corporation as its trade name. We are certain no one will disagree that such an act can only "result in confusion
and open the door to frauds and evasions and difficulties of administration and supervision." Surely, the Red Line case
was not one of change of name.
Neither can We share the posture of His Honor that the change of name of a corporation results in its
dissolution. There is unanimity of authorities to the contrary.
"An authorized change in the name of a corporation has no more effect upon its identity as
a corporation than a change of name of a natural person has upon his identity. It does not affect
the rights of the corporation or lessen or add to its obligations. After a corporation has effected a
change in its name it should sue and be sued in its new name . . ." (13 Am. Jur. 276-277, citing
cases.)
"A mere change in the name of a corporation, either by the legislature or by the
corporators or stockholders under legislative authority, does not, generally speaking, affect the
identity of the corporation, nor in any way affect the rights, privileges, or obligations previously
acquired or incurred by it. Indeed, it has been said that a change of name by a corporation has no
more effect upon the identity of the corporation than a change of name by a natural person has
upon the identity of such person. The corporation, Upon such change in its name, is in no sense a
new corporation, nor the successor of the original one, but remains and continues to be the original
corporation. It is the same corporation with a different name, and its character is in no respect
changed . . ."(6 Fletcher, Cyclopedia of the Law of Private Corporations, 224-225, citing cases.)
"The change in the name of a corporation has no more effect upon its identity as a
corporation than a change of name of a natural person has upon his identity. It does not affect the
rights of the corporation, or lessen or add to its obligations.
"England. — Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L.J. Exch. 418.
"United States. — Metropolitan Nat. Bank v. Claggett, 141 U.S. 520, 12 S. Ct. 60, 35 U.S.
(L. ed.) 841.
"Alabama. — Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So. 670; North
Birmingham Lumber Co. v. Sims, 157 Ala. 595, 48 So. 84.
"Connecticut. — Trinity Church v. Hall, 22 Com. 125.
"Illinois. — Mt. Palatine Academy v. Kleinschnitz, 28 Ill. 133; St. Louis, etc. R. Co. v. Miller,
43 Ill. 199; Reading v. Wedder, 66 Ill. 80.
"Indiana. — Rosenthal v. Madison, etc., Plank Road Co., 10 Ind. 358.
"Kentucky. — Cahill v. Bigger, 8 B. Mon. 211; Wilhite v. Convent of Good Shepherd, 177
Ky. 251, 78 S. W. 138.
Maryland. — Phinney v. Sheppard & Enoch Pratt Hospital, 88 Md. 633, 42 Atl. 58, writ of
error dismissed, 177 U.S. 170 20 S. Ct. 573, 44 U.S. (L. ed.) 720.
"Missouri. — Dean v. La Motte Lead Co., 59 Mo. 523.
"Nebraska. — Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W. 334.
"New York. — First Soc. of M.E. Church v. Brownell, 5 Hun 464.
"Pennsylvania. — Com. v. Pittsburgh, 41 Pa. St. 278.
"South Carolina. — South Carolina Mut. Ins. Co. v. Price 67 S.C. 207, 45 S.E. 173.
"Virginia. — Wilaon v. Chesapeake, etc., R. Co., 21: Gratt, 654; Wright-Caesar Tobacco
Co. v. Hoen, 105 Va. 327, 54 S.E. 309.
"Washington. — King v. Ilwaco R. etc., Co., 1 Wash. 127, 23 Pac. 924.
"Wisconsin. — Racine County Bank v. Ayers, 12 Wis. 512.
"The fact that the corporation by its old name makes a formal transfer of its property to the
corporation by its new name does not of itself show that the change in name has affected a
change in the identity of the corporation. Palfrey v. Association for Relief, etc., 110 La. 452, 34 So.
600. The fact that a corporation organized as a state bank afterwards becomes a national bank by
complying with the provisions of the National Banking Act, and changes its name accordingly, has
no effect on its right to sue upon obligations or liabilities incurred to it by its former name. Michigan
Ins. Bank v. Eldred, 143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
"A deed of land to a church by a particular name has been held not to be affected by the
fact that the church afterwards took a different name. Cahill v. Bigger, 8 B. Mon. (ky) 211.
"A change in the name of a corporation is not a divestiture of title or such a change as
requires a regular transfer of title to property, whether real or personal, from the corporation under
one name to the same corporation under another name. McCloskey v. Doherty, 97 Ky. 300, 30 S.
W. 649." (19 American and English Annotated Cases 1242-1243.)
As was very aptly said in Pacific Bank v. De Ro, 37 Cal. 538, "The changing of the name of a corporation is no
more the creation of a corporation than the changing of the name of a natural person is the 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."
Having arrived at the above conclusion, We have to agree with appellant's pose that the lower court also erred
in holding that it is not the right party in interest to sue defendants-appellees. 4 As correctly pointed out by appellant, the
approval by the stockholders of the amendment of its articles of incorporation changing the name "The Yek Tong Lin
Fire & Marine Insurance Co., Ltd." to "Philippine First Insurance Co., Inc." on March 8, 1961, did not automatically
change the name of said corporation on that date. To be effective, Section 18 of the Corporation Law, earlier quoted,
requires that "a copy of the articles of incorporation as amended, duly certified to be correct by the president and the
secretary of the corporation and a majority of the board of directors or trustees, shall be filed with the Securities &
Exchange Commissioner", and it is only from the time of such filing, that "the corporation shall have the same powers
and it and the members and stockholders thereof shall thereafter be subject to the same liabilities, as if such
amendment had been embraced in the original articles of incorporation." It goes without saying then that appellant
rightly acted in its old name when on May 15, 1961, it entered into the indemnity agreement, Annex A, with the
defendants-appellees; for only after the filing of the amended articles of incorporation with the Securities & Exchange
Commission on May 26, 1961, did appellant legally acquire its new name; and it was perfectly right for it to file the
present case in that new name on December 6, 1961. Such is, but the logical effect of the change of name of the
corporation upon its actions.
"Actions brought by a corporation after it has changed its name should be brought under
the new name although for the enforcement of rights existing at the time the change was made.
Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591,17 So. 670; Newlan v. Lombard University, 62 Ill.
195; Thomas v. Visitors of Frederick County School, 7 Gill & J (M.d.) 388; Delaware, etc., R. Co. v.
Irick, 23 N. J. L. 321; Northumberland County Bank v. Eyer, 60 Pa. St. 436; Wilson v. Chesapeake,
etc., R. Co., 21 Gratt. (Va.) 654.
"The change in the name of the corporation does not affect its right to bring an action on a
note given to the corporation under its former name. Cumberland College v. Ish. 22 Cal 641;
Northwestern College v. Schwagler, 37 Ia. 577." (19 American and English Annotated Cases
1243.)
In consequence, We hold that the lower court erred in dismissing appellant's complaint. We take this
opportunity, however, to express the Court's feeling that it is apparent that appellee's position is more technical than
otherwise. Nowhere in the record is it seriously pretended that the indebtedness sued upon has already been paid. If
appellees entertained any fear that they might against be made liable to Yek Tong Lin Fire & Marine Insurance Co. Ltd.,
or to someone else in its behalf, a cursory examination of the records of the Securities & Exchange Commission would
have sufficed to clear up the fact that Yek Tong Lin had just changed its name but it had not ceased to be their creditor.
Everyone should realize that when the time of the courts is utilized for cases which do not involve substantial questions
and the claim of one of the parties therein is based on pure technicality that can at most delay only the ultimate outcome
necessarily adverse to such party because it has no real cause on the merits, grave injustice is committed to
numberless litigants whose meritorious cases cannot be given all the needed time by the courts. We address this
appeal once more to all members of the bar, in particular, since it is their bounden duty to the profession and to our
country and people at large to help ease as fast as possible the clogged dockets of the courts. Let us not wait until the
people resort to other means to secure speedy, just and inexpensive determination of their cases.
WHEREFORE, judgment of the lower court is reversed, and this case is remanded to the trial court for further
proceedings consistent herewith. With costs against appellees.
||| (Philippine First Insurance Co., Inc. v. Hartigan, G.R. No. L-26370, [July 31, 1970], 145 PHIL 310-329)

[G.R. No. 157900. July 22, 2013.]

ZUELLIG FREIGHT AND CARGO SYSTEMS, petitioner, vs. NATIONAL LABOR RELATIONS
COMMISSION AND RONALDO V. SAN MIGUEL, respondents.

DECISION

BERSAMIN, J p:

The mere change in the corporate name is not considered under the law as the creation of a new corporation;
hence, the renamed corporation remains liable for the illegal dismissal of its employee separated under that guise.
The Case
Petitioner employer appeals the decision promulgated on November 6, 2002, 1 whereby the Court of Appeals (CA)
dismissed its petition for certiorari and upheld the adverse decision of the National Labor Relations Commission (NLRC)
finding respondent Ronaldo V. San Miguel to have been illegally dismissed.
Antecedents
San Miguel brought a complaint for unfair labor practice, illegal dismissal, non-payment of salaries and moral
damages against petitioner, formerly known as Zeta Brokerage Corporation (Zeta). 2 He alleged that he had been a
checker/customs representative of Zeta since December 16, 1985; that in January 1994, he and other employees of Zeta
were informed that Zeta would cease operations, and that all affected employees, including him, would be separated; that
by letter dated February 28, 1994, Zeta informed him of his termination effective March 31, 1994; that he reluctantly
accepted his separation pay subject to the standing offer to be hired to his former position by petitioner; and that on April 15,
1994, he was summarily terminated, without any valid cause and due process.
San Miguel contended that the amendments of the articles of incorporation of Zeta were for the purpose of
changing the corporate name, broadening the primary functions, and increasing the capital stock; and that such
amendments could not mean that Zeta had been thereby dissolved. 3
On its part, petitioner countered that San Miguel's termination from Zeta had been for a cause authorized by the
Labor Code; that its non-acceptance of him had not been by any means irregular or discriminatory; that its predecessor-in-
interest had complied with the requirements for termination due to the cessation of business operations; that it had no
obligation to employ San Miguel in the exercise of its valid management prerogative; that all employees had been given
sufficient time to make their decision whether to accept its offer of employment or not, but he had not responded to its offer
within the time set; that because of his failure to meet the deadline, the offer had expired; that he had nonetheless been
hired on a temporary basis; and that when it decided to hire another employee instead of San Miguel, such decision was not
arbitrary because of seniority considerations. 4 EcHTCD
Decision of the Labor Arbiter
On November 15, 1999, Labor Arbiter Francisco A. Robles rendered a decision holding that San Miguel had been
illegally dismissed, 5 to wit:
Contrary to respondents' claim that Zeta ceased operations and closed its business, we believe
that there was merely a change of business name and primary purpose and upgrading of stocks of the
corporation. Zuellig and Zeta are therefore legally the same person and entity and this was admitted by
Zuellig's counsel in its letter to the VAT Department of the Bureau of Internal Revenue on 08 June 1994
(Reply, Annex "A"). As such, the termination of complainant's services allegedly due to cessation of
business operations of Zeta is deemed illegal. Notwithstanding his receipt of separation benefits from
respondents, complainant is not estopped from questioning the legality of his dismissal. 6
xxx xxx xxx
WHEREFORE, in view of the foregoing, complainant is found to have been illegally dismissed.
Respondent Zuellig Freight and Cargo Systems, Inc. is hereby ordered to pay complainant his
backwages from April 1, 1994 up to November 15, 1999, in the amount of THREE HUNDRED TWENTY
FOUR THOUSAND SIX HUNDRED FIFTEEN PESOS (P324,615.00).
The same respondent is ordered to pay the complainant Ronaldo San Miguel attorney's fees
equivalent to ten percent (10%) of the total award.
All other claims are dismissed.
SO ORDERED. 7
Decision of the NLRC
Petitioner appealed, but the NLRC issued a resolution on April 4, 2001, 8 affirming the decision of the Labor Arbiter.
The NLRC later on denied petitioner's motion for reconsideration via its resolution dated June 15, 2001. 9
Decision of the CA
Petitioner then filed a petition for certiorari in the CA, imputing to the NLRC grave abuse of discretion amounting to
lack or excess of jurisdiction, as follows:
1. In failing to consider the circumstances attendant to the cessation of business of Zeta;
2. In failing to consider that San Miguel failed to meet the deadline Zeta fixed for its employees to
accept the offer of petitioner for re-employment;
3. In failing to consider that San Miguel's employment with petitioner from April 1 to 15, 1994
could in no way be interpreted as a continuation of employment with Zeta;
4. In admitting in evidence the letter dated January 21, 1994 of petitioner's counsel to the Bureau
of Internal Revenue; and
5. In awarding attorney's fees to San Miguel based on Article 2208 of the Civil Code and Article
111 of the Labor Code.
On November 6, 2002, the CA promulgated its assailed decision dismissing the petition for certiorari, 10 viz.:
A careful perusal of the records shows that the closure of business operation was not validly
made. Consider the Certificate of Filing of the Amended Articles of Incorporation which clearly shows that
petitioner Zuellig is actually the former Zeta as per amendment dated January 21, 1994. The same
observation can be deduced with respect to the Certificate of Filing of Amended By-Laws dated May 10,
1994. As aptly pointed out by private respondent San Miguel, the amendment of the articles of
incorporation merely changed its corporate name, broadened its primary purpose and increased its
authorized capital stocks. The requirements contemplated in Article 283 were not satisfied in this case.
Good faith was not established by mere registration with the Securities and Exchange Commission (SEC)
of the Amended Articles of Incorporation and By-Laws. The factual milieu of the case, considered in its
totality, shows that there was no closure to speak of. The termination of services allegedly due to
cessation of business operations of Zeta was illegal. Notwithstanding private respondent San Miguel's
receipt of separation benefits from petitioner Zuellig, the former is not estopped from questioning the
legality of his dismissal. HAIDcE
Petitioner Zuellig's allegation that the five employees who refused to receive the termination
letters were verbally informed that they had until 6:00 p.m. of March 1, 1994 to receive the termination
letters and sign the employment contracts, otherwise the former would be constrained to withdraw its
offer of employment and seek for replacements in order to ensure the smooth operations of the new
company from its opening date, is of no moment in view of the foregoing circumstances. There being no
valid closure of business operations, the dismissal of private respondent San Miguel on alleged
authorized cause of cessation of business pursuant to Article 283 of the Labor Code,was utterly illegal.
Despite verbal notice that the employees had until 6:00 p.m. of March 1, 1994 to receive the termination
letters and sign the employment contracts, the dismissal was still illegal for the said 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 operations merely operates to suspend employment relation
since it is not permanent in character.
Where there is no showing of a clear, valid, and legal 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 was for a valid or authorized cause.
Findings of facts of the NLRC, particularly when both the NLRC and Labor Arbiter are in
agreement, are deemed binding and conclusive upon the Supreme Court.
As regards the second and last argument advanced by 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. Petitioner Zuellig maintains that the factual backdraft (sic) of this petition does not call
for the application of Article 2208 of the Civil Code and Article 111 of the Labor Code as private
respondent's wages were not withheld. On the other hand, public respondent NLRC argues that
paragraphs 2 and 3, Article 2208 of the Civil Code and paragraph (a), Article 111 of the Labor Code
justify the award of attorney's fees. NLRC was saying to the effect that by petitioner Zuellig's act of
illegally dismissing private respondent San Miguel, the latter was compelled to litigate and thus incurred
expenses to protect his interest. In the same passion, private respondent San Miguel contends that
petitioner Zuellig acted in gross and evident bad faith in refusing to satisfy his plainly valid, just and
demandable claim.
After careful and judicious evaluation of the arguments advanced to support the propriety or
impropriety of the award of attorney's fees to private respondent San Miguel, this Court finds the
resolutions of public respondent NLRC supported by laws and jurisprudence. It does not need much
imagination to see that by reason of petitioner Zuellig's feigned closure of business operations, private
respondent San Miguel incurred expenses to protect his rights and interests. Therefore, the award of
attorney's fees is in order.
WHEREFORE, in view of the foregoing, the resolutions dated April 4, 2001 and June 15, 2001 of
the National Labor Relations Commission affirming the November 15, 1999 decision of the Labor Arbiter
in NLRC NCR 05-03639-94 (CA No. 022861-00) are hereby AFFIRMED and the instant petition for
certiorari is hereby DENIED and ordered DISMISSED.
SO ORDERED.
Hence, petitioner appeals.
Issues
Petitioner asserts that the CA erred in holding that the NLRC did not act with grave abuse of discretion in ruling that
the closure of the business operation of Zeta had not been bona fide, thereby resulting in the illegal dismissal of San Miguel;
and in holding that the NLRC did not act with grave abuse of discretion in ordering it to pay San Miguel attorney's fees. 11
In his comment, 12 San Miguel counters that the CA correctly found no grave abuse of discretion on the part of 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 he was entitled to back wages and attorney's fees. HIACac
In its reply, 13 petitioner reiterates that the cessation of 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 illegally
terminated; that his acknowledgment of the validity of his separation from Zeta by signing a quitclaim and waiver estopped
him from claiming that it had subsequently employed him; and that the award of attorney's fees had no basis in fact and in
law.
Ruling
The petition for review on certiorari is denied for its lack of merit.
First of all, the outcome reached by the CA that the NLRC did not commit any grave abuse of discretion was borne
out by the records of the case. We cannot undo such finding without petitioner making a clear demonstration to the Court
now that the CA gravely erred in passing upon the petition for certiorari of petitioner.
Indeed, in a special civil action for certiorari brought against a court or quasi-judicial body with jurisdiction over 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 to lack or excess of jurisdiction in issuing the impugned order. 14 Showing mere
abuse of discretion is not enough, for it is necessary to demonstrate that the abuse of discretion was grave. Grave abuse of
discretion means either that the judicial or quasi-judicial power was exercised in an arbitrary or despotic manner by reason
of passion or personal hostility, or that the respondent judge, tribunal or board evaded a positive duty, or virtually refused to
perform the duty enjoined or to act in contemplation of law, such as when such judge, tribunal or board exercising judicial or
quasi-judicial powers acted in a capricious or whimsical manner as to be equivalent to lack of jurisdiction. 15 Under the
circumstances, the CA committed no abuse of discretion, least of all grave, because its justifications were supported by the
records and by the applicable laws and jurisprudence.
Secondly, it is worthy to point out that the Labor Arbiter, the NLRC, and the CA were united in concluding that the
cessation of business by Zeta was not a bona fide closure to be regarded as a valid ground for the termination of
employment of San Miguel within the ambit of Article 283 of the Labor Code. The provision pertinently reads:
Article 283. Closure of establishment and reduction of personnel. — The employer may also
terminate the employment of any employee due to the installation of labor-saving devices, redundancy,
retrenchment to prevent losses or the closing or cessation of operation of the establishment or
undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by
serving a written notice on the workers and the Department of Labor and Employment at least one
(1) month before the intended date thereof. . . . .
The unanimous conclusions of the CA, the NLRC and the Labor Arbiter, being in accord with law, were not tainted
with any abuse of discretion, least of all grave, on the part of the NLRC. Verily, the amendments of the articles of
incorporation of Zeta to change the corporate name to Zuellig Freight and Cargo Systems, Inc. did not produce the
dissolution of the former as a corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such modes. The effect of the
change of name was not a change of the corporate being, for, as well stated in Philippine First Insurance Co., Inc. v.
Hartigan: 16 "The changing of the 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."
The consequences, legal and otherwise, of the change of name were similarly dealt with in P.C. Javier & Sons, Inc.
v. Court of Appeals, 17 with the Court holding thusly: EaSCAH
From the foregoing documents, it cannot be denied that petitioner corporation was aware of First
Summa Savings and Mortgage Bank's change of corporate name to PAIC Savings and Mortgage Bank,
Inc. Knowing fully well of such change, petitioner corporation has no valid reason not to pay because the
IGLF loans were applied with and obtained from First Summa Savings and Mortgage Bank. First Summa
Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same bank to
which petitioner corporation is indebted. A change in the corporate name does not make a new
corporation, whether effected by a special act or under a general law. It has no effect on the
identity of the corporation, or on its property, rights, or liabilities. The corporation, upon such
change in its name, is in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name, and its character is in no respect
changed. (Bold underscoring supplied for emphasis)
In short, Zeta and petitioner remained one and the same corporation. The change of name did not give petitioner
the license to terminate employees of Zeta like San Miguel without just or authorized cause. The situation was not similar to
that of an enterprise buying the business of another company where the purchasing company had no obligation to rehire
terminated employees of the latter. 18 Petitioner, despite its new name, was the mere continuation of Zeta's corporate
being, and still held the obligation to honor all of Zeta's obligations, one of which was to respect San Miguel's security of
tenure. The dismissal of San Miguel from employment on the pretext that petitioner, being a different corporation, had no
obligation to accept him as its employee, was illegal and ineffectual.
And, lastly, the CA rightfully upheld the NLRC's affirmance of the grant of attorney's fees to San Miguel. Thereby,
the NLRC did not commit any grave abuse of its discretion, considering that San Miguel had been compelled to litigate and
to incur expenses to protect his rights and interest. In Producers Bank of the Philippines v. Court of Appeals, 19 the Court
ruled that attorney's fees could be awarded to a party whom an unjustified act of the other party compelled to litigate or to
incur expenses to protect his interest. It was plain that petitioner's refusal to reinstate San Miguel with backwages and other
benefits to which he had been legally entitled was unjustified, thereby entitling him to recover attorney's fees.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on November 6, 2002; and
ORDERS petitioner to pay the costs of suit. SO ORDERED.
||| (Zuellig Freight and Cargo Systems v. National Labor Relations Commission, G.R. No. 157900, [July 22, 2013], 714 PHIL
401-413)

[G.R. No. L-28113. March 28, 1969.]

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR and AMER MACAORAO BALINDONG,
petitioners, vs. PANGANDAPUN BENITO, HADJI NORODIN MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE, MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO, respondents.

L. Amores and R. Gonzales for petitioners.


Jose W . Diokno for respondents.

SYLLABUS

1. ADMINISTRATIVE LAW; MUNICIPAL CORPORATIONS; RIGHT OF INDIVIDUAL TO ATTACK


CORPORATION COLLATERALLY. — It is indeed true that, generally, an inquiry into the legal existence of a
municipality is reserved to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. But the rule disallowing collateral attacks applies
only where the municipal corporation is at least a de facto corporation. 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 proceeding
by any one whose rights or interests are affected thereby, including the citizens of the territory incorporated unless they
are estopped by their conduct from doing so.
2. ID.; ID.; MUNICIPALITY IN QUESTION IS NOT A DE FACTO CORPORATION. — In the cases where a de
facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the
decisions could fairly be made to rest on the consideration that there was some other valid law giving corporate validity
to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute
had not been invalidated cannot conceivably make it a de facto corporation, as, independently of Section 68 of the
Administrative Code, there is no other valid statute to give color of authority to its creation.
3. ID.; ID.; EFFECT OF NULLITY OF EXECUTIVE ORDER CREATING MUNICIPALITY UPON ACTS
THEREOF BEFORE DECLARATION OF NULLITY. — Executive Order 386 creating the municipality in question is a
nullity pursuant to the ruling in Pelaez vs. Auditor General and Municipality of San Joaquin vs. Siva. The executive order
therefore "created no office." This is not to say, however, that the acts done by the municipality of Balabagan in the
exercise of its corporate powers are a nullity because the executive order "is, in legal contemplation, as inoperative as
though it had never been passed." For the existence of Executive Order 386 is "an operative fact which cannot justly be
ignored." There is then no basis for the respondents' apprehension that the invalidation of the executive order creating
Balabagan would have the effect of unsettling many an act done in reliance upon the validity of the creation of that
municipality.

DECISION

CASTRO, J p:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the respondent
Pangandapun Benito is the mayor, and the rest of the respondents are the councilors, of the municipality of 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 then President Carlos P. Garcia, out of barrios and sitios 1 of the latter
municipality.
The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the respondent
municipal officials from performing the functions of their respective offices, relying on the ruling of this Court in Pelaez v.
Auditor General 2 and Municipality of San Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that Section 23 of Republic
Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to create barrios in the provincial board,
is a "statutory denial of the presidential authority to create a new barrio [and] implies a negation of the bigger power to
create municipalities," and (2) that Section 68 of the Administrative Code, insofar as it gives the President the power to
create municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative power and (b)
because it offends against Section 10 (1) of Article VII of the Constitution, which limits the President's power over local
governments to mere supervision. As this Court summed up its discussion: "In short, even if it did not entail an undue
delegation of legislative powers, as it certainly does, said Section 68, as part of the Revised Administrative Code,
approved on March 10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in 1935, which
is utterly incompatible and inconsistent with said statutory enactment."
On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless argue that
the rule announced in Pelaez can have no application in this case because unlike the municipalities involved in Pelaez,
the municipality of Balabagan is at least a de facto corporation, having been organized under color of a statute before
this was declared unconstitutional, its 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.
It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to the State in a
proceeding for quo warranto or other direct proceeding, and that only in a few exceptions may a private person exercise
this function of government. 4 But the rule disallowing collateral attacks applies only where the municipal corporation is
at least a de facto corporation. 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 proceeding by any one whose rights or interests are
affected thereby, including the citizens of the territory incorporated unless they are estopped by their conduct from doing
so. 6
And so the threshold question is whether the municipality of Balabagan is a de facto corporation. As earlier
stated, the claim that it is rests on the fact that it was organized before the promulgation of this Court's decision in
Pelaez. 7
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 statute is subsequently declared unconstitutional.
This has been a litigiously prolific question, sharply dividing courts in the United States. Thus, some hold that a
de facto corporation cannot exist where the statute or charter creating it is unconstitutional because there can be no de
facto corporation where there can be no de jure one, 8 while others hold otherwise on the theory that a statute is
binding until it is condemned as unconstitutional. 9
An early article in the Yale Law Journal offers the following analysis:
"It appears that the true basis for denying to the corporation a de facto status lay in the absence
of any legislative act to give vitality to its creation. An examination of the cases holding, some of them
unreservedly, that a de facto office or municipal corporation can exist under color of an unconstitutional
statute will reveal that in no instance 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 . . .
"The principle that color of title under an unconstitutional statute can exist only where there is
some other valid law under which the organization may be effected, or at least an authority in potencia by
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 appears on its face or that attempts to authorize the
ousting of a de jure or de facto municipal corporation upon the same territory, in the one case the fact
would imply the imputation of had faith, in the other the new organization must be regarded as a mere
usurper . . .
"As a result of this analysis of the cases the following principles may be deduced which seem to
reconcile the apparently conflicting decisions:
"I. The color of authority requisite to the organization of a de facto municipal corporation may be:
"1. A valid law enacted by the legislature.
"2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the
courts or (b) not yet been declared void; provided that a warrant for its creation can be found in some
other valid law or in the recognition of its potential existence by the general laws or constitution of the
state.
"II. There can be no de facto municipal corporation unless either directly or potentially, such a de
jure corporation is authorized by some legislative fiat.
"III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which
is apparent on its face.
"IV. There can be no de facto corporation created to take place of an existing de jure corporation,
as such organization would clearly be an usurper." 10
In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute
creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some
other valid law giving corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was
organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as,
independently of the Administrative 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 a similar petition for prohibition and
nullified an executive order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez ruling, despite the
fact that the municipality was created in 1961, before Section 68 of the Administrative Code, under which the President
had acted, was invalidated. Of course the issue of de facto municipal corporation did not arise in that case.
In Norton v. Shelby County, 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 office; it is, in legal contemplation, as inoperative as though it
had never been passed." Accordingly, he held that bonds issued by a board of commissioners created under an invalid
statute were unenforceable.
Executive Order 386 "created no office." This is not to say, however, that the acts done by the municipality of
Balabagan in the exercise of its corporate powers are a nullity because the executive order "is, in legal contemplation,
as inoperative as though it had never been passed." For the existence of Executive Order 386 is "an operative fact
which cannot justly be ignored." As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State
Bank: 13
"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, conferring no rights and imposing no duties,
and hence affording no basis for the challenged decree. Norton v. Shelby County, 118 U.S. 425, 442;
Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566. It is quite clear, however, that such broad
statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The
actual existence of a statute, prior to such a determination, in an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a new judicial
declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various
aspects — with respect to particular relations, individual and corporate, and particular conduct, private
and official. Questions of 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 both of the
statute and of its previous application, demand examination. These questions are among the most
difficult of those which have engaged the attention of courts, state and federal, and it is manifest from
numerous decisions that an all- inclusive statement of a principle of absolute retroactive invalidity cannot
be justified."
There is then no basis for the respondents' apprehension that the invalidation of the executive order creating
Balabagan would have the effect of unsettling many an act done in reliance upon the validity of the creation of that
municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the respondents are hereby
permanently restrained from performing the duties and functions of their respective offices. No pronouncement as to
costs.
||| (Municipality of Malabang v. Benito, G.R. No. L-28113, [March 28, 1969], 137 PHIL 358-370)

HARRILL v. DAVIS et al.

No. 2,805

Circuit Court of Appeals, Eighth Circuit

168 F. 187; 1909 U.S. App. LEXIS 4434

March 2, 1909

PRIOR HISTORY: [**1] In Error to the United States Court of Appeals in the Indian Territory.

CORE TERMS: stock, de facto, cotton, color, articles of incorporation, incorporation, milling, individual liability, charter,
actively, supposed, promoters, estopped, ginning, buying, commencement, stockholder, franchise, gin, cotton gin, selling,
general manager, good faith, pretended, assurance, exempt, clerk, incur, user, estoppel

COUNSEL: R. C. Allen (J. C. Pinson, on the brief), for plaintiff in error.

Geo. A. Murphey (S. M. Rutherford, W. T. Hutchings, and W. P. Z. German, on the brief), for defendants in error.

OPINION BY: SANBORN

OPINION

[*190] Before SANBORN and VAN DEVANTER, Circuit Judges, and W. H. MUNGER, District Judge.
SANBORN, Circuit Judge. The patent and indisputable facts in this case are that the four defendants associated themselves
together, and from June, 1902, until December 22, 1902, actively engaged in purchasing lumber, material, and labor of the
plaintiff, and in constructing a cotton gin under the name "The Coweta Gin Company," and in conducting the business of
buying, selling, and ginning cotton for profit under the name "The Coweta Cotton & Milling Company," and that during this
time they incurred more than $4,700 of the indebtedness of $5,145.48 for which this action was brought. On December 22,
1902, they made their first real attempt to incorporate, and for the first time took on the color or appearance of a corporation.
On that day they filed articles [*191] of incorporation with the clerk of the Court [**2] of Appeals, but they never filed any
duplicate of them with the clerk of the judicial district in which their place of business was located, as required by the
statutes in order to constitute them a legal corporation and to authorize them to do business as such. Act Feb. 18, 1901, c.
379, 31 Stat. 794; Mansfield's Dig. Laws Ark. §§ 960, 968, 979.
The general rule is that parties who associate themselves together and actively engage in business for profit under any
name are liable as partners for the debts they incur under that name. It is an exception to this rule that such associates may
escape individual liability for such debts by a compliance with incorporation laws or by a real attempt to comply with them
which gives the color of a legal corporation, and by the user of the franchise of such a corporation in the honest belief that it
is duly incorporated. When the fact appears, as it does in the case at bar, by indisputable evidence that parties associated
and knowingly incurred liabilities under a given name, the legal presumption is that they are governed by the general rule,
and the burden is upon them to prove that they fall under some exception to it. Owen v. Shepard, [**3] 59 Fed. 746, 8
C.C.A. 244; Wechselberg v. Flour City National Bank, 64 Fed. 90, 94, 12 C.C.A. 56, 60, 61, 26 L.R.A. 470; Clark v. Jones,
87 Ala. 474, 6 South. 362.
Counsel for the defendants argue with much force and persuasiveness that they escape liability because they became a
corporation de facto, although they concede that they never became a corporation de jure, and in support of this position
they cite, among other cases: Wells Company v. Gastonia Cotton Mfg. Co., 198 U.S. 177, 25 Sup. Ct. 640, 49 L. Ed. 1003;
Andes v. Ely, 158 U.S. 312, 322, 15 Sup. Ct. 954, 39 L. Ed. 996; New Orleans Debenture Redemption Co. v. Louisiana, 180
U.S. 320, 327, 21 Sup. Ct. 378, 45 L. Ed. 550; Gartside Coal Co. v. Maxwell (C.C.) 22 Fed. 197; Johnson v. Okerstrom, 70
Minn. 303, 73 N.W. 147; Tennessee Automatic Lighting Company v. Massey (Tenn. Ch. App.) 56 S.W. 35; Finnegan v.
Noerenberg, 52 Minn. 239, 53 N.W. 1150, 18 L.R.A. 778, 38 Am. St. Rep. 552; Doty v. Patterson, 155 Ind. 60, 56 N.E. 668;
Merchants' National Bank v. Stone, 38 Mich. 779; Gow v. Collin Lumber Company, 109 Mich. 45, 66 N.W. 676, 678; Eaton
v. Aspinwall, 19 N.Y. 119; Leonardsville Bank v. Willard, 25 N.Y. 574; Cahall v. Citizens' [**4] Mutual Bldg. Ass'n, 61 Ala.
232; Fay v. Noble, 7 Cush. (Mass.) 188, 192, 193; Snider Sons' Company v. Troy, 91 Ala. 224, 8 South. 658, 11 L.R.A. 515,
24 Am. St. Rep. 887; Cochran v. Arnold, 58 Pa. 399, 404; Laflin & Rand Powder Co. v. Sinsheimer, 46 Md. 315, 321, 24
Am. Rep. 522; Rutherford v. Hill, 22 Or. 218, 29 Pac. 546, 17 L.R.A. 549, 29 Am. St Rep. 596. But in every one of these
authorities articles of incorporation had been filed under a general enabling act, or a charter had been issued and there had
been a user of the franchise of the supposed corporation which had been colorably created by the filing of the articles or the
issue of the charter before the indebtedness in question was created, while nothing of this nature had been done before the
debt for the $4,700 which we are now considering was incurred. The authorities which [*192] have been recited rest upon
the proposition that where parties procure a charter or file articles of association under a general law, thereby secure the
color of a legal incorporation, believe that they are a corporation, and use the supposed franchise of the corporation in good
faith, and third parties deal with them as a corporation, [**5] they become a corporation de facto and exempt from
individual liability to such third parties, although there are unknown defects in the proceedings for their incorporation. The
statement of Morawetz on Corporations, at section 748, upon which counsel seem to rely, that:
"If an association assumes to enter into a contract in a corporate capacity, and the party dealing with the association
contracts with it as if it were a corporation, the individual members of the association cannot be charged as parties to the
contract, either severally or jointly, or as partners. This is equally true whether the association was in fact a corporation or
not, and whether the contract with the association in its corporate capacity was authorized by the Legislature or prohibited
by law, or illegal"

is too broad to be sound. Parties who actively engage in business for profit under the name and pretense of a corporation
which they know neither exists nor has any color of existence may not escape individual liability because strangers are led
by their pretense to contract with their pretended entity as a corporation. In such cases they act as the agents of a principal
that they know does not [**6] exist, and they are liable under a familiar rule, because there is no responsible principal. 2
Kent's Commentaries (14th Ed.) 630; Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356, 364, 30 S.W. 163. The
burden is not on the strangers who deal with them as a corporation, but on themselves who act under the name of a
pretended corporation, to see that it is so organized that it exempts them from individual liability, and if they fail in this they
must pay the liabilities they incur, even in the absence of fraud or bad faith, upon the salutary principle that where one of
two parties must suffer he must bear the loss whose breach of duty caused it.
There are cases in which stockholders who took no active part in the business of a pretended corporation which was acting
without any charter or filed articles, who supposed that the corporation was duly organized, have been held exempt from
individual liability for the debts it incurred; but if they had been actively conducting its business with knowledge of its lack of
incorporation, those decisions must have been otherwise. Seacord v. Pendleton, 55 Hun, 579, 9 N.Y. Supp. 46; Fuller v.
Rowe, 57 N.Y. 23, 26.
Neither the hope, [**7] the belief, nor the statement by parties that they are incorporated, nor the signing of articles of
incorporation which are not filed, where filing is requisite to create the corporation, nor the user of the pretended franchise of
such a nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly
use its name to incur obligations from their individual liability to pay them. Color of legal organization as a corporation under
some charter or law and user of the supposed corporate franchise in good faith are indispensable to such exemption.

[*193] Under the general law of Arkansas in force in the Indian Territory, the filing of articles of incorporation with the clerk
of the Court of Appeals was a sine qua non of any color of a legal corporation. Without that there was not, and there could
not be, an apparent corporation or the color of a corporation. Agreements to form one, statements that there was one,
signed articles of association to make one, acts as one, created no color of incorporation, because there could be no
incorporation or color of it under the law until the articles were filed. Johnson v. Corser, 34 Minn. [**8] 355, 25 N.W. 799;
Finnegan v. Noerenberg, 52 Minn. 239, 243, 244, 53 N.W. 1150, 1151, 18 L.R.A. 778, 38 Am. St. Rep. 552; Taylor on
Private Corporations, p. 145, Roberts Mfg. Co. v. Schlick, 62 Minn. 332, 64 N.W. 826. In Finnegan v. Noerenberg, supra,
Chief Justice Gilfillan well said:

"To give to a body of men assuming to act as a corporation, where there has been no attempt to comply with the provisions
of any law authorizing them to become such, the status of a de facto corporation, might open the door to frauds upon the
public. It would certainly be impolitic to permit a number of men to have the status of a corporation to any extent merely
because there is a law under which they might have become incorporated, and they have agreed among themselves to act,
and they have acted, as a corporation. That was the condition in Johnson v. Corser, 34 Minn. 355, 25 N.W. 799, in which it
was held that what had been done was ineffectual to limit the individual liability of the associates. They had not gone far
enough to become a de facto corporation. They had merely signed articles, but had not attempted to give them publicity by
filing for record, which the statute required."

The [**9] defendants cannot escape individual liability for the $4,700 on the ground that the Coweta Cotton & Milling
Company was a corporation de facto when that portion of the plaintiff's claim was incurred, because it then had no color of
incorporation, and they knew it and yet actively used its name to incur the obligation. Owen v. Shepard, 8 C.C.A. 244, 59
Fed. 746; Wechselberg v. Flour City National Bank, 64 Fed. 90, 94, 12 C.C.A. 56, 60, 61, 26 L.R.A. 470; Abbott v. Omaha
Smelting & Refining Co., 4 Neb. 416, 423, 424; Garnett v. Richardson, 35 Ark. 144; Johnson v. Corser, 34 Minn. 355, 357,
25 N.W. 799; Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356, 364, 30 S.W. 163; Bigelow v. Gregory, 73 Ill.
197, 202; Parsons on Partnership, p. 544; Hill v. Beach, 12 N.J. Eq. 31; Kaiser v. Lawrence Savings Bank, 56 Iowa, 104, 8
N.W. 772, 41 Am. St. Rep. 85; Pettis v. Atkins, 60 Ill. 454; Coleman v. Coleman, 78 Ind. 344; Lawler v. Murphy, 58 Conn.
313, 20 Atl. 457, 8 L.R.A. 113; Hurt v. Salisbury, 55 Mo. 310, 314; Beach on Private Corporations, § 16, p. 25; Martin v.
Fewell, 79 Mo. 401, 411; Smith v. Warden, 86 Mo. 382, 399; McVicker v. Cone, 21 Or. 353, 28 Pac. 77.

Another contention [**10] is that the defendants are released from liability because the materials and labor for which the
$4,700 became due were furnished to them while they were promoting the organization of the corporation for the future
corporation, and that the latter has received the benefit of them and ratified their purchase; and in support of this position
they cite Whitney v. Wyman, 101 U.S. 396, 25 L. Ed. 1050; Little Rock & Ft. Smith R.R. Co. v. Perry, 37 Ark. 164; Paxton
Co. v. First National Bank, 21 Neb. 621, 33 N.W. 271, [*194] 59 Am. St. Rep. 852; Stanton v. New York R.R. Co., 59 Conn.
272, 22 Atl. 300, 21 Am. St. Rep. 110; Davis v. Montgomery, 101 Ala. 127, 8 South. 496; Reichwald v. Commercial Hotel
Co., 106 Ill. 439; Wall v. Niagara Co., 20 Utah, 474, 59 Pac. 399; Lancaster Co. v. Murray Co., 19 Tex. Civ. App. 110, 47
S.W. 387; Kaeppler v. Redfield Co., 12 S.D. 483, 81 N.W. 907; Chase v. Redfield, 12 S.D. 529, 81 N.W. 951. In Whitney v.
Wyman, after the articles of incorporation were signed, but before they were filed, three promoters of the incorporation wrote
to the plaintiff that the company was so far organized that by direction of its officers they ordered seven lathes and the [**11]
necessary fixtures for clasping. These lathes were necessary to enable the corporation to commence its contemplated
business, were received and used by it, and the Supreme Court held that the promoters were not individually liable for their
purchase price.

Little Rock & Ft. Smith R.R. Co. v. Perry was an action against the corporation, and the liability of the promoters was not in
issue. The court declared that the rule here invoked grew out of decisions in equity that contracts necessarily made by
promoters on behalf of a future corporation in order to obtain its charter or to complete its organization would be specifically
enforced against it, as in Stanley v. Birkenhead Railway Co., 9 Simons, 264, 16 Eng. Ch. Rep. 264, where the projectors of
a railroad seeking a charter agreed with a landed proprietor, on behalf of the proposed company, in consideration that he
would withdraw his opposition to their bill, to pay him £ 20,000 for the portion of his estate required by the road, and the
court enforced the specific performance of this obligation against the corporation when the charter had been granted, and,
as in Edwards v. Grand Junction Railway Company, 1 Mylne & C. 650, Preston [**12] v. Liverpool, Manchester, etc.,
Railway Co., 7 Eng. L. & Eq. 124, Webb v. Direct London & Portsmouth Railway Company, 9 Hare, 129, Low v. Ct. &
Passumpric Railway, 45 N.H. 375, which are there cited, and the Arkansas court held that in order to recover of such a
corporation the plaintiff must show "either an express promise of the new company, or that the contract was made with
persons then engaged in its formation and taking preliminary steps thereto, and that the contract was made on behalf of the
new company, in the expectation on the part of the plaintiff and with the assurance on the part of the projectors that it would
become a corporate debt, and that the company afterwards entered upon and enjoyed the benefit of the contract, and by no
other title than that derived through it." But there is no evidence that the materials and labor furnished to the defendants
prior to December 22, 1902, were sold by the plaintiff with the assurance on their part, or with the expectation on its part,
that their price would not be paid by them, but would become the debt or obligation of a corporation to be organized in the
future. On the other hand, Davis, who sold these articles for the plaintiff, [**13] and Knight, who bought them for the
defendants, both testified that in the purchase and the sale of all of them they treated themselves as a corporation before,
as completely as after, the filing of their articles. The rule of law here invoked applies to contracts preliminary and incidental
to the organization or to the commencement of the business of a contemplated [*195] corporation, and this debt for $4,700
was not the result of any such contract. It is part of the balance of an account of many tens of thousands of dollars which
arose out of the conduct of a business preliminary, not to its commencement, but to its close. The business of the
defendants was the buying and ginning of cotton. They commenced to construct their buildings in June, to buy cotton in
September, to operate their gin in the first days of October, they filed their articles on December 22d, and ceased to operate
their gin in the following January. They cannot escape liability for debts incurred in this business prior to December 22d on
the ground that their construction of buildings and their dealing in and ginning cotton for two months and a half were
necessary preliminaries to the organization of [**14] their corporation or to the commencement of their business, nor on the
ground that the claim of the plaintiff was incurred on their assurance that it was for and should become the debt of a
corporation to be formed, because these grounds are not sustained by the evidence.

Counsel insist that the defendants are not liable here because one who deals with a corporation de facto is estopped from
denying its existence as a corporation; but the true meaning and legal effect of this rule is that such a dealer is estopped
from denying its existence on the ground that it was not legally incorporated. One who deals with parties who masquerade
under a name which represents no corporation de facto is no more estopped from denying that it is a corporation than he
would be from denying that they constituted or acted for the Union Pacific Railroad Company, or any other well-known
corporation, when they did not. The fact that the plaintiff dealt with and treated the Coweta Cotton & Milling Company as a
corporation did not estop it from denying that it was such before the defendants filed their articles of incorporation, because
it was not a corporation de facto before that time and because the [**15] indispensable elements of an estoppel in pais,
ignorance of the truth and absence of equal means of knowledge of it by the party who claims the estoppel, and action by
the latter induced by the misrepresentation of the party against whom the estoppel is invoked, do not exist in the case at
bar. Bigelow on Estoppel (4th Ed.) p. 679. The plaintiffs did not, and the defendants did, represent that the milling company
was a corporation when it was not.The defendants had better means of knowledge of the fact than the plaintiff, and they
knew it was not a corporation, and they were not induced to act on any representation of the plaintiff that it was such, or by
its treatment of it as such.
Nor was the plaintiff estopped by the fact that its general manager stated under oath in its claim for a lien in May, 1903, that
the milling company was a corporation, first, because the defendants were not induced to take any action by this statement
from which they can suffer any injury by the proof of the truth, and, second, because one is not estopped from pursuing his
true legal remedy by a mistaken attempt to pursue a supposed remedy that does not exist. Standard Oil Company v.
Hawkins, 20 C.C.A. [**16] 468, 472, 74 Fed. 395, 398, 399, 33 [*196] L.R.A. 739; Barnsdall v. Waltemeyer, 73 C.C.A.
515, 520, 142 Fed. 415, 420; Bunch v. Grave, 111 Ind. 351, 12 N.E. 514, 517.

It is said that the plaintiff is estopped from denying the existence of the defendant's supposed corporation because it was
one of its promoters and stockholders, but the evidence fails to convince us that it was ever either. F. M. Davis was the
general manager of the plaintiff. He testified that in June, 1902, he agreed with the other defendants to take a $2,000 share
for the plaintiff in a corporation to be organized with a capital of $10,000 for the purpose of ginning and dealing in cotton,
that Mann agreed to take a $4,000 share, R. S. Davis and James G. Knight a share of $2,000 each, that in September he
signed the articles of incorporation and subscribed for this stock, that the other defendants also subscribed, that these
subscribers paid the first assessment of $3,750 on $10,000 of the stock in the fall of 1902, that the second assessment of
$2,000 was made in January, 1903, that he never reported this stock to the plaintiff until January, 1903, but that in the
summer and fall of 1902 he talked with Edwards [**17] and Wallace, two of the directors, who had 80 shares of stock each
in the plaintiff, about this stock which he was to take and which he had taken, that the plaintiff and they acquiesced in his
action and told him to do the best he could with it, but that they did not direct or instruct him to take the stock or agree that
he should take it, and that he did not talk with the president, who was the owner of the majority of the stock of the plaintiff,
although another witness testified that some time in the fall of 1902 he told Naylor that Davis had taken stock in the milling
company for the plaintiff. Davis, however, subscribed for the stock in his own name, and the plaintiff did not. He testified that
he paid the first assessment in the fall of 1902, but he never charged the plaintiff and credited himself with that payment;
but, on the contrary, on February 23, 1903, after the milling company had ceased to operate its gin, he caused an entry to
be made on the books of the investment company charging it and crediting the milling company with $1,150, the amount of
the two assessments on his stock, an entry which the plaintiff subsequently repudiated. There are two reasons why, under
[**18] the evidence in this record, the plaintiff never became a holder, either in law or in equity, of any share in the
defendant's enterprise or company, either as a stockholder or otherwise. In the first place, the construction and operation of
a cotton gin was beyond the powers of the plaintiff corporation, the nature of whose business was declared and limited by
its articles to "buying, selling, leasing and dealing in lands, securities, bonds, notes, stocks and other negotiable paper, and
also buying and selling general merchandise." In the second place, if by any conceivable interpretation the construction and
operation of a cotton gin and the formation of the corporation, and the taking of stock therein to accomplish that purpose,
could be deemed to be within the powers of this corporation, they are so far beyond the scope of its ordinary business that a
general manager could be authorized to commit his corporation to them only by the express authority of its board of
directors, or of its principal officers, after a full disclosure to them of all the facts relating to the proposed enterprise, and the
desultory [*197] talks which Davis had with the two directors fall far short [**19] of any evidence of such authority.

Much is made in argument of the testimony of Davis and Knight that they acted in good faith, that the defendants never
received any benefit from the materials and labor for the purchase price of which the plaintiff sues, but good faith and the
use of a name which they know represents no corporation as the name of a corporation under which they do business
creates a partnership, and neither a corporation de jure nor de facto. And the defendants had all the benefit there was from
the materials and labor furnished by the plaintiff, for the milling company never issued any stock, and these defendants
owned their respective shares in its property, and whatever it had they had, and, as far as they have not disposed of it, they
still have. The fact is that during this entire transaction while Davis was the general manager of the plaintiff he was the
partner of the defendants, and, in all transactions between the plaintiff and the defendants, was pecuniarily interested
adversely to his principal.

The sum of the whole matter is that the defendants agreed in April or June, 1902, to take certain shares in a $10,000
enterprise for the purpose of building [**20] a cotton gin, and buying, ginning, and selling cotton, and to organize a
corporation to carry on this business they bought between June and December 22, 1902, materials and labor with which
they built the cotton gin, and between September 15th and December 22d operated their cotton gin and carried on the
business of buying, ginning, and selling cotton with the plaintiff to the amount of several tens of thousands of dollars, and
there remains a balance of about $4,700 due the plaintiff on this account. They never issued any stock, but in September,
November, and December they signed articles of incorporation which they filed with the clerk of the Court of Appeals on
December 22, 1902. During this time they treated themselves and the plaintiff dealt with them as a corporation. They
represented themselves to be a corporation when they knew they were not; under the name of a corporation which did not
exist they purchased these goods and services.
And our conclusion is that the defendants never became a corporation de facto prior to December 22, 1902, that they never
became a corporation de jure, that the indebtedness here in question was not incurred under any promise or assurance
[**21] of the defendants as promoters that it should become the obligation of a corporation to be formed, that a large part of
it was incurred in the conduct of a general commercial business, and not to prepare for the commencement of such a
business or for the organization of a corporation, and that the trial court below should have instructed the jury that the
defendants were individually liable for that portion of the plaintiff's claim which was incurred prior to December 22, 1902. Its
failure to do so was a fatal error which necessitates a reversal of the judgments below.
In view of the conclusion which has now been reached, it is unnecessary to discuss at length or to determine other
questions which are presented in this record. It is sufficient to say regarding the portion of the plaintiff's claim incurred
subsequent to December 22, 1902, that while there is a conflict of authority upon the question whether [*198] or not
incorporators or stockholders remain personally liable after the filing of articles in one office only where the statute requires
them to be filed in two offices as a condition of incorporation or of the commencement of business ( Mokelumne Hill Canal &
Mining [**22] Co. v. Woodbury, 14 Cal. 265, 267), the statute under which this case arose was brought into the Indian
Territory from the state of Arkansas, and the Supreme Court of that state had held, before it was adopted in the Indian
Territory, that such corporators or stockholders remain individually liable under this statute unless and until their articles of
incorporation are filed in both offices. Garnett v. Richardson, 35 Ark. 144. This conclusion is sustained by eminent authority
(Wechselberg v. Flour City National Bank, 12 C.C.A. 56, 60, 61, 64 Fed. 90, 94, 26 L.R.A. 470, and authorities there cited),
and it is an established rule of statutory construction that the adoption of a statute previously in force in some other
jurisdiction is presumed to be the adoption of the interpretation thereof which had been theretofore placed upon it by the
judicial tribunal whose duty it was to construe it. Black, Interpretation of Laws, p. 159, § 70; McDonald v. Hovey, 110 U.S.
619, 628, 4 Sup. Ct. 142, 28 L. Ed. 269; Sanger v. Flow, 1 C.C.A. 56, 58, 48 Fed. 152, 154; Blaylock v. Incorporated Town
of Muskogee, 54 C.C.A. 639, 117 Fed. 125.

The judgments of the courts below must be reversed, and [**23] the case must be remanded to the proper court for a new
trial; and it is so ordered.

[G.R. No. L-2598. June 29, 1950.]

C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs. EDMUNDO S. PICCIO, Judge of the
Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his
capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc., respondent.

Claro M. Recto for petitioners.


Ramon Diokno and Jose W. Diokno for respondents.

SYLLABUS

1. CORPORATION "DE FACTO"; DISSOLUTION BY SUIT OF STOCKHOLDERS; JURISDICTION OF


COURT. — An entity whose certificate of incorporation had not been obtained may be terminated in a private suit for its
dissolution between stockholders, without the intervention of the state. The question as to the right of minority
stockholders to sue for dissolution does not affect the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal by the aggrieved party at the proper time.
2. ID.; RIGHTS OF. — Persons acting as corporation may not claim rights of "de facto" corporation if they have
not obtained certificate of incorporation.

DECISION

BENGZON, J p:

This is a petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance of Leyte
and to enjoin the respondent judge from further acting upon the same.

Facts: (1) On May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the articles of
incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business
to carry on as general contractors, operators and managers, etc. Attached to the articles was an affidavit of the
treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to
the corporation described in a list appended thereto. .
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do business
with the adoption of by-laws and the election of its officers. (3) On December 2, 1947, the said articles of incorporation
were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate
of incorporation. (4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental
office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of
First Instance of Leyte the civil case numbered 381, 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 they wished to
have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and
heavy financial losses. (5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiency of the cause of action. (6) After hearing the parties, the
Hon. Edmundo S. Piccio ordered the dissolution of the company; and at the request of plaintiffs, appointed the
respondent Pedro A. Capuciong as receiver of the properties thereof, upon the filing of a P20,000 bond. (7) The
defendants therein (petitioners herein) offered to 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: .
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because it being
a de facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance
with section 19 of the Corporation Law. .
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the articles of incorporation, they are
estopped from claiming that it is not a corporation but only a partnership. .
Discussion: The second proposition may at once be dismissed. All the parties are informed that the Securities
and Exchange Commission has not, so far, issued the corresponding certificate of incorporation. All of them know, or
ought to know, that the personality of a corporation begins to exist only from the moment such certificate is issued - not
before (sec. 11, Corporation Law). The complaining associates have not represented to the others that they were
incorporated any more than the latter had made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is not an instance
requiring the enforcement of contracts with the corporation through the rule of estoppel. .
The first proposition above stated is premised on the 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 no
jurisdiction to take cognizance of said civil case number 381. Section 19 reads in part as follows: .
"*** The due incorporation of any corporations claiming in good faith to be a corporation under this Act and its
right to exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may
be a party, but such inquiry may be had at the suit of the Insular Government on information of the Attorney-General." .
There are at least two reasons why this section does not govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber and Commercial Co. - even its stockholders - may not probably
claim "in good faith" to be a corporation. .
"Under our statute it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate of
incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation into being. The
immunity of collateral attack is granted to corporations 'claiming in good faith to be a corporation under this act.' Such a
claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law.
Unless there has been an evident attempt to comply with the law the claim to be a corporation 'under this act' could not
be made 'in good faith.' " (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59
Fla., 295; 52 So., 362.) .
Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders, without the intervention of the state. .
There might be room for argument on the right of minority 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. Which
brings us to one principal reason why this petition may not prosper, namely: the petitioners have their remedy by
appealing the order of dissolution at the proper time. .
There is a secondary issue in connection with the appointment of a receiver. But it must be admitted that
receivership is proper in proceedings for dissolution of a company or corporation, and it was no error to reject the
counter-bond, the court having decreed the dissolution. As to the amount of the bond to be demanded of the receiver,
much depends upon the discretion of the trial court, which in this instance we do not believe has been clearly abused. .
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore issued will
be dissolved. .
||| (Hall v. Piccio, G.R. No. L-2598, [June 29, 1950], 86 PHIL 603-607)

[G.R. No. 22106. September 11, 1924.]

ASIA BANKING CORPORATION, plaintiff-appellee, vs. STANDARD PRODUCTS CO., INC., defendant-
appellant.

Charles C. De Selms for appellant.


Gibbs & McDonough and Roman Ozaeta for appellee.

SYLLABUS

1. CORPORATION; CORPORATE EXISTENCE, ESTOPPEL FROM DENYING. — In the absence of fraud, a


person who has contracted or dealt with an association in such a way as to recognize and in effect admit its legal
existence as a corporate body is thereby estopped to deny its corporate existence in an action leading out of or
involving such contract or dealing, unless the existence is attacked for causes which have arisen since making the
contract or other dealing relied on as an estoppel.
2. ID.; ID.; EVIDENCE. — The defendant having recognized the or the corporate existence of the plaintiff by
making a promissory note in its favor and making payments on the same, and the defendant having held itself out as a
corporate and being therefore estopped from denying its own corporate existence it is necessary for the plaintiff to
present other evidence of the corporate existence of either of the parties.

DECISION

OSTRAND, J p:

This action is brought to recover the sum of P24,736.47, the balance due on the following promissory note:
"P37,757.22

"MANILA, P. I., Nov. 28, 1921.


"On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of
thirty-seven and 22/100 pesos at their office in Manila, for value received, together with interest at the
rate of ten per cent per annum.
"No._______Due _________
"THE STANDARD PRODUCTS CO., INC.
"By (Sgd.) GEORGE H. SEAVER
"President"
The court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, with interest
on 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.
At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the
appellant insists that under these circumstances the court erred in finding that the parties were corporations with
juridical personality and assigns same as reversible error.
There is no merit whatever i the appellant's contention. The general rule is that in the absence of fraud a person
who has contracted or otherwise dealt with a association in such a way as to recognized and in effect admit its legal
existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or
involving such contract or dealing, unless its existence is attacked for causes which have arisen since making the
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 Ching, 14 Phil., 222)
The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its
favor and 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.
||| (Asia Banking Corp. v. Standard Products Co., Inc., G.R. No. 22106, [September 11, 1924], 46 PHIL 144-146)

CRANSON v. INTERNATIONAL BUSINESS MACHINES CORPORATION

Court of Appeals of Maryland.

Decided April 30, 1964.

Attorney(s) appearing for the Case

William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the appellant.

Henry J. Noyes for the appellee.


The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT, JJ.

HORNEY, J., delivered the opinion of the Court.


On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation and that Albion C.
Cranson, Jr., was a partner in the business conducted by the Bureau and as such was personally liable for its debts, the
International Business Machines Corporation brought this action against Cranson for the balance due on electric typewriters
purchased by the Bureau. At the same time it moved for summary judgment and supported the motion by affidavit. In due
course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in which he asserted in effect
that the Bureau was a de facto corporation and that he was not personally liable for its debts.
The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new business corporation which
was about to be created. Towards this purpose he met with other interested individuals and an attorney and agreed to
purchase stock and become an officer and director. Thereafter, upon being advised by the attorney that the corporation had
been formed under the laws of Maryland, he paid for and received a stock certificate evidencing ownership of shares in the
corporation, and was shown the corporate seal and minute book. The business of the new venture was conducted as if it
were a corporation, through corporate bank accounts, with auditors maintaining corporate books and records, and under a
lease
[234 Md. 480]
entered into by the corporation for the office from which it operated its business. Cranson was elected president and all
transactions conducted by him for the corporation, including the dealings with I.B.M., were made as an officer of the
corporation. At no time did he assume any personal obligation or pledge his individual credit to I.B.M. Due to an oversight
on the part of the attorney, of which Cranson was not aware, the certificate of incorporation, which had been signed and
acknowledged prior to May 1, 1961, was not filed until November 24, 1961. Between May 17 and November 8, the Bureau
purchased eight typewriters from I.B.M., on account of which partial payments were made, leaving a balance due of
$4,333.40, for which this suit was brought.
Although a question is raised as to the propriety of making use of a motion for summary judgment as the means of
determining the issues presented by the pleadings, we think the motion was appropriate. Since there was no genuine
dispute as to the material facts, the only question was whether I.B.M. was entitled to judgment as a matter of law. The trial
court found that it was, but we disagree.
The fundamental question presented by the appeal is whether an officer1 of a defectively incorporated association may be
subjected to personal liability under the circumstances of this case. We think not.
Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively incorporated association with
the corporate attribute of limited liability. The first, often referred to as the doctrine of de facto corporations, has been
applied in those cases where there are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in
good faith to incorporate under the existing law; and (3) actual user or exercise of corporate powers. Ballantine, Private
Corporations, § 23; 8 Fletcher, Cyclopedia of the Law of Private
[234 Md. 481]
Corporations, § 3777; 13 Am. Jur., Corporations, §§ 49-56; 18 C.J.S., Corporations, § 99. The second, the doctrine of
estoppel to deny the corporate existence, is generally employed where the person seeking to hold the officer personally
liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit its
existence as a corporate body. Ballantine, op.cit., § 29; Machen, Modern Law of Corporations, §§ 278-282; 18 C.J.S.,
op.cit., § 109.
It is not at all clear what Maryland has done with respect to the two doctrines. There have been no recent cases in this State
on the subject and some of the seemingly irreconcilable earlier cases offer little to clarify the problem. 2
In one line of cases, the Court, in determining the rights and liabilities of a defectively organized corporation, or a member or
stockholder thereof, seems to have drawn a distinction between those acts or requirements which are a condition precedent
to corporate existence and those acts prescribed by law to be done after incorporation. In so doing, it has been generally
held that where there had been a failure to comply with a requirement which the law declared to be a condition precedent to
the existence of the corporation, the corporation was not a legal entity and was therefore precluded from suing or being
sued as such. Boyce v. M.E. Church, 46 Md. 359 (1877); Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v.
Lake Roland R.R. Co., 75 Md. 340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76 (1894);
Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland v. Mullin, 96 Md. 598,
[234 Md. 482]
54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 19 (1909). These cases appear to stand
for the proposition that substantial compliance with those formalities of the corporation law, which are made a condition
precedent to corporate existence, was not only necessary for the creation of a corporation de jure, but was also a
prerequisite to the existence of a de facto corporation or a corporation by estoppel.
In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the Court (at p. 373 and p.
374), in holding that the society was not estopped to deny its corporate existence, said:
We think it would be extending the doctrine of estoppel to an extent, not justified by the principles of public policy, to allow it
to operate through the conduct of the parties concerned, to create substantially a de facto corporation, with just such powers
as the parties may by their acts give to it. * * * The statute law of the State, expressly requiring certain prescribed acts to be
done to constitute a corporation, to permit parties indirectly, or upon the principle of estoppel, virtually to create a
corporation for any purpose, or to have acts so construed, would be in manifest opposition to the statute law, and clearly
against its policy, and justified upon no sound principle in the administration of justice.
In the Maryland Tube case, an action by a corporation for specific performance of a contract to convey land which it had
entered into prior to its becoming a legal entity, the Court, having cited (at p. 217) the statements in Jones v. Aspen
Hardware Co., 40 Pac. 457 (Colo. 1895),3 with approval for the
[234 Md. 483]
proposition that "`the doctrine of estoppel cannot be successfully invoked, unless the corporation has at least a de facto
existence,'" that "`a de facto corporation can never be recognized in violation of a positive law'" and that "`there is a broad
distinction between those acts made necessary by the statute as a prerequisite to the exercise of corporate powers, and
those acts required of individuals seeking incorporation but not made prerequisite to the exercise of such powers,'" went on
to say (at p. 218) that "these principles were clearly recognized and applied" in the Boyce case.
In the National Shutter Bar case, an action by a corporation for an alleged libel which had occurred before the performance
of a condition precedent necessary for legal incorporation, it was held — citing the Maryland Tube case for the proposition
that statutory conditions precedent must have been complied with to give existence to corporations formed under general
laws — that the corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case, it was said
(at p. 320) that "it has been held by our predecessors that a corporation cannot be actually or virtually created by estoppel in
Maryland." And, on the basis of the statements in Jones v. Aspen Hardware Co., supra (also relied on in the Maryland Tube
case), it was concluded that the corporation could not maintain the action.
On the other hand, where the corporation has obtained legal existence but has failed to comply with a condition subsequent
to corporate existence, this Court has held that such nonperformance afforded the State the right to institute proceedings for
the forfeiture of the charter, but that such neglect or omission could never be set up by the corporation itself, or by its
members and stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O. Railroad Co., 4
G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102 Md. 501, 63 Atl. 62 (1906).
[234 Md. 484]
In the Hammond case, an action by a creditor against a stockholder of a state bank on his statutory liability, the Court, after
stating that a corporation or a stockholder could not defeat an action by showing noncompliance with the requirements of
the corporation law unless the acts required are conditions precedent to corporate existence, said (at p. 15): By holding
otherwise, parties might avail themselves of the powers and privileges of a corporation, without in any manner subjecting
themselves to its duties and obligations, and might set up their own neglect of duty, of wilful omission to comply with the
requirements of the statute, as means of discharge from all their just obligations under the law. This is forbidden by every
principle of law and justice, and hence such a defense could never be tolerated.
It seems clear therefore that when a defect in the incorporation process resulted from a failure to comply with a condition
subsequent, the doctrine of estoppel may be applied for the benefit of a creditor to estop the corporation, or the members or
stockholders thereof, from denying its corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and
Practice (rev. ed.), § 339.
In another line of Maryland cases which determined the rights and liabilities of a defectively organized corporation, or a
member or stockholder thereof, the Court, apparently disregarding the distinction made between those requirements which
are conditions precedent and those which are conditions subsequent to corporate existence, has generally precluded, on
the grounds of estoppel or collateral attack, inquiry into the question of corporate existence. Maltby v. Northwestern Va.
R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259 (1866); Grape Sugar & Vinegar Mfg. Co. v.
Small, 40 Md. 395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46 Md. 315 (1877); Keene v. Van Reuth, 48 Md. 184
(1878); Bartlett v. Wilbur, 53 Md. 485 (1880); Pott & Co. v. Schmucker, 84 Md. 535, 36 Atl. 592 (1897). In the Grape Sugar
case, an action against a defectively organized corporation to
[234 Md. 485]
recover the balance due for work done and materials furnished, the Court said (at p. 400): The second prayer proceeds
upon the assumption that the [corporation] is not liable, provided the work was done prior to the recording of the certificate
of incorporation. It is true, that under the general incorporation law of this State, the recording of the certificate was
necessary to constitute the [corporation] a body politic. If, however, the contract was made with the [creditor] through * * *
[the] President of the [corporation], after the certificate had been signed by the members of the proposed corporation, but
before it was recorded, and the company, after its incorporation was complete, accepted the work done under the contract,
it will be estopped, both in law and equity, from denying its liability, on account of the same.
Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might be distinguishable in that
it involved an effort to impose liability on a religious society and not a business corporation.
In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an action against certain
members of a corporation to make them individually liable for goods sold and delivered to the corporation, said (at p. 321):
[The company] has been clothed with all the forms of a corporation by the laws of a neighboring State, and was in the
exercise and use of the franchises conferred upon it. It was a corporation de facto at the time the goods were sold and
delivered to it * * * and its existence as a corporation cannot be collaterally drawn into question. To permit a recovery
against the defendants, and thereby to say that they are to be regarded in law as a voluntary unincorporated association,
would be a departure from all the cases. The debt was not created with them individually, but with a company acting under a
formal incorporation, and in the exercise of its corporate powers. This [creditor] dealt with it and gave it credit as a
corporation. If its assets are not ample to pay, it is the misfortune of the creditor.4
See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for similar statements of the law.
From these cases it appears that where the parties have assumed corporate existence and dealt with each other on that
basis, the Court will apply the estoppel doctrine on the theory that the parties by recognizing the organization as a
corporation were thereafter prevented from raising a question as to its corporate existence.
When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals that the cases seem to fall
into one or the other of two categories. In one line of cases, the Court, choosing to disregard the nature of the dealings
between the parties, refused to recognize both doctrines where there had been a failure to comply with a condition
precedent to corporate existence, but, whenever such noncompliance concerned a condition subsequent to incorporation,
the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to make no distinction between
defects which
[234 Md. 487]
were conditions precedent and those which were conditions subsequent, emphasized the course of conduct between the
parties and applied the estoppel doctrine when there had been substantial dealings between them on a corporate basis.
Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of repudiating the de facto doctrine in
this state, as some of the text writers seem to think, is a question we do not reach in this case and therefore need not
consider at this time. On the other hand, since it is clear that the Maryland Tube and National Shutter Bar cases are
inconsistent with other Maryland cases insofar as they held (in relying on the statements in Jones v. Aspen Hardware Co.,
supra) that the doctrine of estoppel cannot be invoked unless a corporation has at least a de facto existence, both cases —
Maryland Tube and National Shutter Bar — should be, and are hereby, overruled to the extent of the inconsistency. There
is, as we see it, a wide difference between creating a corporation by means of the de facto doctrine and estopping a party,
due to his conduct in a particular case, from setting up the claim of no incorporation. Although some cases tend to
assimilate the doctrines of incorporation de facto and by estoppel, each is a distinct theory and they are not dependent on
one another in their application. See 8 Fletcher, op.cit., § 3763; France on Corporations (2nd ed.), § 29; 18 C.J.S., op.cit., §
111h. Where there is a concurrence of the three elements necessary for the application of the de facto corporation doctrine,
there exists an entity which is a corporation de jure against all persons but the state. On the other hand, the estoppel theory
is applied only to the facts of each particular case and may be invoked even where there is no corporation de facto.
Accordingly, even though one or more of the requisites of a de facto corporation are absent, we think that this factor does
not preclude the application of the estoppel doctrine5 in a proper case, such as the one at bar.
[234 Md. 488]
I.B.M. contends that the failure of the Bureau to file its certificate of incorporation debarred all corporate existence. But, in
spite of the fact that the omission might have prevented the Bureau from being either a corporation de jure or de facto,6
Jones v. Linden Building Asso., supra, we think that I.B.M. having dealt with the Bureau as if it were a corporation and relied
on its credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated at the time the
typewriters were purchased. Laflin & Rand Powder Co. v. Sinsheimer, supra. See also Tulane Improvement Co. v. S.A.
Chapman & Co., 56 So. 509 (La. 1911). In 1 Clark and Marshall, Private Corporations, § 89, it is stated: The doctrine in
relation to estoppel is based upon the ground that it would generally be inequitable to permit the corporate existence of an
association to be denied by persons who have represented it to be a corporation, or held it out as a corporation, or by any
persons who have recognized it as a corporation by dealing with it as such; and by the overwhelming weight of authority,
therefore, a person may be estopped to deny the legal incorporation of an association which is not even a corporation de
facto.
In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of other jurisdictions have held
that where one has recognized the corporate existence of an association, he is estopped to assert the contrary with respect
to a claim arising out of such dealings. See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J.
Zimmern's Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John Lucas Co. v. Bernhardt's
Estate, 100 So. 399 (La. 1924).
Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was not liable for the balance
due on account of the typewriters.

Judgment reversed; the appellee to pay the costs.

[G.R. No. L-11442. May 23, 1958.]


MANUELA T. VDA. DE SALVATIERRA, petitioner, vs. HON. LORENZO C. GARLITOS, in his capacity
as Judge of the Court of First Instance of Leyte, Branch II, and SEGUNDINO REFUERZO,
respondents.

Jimenez, Tantuico, Jr. & Tolete for petitioner.


Francisco Astilla for respondent Segundino Refuerzo.

SYLLABUS

1. PLEADING AND PRACTICE; PETITION FOR RELIEF; WHEN TO FILE PETITION. — Rule 38, Section 3, of
the Rules of Court treats of 2 periods within which a petition for relief may be filed. The petition must be filed within 60
days after the petitioner learns of the judgment and not more than 6 months after the judgment or order was rendered,
both of which must be satisfied.
2. CORPORATION LAW; LIABILITY OF PERSON DEALING WITH ASSOCIATION AS A CORPORATE
BODY; WHEN ESTOPPEL MAY NOT BE INVOKED. — While as a general rule, a person who deals with an
association in such a way to recognize its existence as a corporate body is estopped from denying the same in an
action arising out of such transaction, yet this doctrine may not be held to be applicable 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 defendant
corporation had no juridical personality, its president gave no confirmation or denial of the same and the circumstance
surrounding the execution of the contract lead to the inescapable conclusion that plaintiff was really made to believe
that such corporation was duly organized in accordance with law.
3. ID.; LIABILITY OF MEMBERS WHO ACT AS AGENTS OF AN UNINCORPORATED ASSOCIATION. — A
corporation when registered has a juridical personality separate and distinct from its component members or
stockholders and officers, such that a corporation cannot be held liable for the personal in indebtedness of a
stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G. R. No. 42420) and conversely, a
stockholder cannot be held personally liable for any financial obligation by the corporation in excess of his unpaid
subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the
liability of members of an unincorporated association. The reason behind this doctrine is obvious - an unincorporated
association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law, it cannot create agents or confer authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts performed as such agent (Fay vs. Noble, 7
Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., p. 689-690).

DECISION

FELIX, J p:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of
First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the
contract entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the
president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Población,
Burauen, Leyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers
Co., Inc., allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen,
Leyte, Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the
President". It was provided in said contract, among other things, that the lifetime of the lease would be for a period of 10
years; that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled
to 30 per cent of the net income accruing from the harvest of any crop without being responsible for the cost of
production thereof; and that after every harvest, the lessee was bound to declare at the earliest possible time the
income derived therefrom and to deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with
because on April 5, 1955, Manuela T. Vda. de Salvatierra filed with the Court of First Instance of Leyte a complaint
against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages
(Civil Case No. 1912). She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the commencement of the action, already harvested, processed and sold by
defendants; that notwithstanding that fact, defendants refused to render an accounting of the income derived therefrom
and to deliver the lessor's share; that the estimated gross income was P4,500, and the deductible expenses a mounted
to P1,000; that as defendants' refusal to undertake such task was in violation of the terms of the covenant entered into
between the plaintiff and defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the
Court declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered
judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land
subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income
realized from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It
was further provided that upon defendants' failure to abide by the said requirement, the gross income would be fixed at
P4,200 or a net income of P3,200 after deducting the expenses for productions, 30 per cent of which or P960 was held
to be due the plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff,
issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land
registered in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found
available for attachment.
On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said
Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his
personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's
opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the evidence on record made no
mention or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from
said order was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in
issuing the order complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by the
respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of
said Rule, however, in providing for the period within which such a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided for
in either of the preceding sections of this rule must be verified, filed within sixty days after the petitioner
learns of the judgment, order, or other proceeding to be set aside, and not more than six months after
such judgment or order was entered, or such proceeding was taken; and must be accompanied with
affidavit showing the fraud, accident, mistake, or excusable negligence relied upon, and the facts
constituting the petitioner's good and substantial cause of action or defense, as the case may be, which
he may prove if his petition be granted". (Rule 33)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more
than 6 months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at
bar was under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or
after the lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the
prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision
or order is certainly an act of grace or benevolence intended to afford said litigant a penultimate opportunity to protect
his interest. Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-
extendible and never interrupted; nor could it be subjected to any condition or contingency because it is of itself devised
to meet a condition or contingency (Palomares vs. Jimenez, * G. R. No. L-4513, January 31, 1952). On this score alone,
therefore, the petition for a writ of certiorari filed herein may be granted. However, taking note of the question presented
by the motion for relief involved herein, We deem it wise to delve in and pass upon the merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the obligation
imposed on defendant Philippine Fibers Producers Co., Inc, interposed the defense that the complaint filed with the
lower court contained no allegation which would hold him liable personally, for while it was stated therein that he was a
signatory to the lease contract, he did so in his capacity as president of the corporation. And this allegation was found
by the Court a quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending
that her failure to specify defendant's personal liability was due to the fact that all the time she was under the impression
that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing
in the contract, but a subsequent inquiry from the Securities & Exchange Commission yielded otherwise. While as a
general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking
Corporation vs. Standard Products Co., 46 Phil., 144; Compañia Agrícola de Ultramar vs. Reyes, 4 Phil., 1; Ohta
Development Co. vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable 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 no juridical personality, defendant Refuerzo gave no confirmation or denial
and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff
Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with
law.
There can be no question that a corporation when registered has a juridical personality separate and distinct
from its component members or stockholders and officers such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G. R. No. 42420)
and conversely, a stockholder or member cannot be held personally liable for any financial obligation by the corporation
in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious
— since an organization 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 law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent
without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all
the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the
Philippines, Fifth Ed., p. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation
Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting
as its representative, his liability cannot be limited or restricted to that imposed upon corporate shareholders. In acting
on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential
damages or resultant rights, if any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and
ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been
attached in the execution of such judgment, is hereby set aside and nullified as if it had never been issued. With costs
against respondent Segundino Refuerzo. It is so ordered.
||| (Vda. de Salvatierra v. Garlitos, G.R. No. L-11442, [May 23, 1958], 103 PHIL 757-764)

[G.R. No. 58028. April 18, 1989.]

CHIANG KAI SHEK SCHOOL, petitioner, vs. COURT OF APPEALS and FAUSTINA FRANCO OH,
respondents.

SYLLABUS
1. REMEDIAL LAW; PARTIES IN A CIVIL ACTION; FAILURE OF SCHOOL TO INCORPORATE DOES NOT
EXEMPT IT FROM SUIT AS A JURIDICAL ENTITY. — It is true that Rule 3, Section 1, of the Rules of Court clearly
provides that "only natural or juridical persons may be parties in a civil action." It is also not denied that the school has
not been incorporated. However, this omission should not prejudice the private respondent in the assertion of her claims
against the school. 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 under the provisions of Act No. 1459 known as the
Corporation Law, within 90 days after the date of recognition, and shall file with the Secretary of Public Instruction a
copy of its incorporation papers and by-laws. Having been recognized by the government, it was under obligation to
incorporate under the Corporation Law within 90 days from such recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it had been in existence even earlier than 1932. The petitioner cannot
now invoke its own non-compliance with the law to immunize it from the private respondent's complaint.
2. ID.; ID.; SCHOOL HAVING REPRESENTED ITSELF AS POSSESSED OF JURIDICAL PERSONALITY
ESTOPPED FROM DENYING THE SAME. — There is no question that having contracted with the private respondent
every year for thirty two years and thus represented itself as possessed of juridical personality to do so, the petitioner
Chiang Kai Shek School is now estopped from denying such personality to defeat her claim against it. According to
Article 1431 of the Civil Code, "through estoppel an admission or representation is rendered conclusive upon the person
making it and cannot be denied or disproved as against the person relying on it."
3. LABOR LAW; CHARITABLE INSTITUTIONS COVERED THEREIN. — It is clear now that a charitable
institution is covered by the labor laws although the question was still unsettled when this case arose in 1968. At any
rate, there was no law even then exempting such institutions from the operation of the labor laws (although they were
exempted by the Constitution from ad valorem taxes).Hence, even assuming that the petitioner was a charitable
institution as it claims, the private respondent was nonetheless still entitled to the protection of the Termination Pay
Law, which was then in force.
4. ID.;TERMINATION OF EMPLOYMENT; DISMISSAL OF PERMANENT EMPLOYEE WITHOUT CAUSE
AND DUE NOTICE NOT PROPER. — The Court holds, after considering the particular circumstance of Oh's
employment, that she had become a permanent employee of the school and entitled to security of tenure at the time of
her dismissal. Since no cause was shown and established at an appropriate hearing, and the notice then required by
law had not been given, such dismissal was invalid. The private respondent's position is no different from that of the
rank-and-file employees involved in Gregorio Araneta University Foundation v. NLRC, of whom the Court had the
following to say: Undoubtedly, the private respondents' positions as deans and department heads of the petitioner
university are necessary in its usual business. Moreover, all the private respondents have been serving the university
from 18 to 28 years. All of them rose from the ranks starting as instructors until they became deans and department
heads of the university. A person who has served the University for 28 years and who occupies a high administrative
position in addition to teaching duties could not possibly be a temporary employee or a casual.
5. ID.;ID.;ILLEGAL DISMISSAL DONE IN WANTON AND OPPRESSIVE MANNER, AWARD OF MORAL AND
EXEMPLARY DAMAGES PROPER. — We find that the private respondent was arbitrarily treated by the petitioner,
which has shown no cause for her removal nor had it given her the notice required by the Termination Pay Law. As the
respondent court said, the contention that she did not report one week before the start of classes is a flimsy justification
for replacing her. She had been in its employ for all of thirty-two years. Her record was apparently unblemished. There
is no showing of any previous strained relations between her and the petitioner. Oh had every reason to assume, as
she had done in previous years, that she would continue teaching as usual. It is easy to imagine the astonishment and
hurt she felt when she was flatly and without warning told she was 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
informed she was no longer in the teaching staff. To put it bluntly, she was fired. For the wrongful act of the petitioner,
the private respondent is entitled to moral damages. As a proximate result of her illegal dismissal, she suffered mental
anguish, serious anxiety, wounded feelings and even besmirched reputation as an experienced teacher for more than
three decades. We also find that the respondent court did not err in awarding her exemplary damages because the
petitioner acted in a wanton and oppressive manner when it dismissed her.

DECISION
CRUZ,J p:

An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai Shek School in
Sorsogon on the first week of July, 1968. She was told she had no assignment for the next semester. Oh was shocked.
She had been teaching in the school since 1932 for a continuous period of almost 33 years. And now, out of the blue,
and for no apparent or given reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity benefits and
moral and exemplary damages. 1 The original defendant was the Chiang Kai Shek School but when it filed a motion to
dismiss on the ground that it could not be sued, the complaint was amended. 2 Certain officials of the school were also
impleaded to make them solidarily liable with the school.
The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was set aside by the
respondent court, which held the school suable and liable while absolving the other defendants. 4 The motion for
reconsideration having been denied, 5 the school then came to this Court in this petition for review on certiorari.
The issues raised in the petition are:
1. Whether or not a school that has not been incorporated may be sued by reason alone of its long continued
existence and recognition by the government.
2. Whether or not a complaint filed against persons associated under a common name will justify a judgment
against the association itself and not its individual members.
3. Whether or not the collection of tuition fees and book rentals will make a school profit-making and not
charitable.
4. Whether or not the Termination Pay Law then in force was available to the private respondent who was
employed on a year-to-year basis.
5. Whether or not the awards made by the respondent court were warranted.
We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules of Court clearly
provides that "only natural or juridical persons may be parties in a civil action." It is also not denied that the school has
not been incorporated. However, this omission should not prejudice the private respondent in the assertion of her claims
against the school. LLphil
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 under the provisions of Act No. 1459 known as the
Corporation Law, within 90 days after the date of recognition, and shall file with the Secretary of Public
Instruction a copy of its incorporation papers and by-laws.
Having been recognized by the government, it was under obligation to incorporate under the Corporation Law
within 90 days from such recognition. It appears that it had not done so at the time the complaint was filed
notwithstanding that it had been in existence even earlier than 1932. The petitioner cannot now invoke its own non-
compliance with the law to immunize it from the private respondent's complaint.
There should also be no question that having contracted with the private respondent every year for thirty two
years and thus represented itself as possessed of juridical personality to do so, the petitioner is now estopped from
denying such personality to defeat her claim against it. According to Article 1431 of the Civil Code, "through estoppel an
admission representation is rendered conclusive upon the person making it and cannot be denied or disproved as
against the person relying on it."
As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15, under which the
persons joined in an association without any juridical personality may be sued with such association. Besides, it has
been shown that the individual members of the board of trustees are not liable, having been appointed only after the
private respondent's dismissal. 6
It is clear now that a charitable institution is covered by the labor laws 7 although the question was still
unsettled when this case arose in 1968. At any rate, there was no law even then exempting such institutions from the
operation of the labor laws (although they were exempted by the Constitution from ad valorem taxes).Hence, even
assuming that the petitioner was a charitable institution as it claims, the private respondent was nonetheless still entitled
to the protection of the Termination Pay Law, which was then in force.
While it may be that the petitioner was engaged in charitable works, it would not necessarily follow that those in
its employ were as generously motivated. Obviously, most of them would not have the means for such charity. The
private respondent herself was only a humble school teacher receiving a meager salary of P180.00 per month.
At that, it has not been established that the petitioner is a charitable institution, considering especially that it
charges tuition fees and collects book rentals from its students. 8 While this alone may not indicate that it is profit-
making, it does weaken its claim that it is a non-profit entity. llcd
The petitioner says the private respondent had not been illegally dismissed because her teaching contract was
on a yearly basis and the school was not required to rehire her in 1968. The argument is that her services were
terminable at the end of each year at the discretion of the school. Significantly explanation was given by the petitioner,
and no advance notice either, of her relief. After teaching year in and year out for all of thirty-two years, the private
respondent was simply told she could not teach any more.
The Court holds, after considering the particular circumstance of Oh's employment, that she had become a
permanent employee of the school and entitled to security of tenure at the time of her dismissal. Since no cause was
shown and established at an appropriate hearing, and the notice then required by law had not been given, such
dismissal was invalid.
The private respondent's position is no different from that of the rank-and-file employees involved in Gregorio
Araneta University Foundation v. NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents' positions as deans and department heads of the petitioner
university are necessary in its usual business. Moreover, all the private respondents have been serving
the university from 18 to 28 years. All of them rose from the ranks starting as instructors until they
became deans and department heads of the university. A person who has served the University for 28
years and who occupies a high administrative position in addition to teaching duties could not possibly be
a temporary employee or a casual.
The applicable law is the Termination Pay Law, which provided:
SECTION 1. In cases of employment, without a definite period, in a commercial, industrial, or agricultural
establishment or enterprise, the employer or the employee may terminate at any time the employment
with just cause; or without just cause in the case of an employee by serving written notice on the
employer at least one month in advance, or in the case of an employer, by serving such notice to the
employee at least one month in advance or one-half month for every year of service of the employee,
whichever, is longer, a fraction of at least six months being considered as one whole year.
The employer, upon whom no such notice was served in case of termination of employment without just
cause may hold the employee liable for damages.
The employee, upon whom no such notice was served in case of termination of employment without just
cause shall be entitled to compensation from the date of termination of his employment in an amount
equivalent to his salaries or wages corresponding to the required period of notice. ...
The respondent court erred, however, in awarding her one month pay instead of only one-half month salary for
every year of service. The law is quite clear on this matter. Accordingly, the separation pay should be computed at
P90.00 times 32 months, for a total of P2,880.00. Cdpr
Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School Teachers, confers
security of tenure on the teacher upon appointment as long as he possesses the required qualification. 10 And under
the present policy of the Department of Education, Culture and Sports, a teacher becomes permanent and automatically
acquires security of tenure upon completion of three years in the service. 11
While admittedly not applicable to the case at bar, these rules nevertheless reflect the attitude of the
government on the protection of the worker's security of tenure, which is now guaranteed by no less than the
Constitution itself. 12
We find that the private respondent was arbitrarily treated by the petitioner, which has shown no cause for her
removal nor had it given her the notice required by the Termination Pay Law. As the respondent court said, the
contention that she did not report one week before the start of classes is a flimsy justification for replacing her. 13 She
had been in its employ for all of thirty-two years. Her record was apparently unblemished. There is no showing of any
previous strained relations between her and the petitioner. Oh had every reason to assume, as she had done in
previous years, that she would continue teaching as usual.
It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning told she was
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 informed she was no longer in the teaching staff. To put it bluntly, she was
fired.
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 mental anguish, serious anxiety, wounded feelings and even besmirched
reputation as an experienced teacher for more than three decades. We also find that the respondent court did not err in
awarding her exemplary damages because the petitioner acted in a wanton and oppressive manner when it dismissed
her. 15
The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are always at the
forefront in the battle against illiteracy and ignorance. If only because it is they who open the minds of their pupils to an
unexplored world awash with the magic of letters and numbers, which is an extraordinary feat indeed, these humble
mentors deserve all our respect and appreciation.
WHEREFORE, the petition is DENIED. The appealed 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.
This decision is immediately executory. SO ORDERED.
||| (Chiang Kai Shek School v. Court of Appeals, G.R. No. 58028, [April 18, 1989], 254 PHIL 394-403)

[G.R. No. 125221. June 19, 1997.]

REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, RTC,
Br. 58, Angeles City; and ANTONIO ANDA, respondents.

Willie B. Rivera for petitioner.


Yabut Law Office for respondents.

SYLLABUS

1. COMMERCIAL LAW; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; DETERMINATION


THEREOF. — The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the law. This
jurisdiction is determined by a concurrence of two elements: (1) the status or relationship of the parties; and (2) the nature of
the question that is the subject of their controversy. The first element requires that the controversy must arise out of
intracorporate or partnership relations between and among stockholders, members, or associates; between any or all of
them and the corporation, partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the State in so far as it concerns their individual franchises.
The second element requires that the dispute among the parties be intrinsically connected with the regulation of the
corporation, partnership or association or deal with the internal affairs of the corporation, partnership or association. After
all, the principal function of the SEC is the supervision and control of corporations, partnerships and associations with the
end in view that investments in these entities may be encouraged and protected, and their activities pursued for the
promotion of economic development. DaScAI
2. ID.; ID.; ID.; DISPUTE BETWEEN MEMBERS OF TWO SEPARATE AND DISTINCT CORPORATIONS WHO
HAVE NO INTRACORPORATE RELATION, DOES NOT FALL WITHIN THE JURISDICTION OF SECURITIES AND
EXCHANGE COMMISSION; CASE AT BAR. — The KAMAJDA and SAMAJODA to which petitioner and private respondent
belong are duly registered with the SEC, but these associations are two separate entities. The dispute between petitioner
and private respondent is not within the KAMAJDA nor the SAMAJODA. It is between members of separate and distinct
associations. Petitioner and private respondent have no intracorporate relation much less do they have an intracorporate
dispute. The SEC therefore has no jurisdiction over the complaint.
3. ID.; ID.; ID.; DOCTRINE OF CORPORATION BY ESTOPPEL CANNOT OVERRIDE JURISDICTIONAL
REQUIREMENTS. — The doctrine of corporation by estoppel advanced by private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. It cannot be acquired through or
waived, enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of the
court.
4. ID.; ID.; ID.; WHERE THERE IS NO THIRD PERSON INVOLVED AND THE CONFLICT ARISES ONLY AMONG
THOSE ASSUMING THE FORM OF A CORPORATION, THERE IS NO CORPORATION BY ESTOPPEL. — Corporation
by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons
assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where
there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore
know that it has not been registered, there is no corporation by estoppel. EATcHD

DECISION

PUNO, J p:

This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court, Branch 58, Angeles
City which ordered the Municipal Circuit Trial Court, Mabalacat and Magalang, Pampanga to dismiss Civil Case No. 1214
for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil Case No. 1214 for
damages against respondent Antonio Anda before the Municipal Circuit Trial Court (MCTC), Mabalacat and Magalang,
Pampanga. Petitioner alleged that he was the president of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association,
Inc. (KAMAJDA) while respondent Anda was the president of the Samahang Angeles-Mabalacat Jeepney Operators' and
Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the request of the Sangguniang Bayan of Mabalacat,
Pampanga, petitioner and private respondent agreed to consolidate their respective associations and form the Unified
Mabalacat-Angeles Jeepney Operators' and Drivers' Association, Inc. (UMAJODA); petitioner and private respondent also
agreed to elect one set of officers who shall be given the sole authority to collect the daily dues from the members of the
consolidated association; elections were held on October 29, 1995 and both petitioner and private respondent ran for
president; petitioner won; private respondent protested and, alleging fraud, refused to recognize the results of the election;
private respondent also refused to abide by their agreement and continued collecting the dues from the members of his
association despite several demands to 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 and attorney's fees of
P500.00. 1
Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction was lodged with
the Securities and Exchange Commission (SEC). The MCTC denied the motion on February 9, 1996. 2 It denied
reconsideration on March 8, 1996. 3
Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58, Angeles City. 4 The trial
court found the dispute to be intracorporate, hence, subject to the jurisdiction of the SEC, and ordered the MCTC to dismiss
Civil Case No. 1214 accordingly. 5 It denied reconsideration on May 31, 1996. 6
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
BETWEEN HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC] APPROVED AND REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION." 7
The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of Presidential Decree
No. 902-A.. Section 5 reads as follows:
"Section 5. . . . [T]he Securities and Exchange Commission [has] original and exclusive
jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, members of associations or organizations registered
with the Commission. cdtai
(b) Controversies arising out of intracorporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members, or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity.
(c) Controversies in the election or appointment of directors, trustees, officers or managers of
such corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses sufficient
property to cover all its debts but foresees the impossibility of meeting them when they respectively fall
due or in cases where the corporation, partnership or association has no sufficient assets to cover its
liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created
pursuant to this Decree."
The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the law. 8 This
jurisdiction is determined by a concurrence of two elements: (1) the status or relationship of the parties; and (2) the nature of
the question that is the subject of their controversy. 9
The first element requires that the controversy must arise out of intracorporate or partnership relations between and
among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the State in so far as it concerns their individual franchises. 10 The second element requires that the
dispute among the parties be intrinsically connected with the regulation of the corporation, partnership or association or deal
with the internal affairs of the corporation, partnership or association. 11 After all, the principal function of the SEC is the
supervision and control of corporations, partnerships and associations with the end in view that investments in these entities
may be encouraged and protected, and their activities pursued for the promotion of economic development. 12
There is no intracorporate nor partnership relation between petitioner and private respondent. The controversy
between them arose out of their plan to consolidate their respective jeepney drivers' and operators' associations into a
single common association. This unified association was, however, still a proposal. It had not been approved by the SEC,
neither had its officers and members submitted their articles of consolidation in accordance with Sections 78 and 79 of the
Corporation Code. Consolidation becomes effective not upon mere agreement of the members but only upon issuance of
the certificate of consolidation by the SEC. 13 When the SEC, upon processing and examining the articles of consolidation,
is satisfied that the consolidation of the corporations is not inconsistent with the provisions of the Corporation Code and
existing laws, it issues a certificate of consolidation which makes the reorganization official. 14 The new consolidated
corporation comes into existence and the constituent corporations dissolve and cease to exist. 15
The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly registered with the
SEC, but these associations are two separate entities. The dispute between petitioner and private respondent is not within
the KAMAJDA nor the SAMAJODA. It is between members of separate and distinct associations. Petitioner and private
respondent have no intracorporate relation much less do they have an intracorporate dispute. The SEC therefore has no
jurisdiction over the complaint.
The doctrine of corporation by estoppel 16 advanced by private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. 17 It cannot be acquired through
or waived, enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of
the court. 18
Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. 19 It
applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with
third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a
corporation, who therefore know that it has not been registered there is no corporation by estoppel. 20
IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order dated May 31,
1996 of the Regional Trial Court, Branch 58, Angeles City are set aside. The Municipal Circuit Trial Court of Mabalacat and
Magalang, Pampanga is ordered to proceed with dispatch in resolving Civil Case No. 1214. No costs. SO ORDERED.
||| (Lozano v. De los Santos, G.R. No. 125221, [June 19, 1997], 340 PHIL 563-570)
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

Roberto A. Abad for petitioner.


Benjamin S. Benito & Associates for private respondent.

SYNOPSIS

Antonio Chua and Peter Yao entered into a contract in behalf of Ocean Quest Fishing Corporation for the purchase
of fishing nets from respondent Philippine Fishing Gear Industries, Inc. Chua and Yao claimed that they were engaged in
business venture with petitioner Lim Tong Lim, who, however, was not a signatory to the contract. The buyers failed to pay
the fishing nets. Respondent filed a collection against Chua, Yao and petitioner Lim in their capacities as general partners
because it turned out that Ocean Quest Fishing Corporation is a non-existent corporation. The trial court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing nets. The trial court rendered its decision ruling
that respondent was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable
to pay respondent. Lim appealed to the Court of Appeals, but the appellate court affirmed the decision of the trial court that
petitioner Lim is a partner and may thus be held liable as such. Hence, the present petition. Petitioner claimed that since his
name did not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo,
he cannot be held liable. cIaCTS
The Supreme Court denied the petition. The Court ruled that having reaped the benefits of the contract entered into
by Chua and Yao, with whom he had an existing relationship, petitioner Lim is deemed a part of said association and is
covered by the doctrine of corporation by estoppel. The Court also ruled that under the principle of estoppel, those acting on
behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.

SYLLABUS

1. CIVIL LAW; PARTNERSHIP; AGREEMENT THAT ANY LOSS OR PROFIT FROM THE SALE AND
OPERATION OF THE BOATS WOULD BE DIVIDED EQUALLY AMONG THEM SHOWS THAT THE PARTIES HAD
INDEED FORMED A PARTNERSHIP. — From the factual findings of both lower courts, it is clear that Chua, Yao and Lim
had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed their
intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss.
These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund"
under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally
among them also shows that they had indeed formed a partnership. Moreover, it is clear that the partnership extended not
only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to
fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself
so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have
proceeded. Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in
the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that
the proceeds from the sales and operations thereof would be divided among them.
2. ID.; ID.; COMPROMISE AGREEMENT OF THE PARTIES NOT THE SOLE BASIS OF PARTNERSHIP. —
Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the Compromise
Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate
their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment of the
relationship extant among the parties prior to its execution. A proper adjudication of claimants' rights mandates that courts
must review and thoroughly appraise all relevant facts. Both lower courts have done so and have found, correctly, a
preexisting partnership among the parties. In implying that the lower courts have decided on the basis of one piece of
document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored
all the possible consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts' factual
findings mentioned above nullified petitioner's argument that the existence of a partnership was based only on the
Compromise Agreement.
3. ID.; ID.; PETITIONER WAS A PARTNER, NOT A LESSOR. — Verily, as found by the lower courts, petitioner
entered into a business agreement with Chua and Yao, in which debts were undertaken in order to finance the acquisition
and the upgrading of the vessels which would be used in their fishing business. The sale of the boats, as well as the division
among the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though
registered in his name, was not his own property but an asset of the partnership. It is not uncommon to register the
properties acquired from a loan in the name of the person the lender trusts, who in this case is the petitioner himself. After
all, he is the brother of the creditor, Jesus Lim. We stress that it is unreasonable — indeed, it is absurd — for petitioner to
sell his property to pay a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee,
instead of partners.
4. MERCANTILE LAW; PRIVATE CORPORATIONS; HAVING REAPED THE BENEFITS OF THE CONTRACT
ENTERED INTO BY PERSONS WITH WHOM HE PREVIOUSLY HAD AN EXISTING RELATIONSHIP, PETITIONER IS
DEEMED TO BE PART OF SAID ASSOCIATION AND IS COVERED BY THE DOCTRINE OF CORPORATION BY
ESTOPPEL. — There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets
it sold. The only question here is whether petitioner should be held jointly liable with Chua and Yao. Petitioner contests such
liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name
does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable. Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because
the Writ has effectively stopped his use of the fishing vessel. It is difficult to disagree with the RTC and the CA that Lim,
Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone
does not preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel,
those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as
general partners. Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.
5. REMEDIAL LAW; PROVISIONAL REMEDIES; ATTACHMENT; ISSUE OF VALIDITY THEREOF, MOOT AND
ACADEMIC. — Petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the
Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed.
The nets and the floats were specifically manufactured and tailor-made according to their own design, and were bought and
used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated
in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine
Fishing Gear, until full payment thereof.
VITUG, J., concurring:
1. CIVIL LAW; PARTNERSHIP; EXTENT OF LIABILITY OF PARTNERS IN A GENERAL PARTNERSHIP. —
When a person by his act or deed represents himself. as a partner in an existing partnership or with one or more persons
not actual partners, he is deemed an agent of such persons consenting to such representation and in the same manner, if
he were a partner, with respect to persons who rely upon the representation. The association formed by Chua, Yao and
Lim, should be, as it has been deemed, a de facto partnership with all the consequent obligations for the purpose of
enforcing the rights of third persons. The liability of general partners (in a general partnership as so opposed to a limited
partnership) is laid down in Article 1816 which posits that all partners shall be liable pro rata beyond the partnership assets
for all the contracts which may have been entered into in its name, under its signature, and by a person authorized to act for
the partnership.
2. ID.; ID.; ID.; INSTANCES WHEN THE PARTNERS CAN BE HELD SOLIDARILY LIABLE WITH THE
PARTNERSHIP. — This rule is to be construed along with other provisions of the Civil Code which postulate that the
partners can be held solidarily liable with the partnership specifically in these instances. — (1) where, by any wrongful act or
omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-
partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so acting or omitting to act; (2) where one partner acting
within the scope of his apparent authority receives money or property of a third person and misapplies it; and (3) where the
partnership in the course of its business receives money or property of a third person and the money or property so
received is misapplied by any partner while it is in the custody of the partnership — consistently with the rules on the nature
of civil liability in delicts and quasi-delicts.
DECISION

PANGANIBAN, J p:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to
divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their
own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets.
Being partners, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into
on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly
transacted on its behalf, but reaped benefits from that contract. cda
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the
Court of Appeals in CA-GR CV 41477, 1 which disposed as follows:
"WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
affirmed." 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as
follows:
"WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September
20, 1990; cdphil
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and circumstances and the
proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and computed on their
respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13,
1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19,
1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per appearance
in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted
from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale); cdasia
e. Cost of suit.
"With respect to the joint liability of defendants for the principal obligation or for the unpaid price
of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of
P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of
the nets during the pendency of this case, it was ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced the attached property as a
guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and
possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff
until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own
properties. It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff
to guaranty damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of defendants.
"From the foregoing, it would appear therefore that whatever judgment the plaintiff may be
entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced
the attached nets and floats. Considering, however, that the total judgment obligation as computed above
would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the
defendants who are not entitled to damages and who did not put up a single centavo to raise the amount
of P900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason,
the defendants are hereby relieved from any and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats
and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED." 3 cdasia
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was
not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection
suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought
against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a
nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. 5 On September 20,
1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila. LLpr
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable
time within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed
an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his
behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear
Industries won the bidding and deposited with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN which Chua
and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial
documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.
10 The Compromise Agreement provided: cdll
"a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied
as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong
Lim;
"b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua;
1/3 Peter Yao;
"c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao." 11
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss. 12
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may
thus be held liable as such for the fishing nets and floats purchased by and for the use of the partnership. The appellate
court ruled:
"The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing . . . . Obviously, the
ultimate undertaking of the defendants was to divide the profits among themselves which is what a
partnership essentially is . . . . By a contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund with the intention of dividing the profits among
themselves (Article 1767, New Civil Code)." 13 cdtai
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
"I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
"II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
"III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS."
In determining whether petitioner may be held liable for the fishing nets and floats purchased from respondent, the
Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership. cdasia
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the
CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on
the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the
respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of
Lease" dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership —
the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the gross
catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed
that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:
"ARTICLE 1767. By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits among
themselves." llcd
Specifically, both lower courts ruled that a partnership among the three existed based on the following factual
findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to
join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale
over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking
and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and Chua entrusted
the ownership papers of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong
Lim. cdtai
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported
business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents;
(b) reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the
parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing
business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was
petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the
repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution
to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that
any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had
indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their
business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition
of the aforesaid equipment, without which the business could not have proceeded. cdtai
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the
fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the
proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus,
the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present
action is embraced by one of the exceptions to the rule. 16 In assailing the factual findings of the two lower courts, petitioner
effectively goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not
to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment
of the relationship extant among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant
facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying
that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA
and the RTC delved into the history of the document and explored all the possible consequential combinations in harmony
with law, logic and fairness. Verily, the two lower courts' factual findings mentioned above nullified petitioner's argument that
the existence of a partnership was based only on the Compromise Agreement. LLphil
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers
showing that he was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own
boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor
would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among all
three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which
debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their
fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the payment
of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset
of the partnership. It is not uncommon to register the properties acquired from a loan in the name of the person the lender
trusts, who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim. prLL
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt he did not
incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao,
and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
"Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate personality.
"One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation." LibLex
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. "The reason behind this doctrine is obvious — an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided
by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all
the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or
for other acts performed as such agent." 17
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first
instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack
of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the
alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. cdrep
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold.
The only question here is whether petitioner should be held jointly 18 liable with Chua and Yao. Petitioner contests such
liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name
does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier
been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has
effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it
was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be
part of said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the
Court in Alonso v. Villamor: 19 prLL
"A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the
subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly
trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done
upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves
scant consideration from courts. There should be no vested rights in technicalities."
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the
Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed.
The nets and the floats were specifically manufactured and tailor-made according to their own design, and were bought and
used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated
in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine
Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner. CdprSO
ORDERED.
|||
(Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, [November 3, 1999], 376 PHIL 76-95)

[G.R. No. 119020. October 19, 2000.]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF
APPEALS, HENRI KAHN, PHILIPPINES FOOTBALL FEDERATION, respondents.

DECISION

KAPUNAN, J p:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director,
wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn,
wherein the former offered its services as a travel agency to the latter. 1 The offer was accepted. AaCEDS
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East
Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost
of the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in
September of 1989, in the total amount of P176,467.50. 2
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for
the amount of P265,894.33. 3 On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of
P31,603.00. 4
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. 5 Thereafter, no further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in
his personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant.
Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground
that Henri Kahn allegedly guaranteed the said obligation. 6
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the
amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of
action against him either in his personal capacity or in his official capacity as president of the Federation. He maintained that
he did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical
personality. 7
On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court. 8
In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn
personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly established
that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "defendant Philippine Football
Federation is a sports association . . . ." This has not been denied by defendant Henri Kahn in his
Answer. Being the President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff
that it is a mere sports association if it were a domestic corporation. But he did not.
xxx xxx xxx
A voluntary unincorporated association, like defendant Federation has no power to enter into, or
to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not
binding on, or enforceable against it. The officers or agents are themselves personally liable.
xxx xxx xxx 9
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the
principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the
date the complaint was filed, until the principal obligation is fully liquidated; and another sum of
P15,000.00 for attorney's fees. SEHDIC
The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of
the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn. 10
Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court
rendered a decision reversing the trial court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and
SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn. 11
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized
that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable
for the same as said entity has a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable
for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated
that:
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 for the unpaid obligation, it
should be remembered that the trial court dismissed the complaint against the Philippine Football
Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is
not a party to this appeal and consequently, no judgment may be pronounced by this Court against the
PFF without violating the due process clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the plaintiff's failure to appeal therefrom. The
alternative prayer is therefore similarly DENIED. 12
Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned
errors: 13
A. THE, HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD
DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE
ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS
THE ONE, WHO REPRESENTED THE PFF AS HAVING CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE
RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND
CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL
PAYMENT AN ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY
LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE
OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation
as a juridical person. In the assailed decision, 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 Philippine Amateur Athletic Federation,
and Presidential Decree No. 604 as the laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of
national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14
of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. — The National Sports' Association shall
have the following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and government.
2. To raise funds by donations benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal, for
the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due consultation
with the executive committee;
xxx xxx xxx
13. To perform such other acts as may be necessary for the proper accomplishment of
their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. — The National sports
associations shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government
which shall be submitted to the Department and any amendment hereto shall take effect upon
approval by the Department: Provided, however, That no team, school, club, organization or
entity shall be admitted as a voting member of an association unless 60 per cent of the athletes
composing said team, school, club, organization or entity are Filipino citizens.
2. Raise funds by donations, benefits, and other means for their purpose subject to the
approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic and
Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due consultation with
the Department;
xxx xxx xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly indicate that these entities may
acquire a juridical personality. The power to purchase, 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 appellate court that
national sports associations may be accorded corporate status, such does not automatically take place by the mere
passage of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent
either in the form of a special law or a general enabling act. We cannot agree with the view of the 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
recognized the existence of national sports associations and provided the manner by which these entities may acquire
juridical personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. — A National Association
shall be organized for each individual sports in the Philippines in the manner hereinafter provided to
constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports'
Association shall be filed with the executive committee together with, among others, a copy of the
constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten
pesos.
The Executive Committee shall give the recognition applied for if it is satisfied that said
association will promote the purposes of this Act and particularly section three thereof. No application
shall be held pending for more than three months after the filing thereof without any action having been
taken thereon by the executive committee. Should the application be rejected, the reasons for such
rejection shall be clearly stated in a written communication to the applicant. Failure to specify the reasons
for the rejection shall not affect the application which shall be considered as unacted upon: Provided
however, That until the executive committee herein provided shall have been formed, applications for
recognition shall be passed upon by the duly elected members of the present executive committee of the
Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon the
organization of the executive committee herein provided: Provided, further, That the functioning executive
committee is charged with the responsibility of seeing to it that the National Sports' Associations are
formed and organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations: — Application for accreditation or recognition as a
national sports association for each individual sport in the Philippines 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 is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially complied with
the rules and regulations of the Department: Provided, That the Department may withdraw accreditation
or recognition for violation of this Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports association: Provided, That the latter shall
have exclusive technical control over the development and promotion of the particular sport for which
they are organized.
Clearly the above cited provisions require that before an entity may be considered as a national sports association,
such entity must be recognized by the accrediting organization, the Philippine, Amateur Athletic Federation under R.A.
3135, and the Department of Youth and Sports Development under P.D. 604.
This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of
the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and by-
laws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been
recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports
Development. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate existence of its own. caCTHI
Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled principle in corporation law that any person acting or purporting
to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for
contract entered into or for other acts performed as such agent. 14 As president of the Federation, Henri Kahn is presumed
to have known about the corporate existence or non-existence of the Federation. We cannot subscribe to the position taken
by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner cannot deny the
corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to
recognize and in effect admit its existence. 15 The doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape
liabilities on a contract from which he has benefited on the irrelevant ground of defective incorporation. 16 In the case at bar,
the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial
Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED. SO ORDERED.
||| (International Express Travel & Tour Services, Inc. v. Court of Appeals, G.R. No. 119020, [October 19, 2000], 397 PHIL
751-762)
[G.R. No. 117188. August 7, 1997.]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs. HON.
COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN
ENCARNACION and HORATIO AYCARDO, respondents.

SYLLABUS

1. STATUTORY CONSTRUCTION; STATUTE; INTERPRETATION; THE WORD "MUST" IS NOT ALWAYS


IMPERATIVE. — Ordinarily, the word "must" connotes an imperative act or operates to impose a duty which may be
enforced. It is synonymous with "ought" which connotes compulsion or mandatoriness. However, the word "must" in a
statute, like, "shall", is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable construction of the statute in which it is used demands
or requires. This is equally true as regards the word "must". Thus, if the language of a statute considered as a whole and
with due regard to its nature and object reveals that the legislature intended to use the words "shall" and "must" to be
directory, they should be given that meaning. cdt
2. COMMERCIAL LAW; CORPORATION CODE;SEC. 46 (ADOPTION OF BY-LAWS); BY-LAWS; REQUIREMENT
FOR THE ADOPTION THEREOF WITHIN THE PERIOD PROVIDED; NOT MANDATORY. — Taken as a whole and under
the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum). Section
46 of the Corporation Code reveals the legislative intent to attach a directory, and not mandatory, meaning for the word
"must" in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the
by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the
requirement of filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission". It necessarily follows that failure to file the by-laws within any
period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation
but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. There are
in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus: "In
the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a
corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently
provides for the government of the body; and even where the governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will not
render void any acts of the corporation which would otherwise be valid." As the "rules and regulations or private laws
enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are
indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are
required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the
period required by law by no means tolls the automatic dissolution of a corporation.
3. ID.; ID.; ID.; EFFECT OF FAILURE TO FILE. — Although the Corporation Code requires the filing of by-laws, it
does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46.
However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of
the SEC of which state: "SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers: . . . (1) to suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the following: . . . Failure to
file by-laws within the required period; . . . In the exercise of the foregoing authority and jurisdiction of the Commissions or
by a Commissioner or by such there bodies, boards committees and/or any officer as may be created or designated by the
Commission for the purpose. The decision, ruling or order of any such Commissioner, bodies, boards, committees and/or
officer may be appealed to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of
such decision, ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings
and appeals of cases falling within its jurisdiction. The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for review in accordance with the pertinent provisions of the
Rules of Court." Even under the foregoing express grant of power and authority, there can be no automatic corporate
dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" private of corporate existence. Proper notice and hearing are cardinal
components of due process in any democratic institution, agency or society. In other words, the incorporators must be given
the chance to explain their neglect or omission and remedy the same. That the failure to file by-laws is not provided for by
the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect immediately after its
promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the provisions above-quoted supply the
law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari
materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized
with other statutes as to form a uniform system of jurisprudence. cdasia

DECISION

ROMERO, J p:

May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated
by Section 46 of the Corporation Code, result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the Decision 1 of the Court of Appeals affirming the
decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas
Homeowners Association (LGVHA) as the sole homeowners' association in Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City that was owned and developed by Solid Homes, Inc. It revoked the certificates
of registration issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the North Association for
brevity) and Loyola Grand Villas Homeowners (South) Association Incorporated (the South Association). aisadc
LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of the Loyola Grand
Villas. It was registered with the Home Financing Corporation, the predecessor of herein respondent HIGC, as the sole
homeowners' organization in the said subdivision under Certificate of Registration No. 04-197. It was organized by the
developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown
reasons, however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. 2 'To the officers'
consternation, they discovered that there were two other organizations within the subdivision — the North Association and
the South Association. According to private respondents, a non-resident and Soliven himself, respectively headed these
associations. They also discovered that these associations had five (5) registered homeowners each who were also the
incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North
Association while three (3) members of LGVHAI were listed as members of the South Association. 3 The North Association
was registered with the HIGC on February 13, 1989 under Certificate of Registration No. 04-1160 covering Phases West II,
East III, West III and East IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal
department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not
submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate charter
because HIGC had not received any report on the association's activities. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27, 1989 covering Phases West I, East I and East II. It filed its
by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the
revocation of LGVHAI's certificate of registration without due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a
certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from HIGC
Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as follows:
"WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners
Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of
Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola Grand
Villas Homeowners Association, Inc., all assets and records of the Association now under his custody
and possession."
The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8, 1993, the
Board 4 dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First, whether or not
LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code resulted in the
automatic dissolution of LGVHAI. Second, whether or not two homeowners' associations may be authorized by the HIGC in
one "sprawling subdivision." However, in the Decision of August 23, 1994 being assailed here, the Court of Appeals
affirmed the Resolution of the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private corporation
commences to have corporate existence and juridical personality from the date the Securities and Exchange Commission
(SEC) issues a certificate of incorporation under its official seal. The requirement for the filing of by-laws under Section 46 of
the Corporation Code within one month from official notice of the issuance of the certificate of incorporation presupposes
that it is already incorporated, although it may file its by-laws with its articles of incorporation. Elucidating on the effect of a
delayed filing of by-laws, the Court of Appeals said:
"We also find nothing in the provisions cited by the petitioner, i.e., Sections 46 and 22,
Corporation Code,or in any other provision of the Code and other laws which provide or at least imply
that failure to file the by-laws results in an automatic dissolution of the corporation. While Section 46, in
prescribing that by-laws must be adopted within the period prescribed therein, may be interpreted as a
mandatory provision, particularly because of the use of the word 'must,' its meaning cannot be stretched
to support the argument that automatic dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation Code are silent on the result of
the failure to adopt and file the by-laws within the required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A. This section
empowers the SEC to suspend or revoke certificates of registration on the grounds listed therein. Among
the grounds stated is the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp.
124-125). Such suspension or revocation, the same section provides, should be made upon proper
notice and hearing. Although P.D. 902-A refers to the SEC, the same principles and procedures apply to
the public respondent HIGC as it exercises its power to revoke or suspend the certificates of registration
or homeowners associations. (Section 2 [a], E.O. 535, series 1979, transferred the powers and
authorities of the SEC over homeowners associations to the HIGC.)
We also do not agree with the petitioner's interpretation that Section 46, Corporation Code
prevails over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former. There
is no basis for such interpretation considering that these two provisions are not inconsistent with each
other. They are, in fact, complementary to each other so that one cannot be considered as invalidating
the other."
The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been validly
revoked, it continued to be the duly registered homeowners' association in the Loyola Grand Villas. More importantly, the
South Association did not dispute the fact that LGVHAI had been organized and that, thereafter, it transacted business
within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling 5 that the HIGC has the authority to order
the holding of a referendum to determine which of two contending associations should represent the entire community,
village or subdivision.
Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole issue for
resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the LGVHAI's failure to file its by-laws
within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said
corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect to the filing of by-laws, noncompliance
therewith would result in "self-extinction" either due to non-occurrence of a suspensive condition or the occurrence of a
resolutory condition ''under the hypothesis that (by) the issuance of the certificate of registration alone the corporate
personality is deemed already formed." It asserts that the Corporation Code provides for a "gradation of violations of
requirements." Hence, Section 22 mandates that the corporation must be formally organized and should commence
transactions within two years from date of incorporation. Otherwise, the corporation would be deemed dissolved. On the
other hand, if the corporation commences operations but becomes continuously inoperative for five years, then it may be
suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for sanctions
for non-filing of the by-laws. However, it insists that no sanction need be provided "because the mandatory nature of the
provision is so clear that there can be no doubt about its being an essential attribute of corporate birth." To petitioner, its
submission is buttressed by the facts that the period for compliance is "spelled out distinctly," that the certification of the
SEC/HIGC must show that the by-laws are not inconsistent with the Code, and that a copy of the by-laws "has to be
attached to the articles of incorporation." Moreover, no sanction is provided for because "in the first place, no corporate
identity has been completed." Petitioner asserts that "non-provision for remedy or sanction is itself the tacit proclamation
that non-compliance is fatal and no corporate existence had yet evolved," and therefore, there was "no need to proclaim its
demise." 6 In a bid to convince the Court of its arguments, petitioner stresses that:
". . . the word MUST is used in Sec. 46 in its universal literal meaning and corollary human
implication — its compulsion is integrated in its very essence — MUST is always enforceable by the
inevitable consequence — that is, 'OR ELSE'. The use of the word MUST in Sec. 46 is no exception — it
means file the by-laws within one month after notice of issuance of certificate of registration OR ELSE.
The OR ELSE, though not specified, is inextricably a part of MUST. Do this or if you do not you are
'Kaput'. The importance of the by-laws to corporate existence compels such meaning for as decreed the
by-laws is 'the government' of the corporation. Indeed, how can the corporation do any lawful act as such
without by-laws. Surely, no law is intended to create chaos." 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code which itself
does not provide sanctions for non-filing of by-laws. For the petitioner, it is "not proper to assess the true meaning of Sec.
46 . . . on an unauthorized provision on such matter contained in the said decree."
In their comment on the petition, private respondents counter that the requirement of adoption of by-laws is not
mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement is mandatory or merely
directory. Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private respondents contend that Section 6(I) of that
decree provides that non-filing of by-laws is only a ground for suspension or revocation of the certificate of registration of
corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover, the adoption and filing of
by-laws is a condition subsequent which does not affect the corporate personality of a corporation like the LGVHAI. This is
so because Section 9 of the Corporation Code provides that the corporate existence and juridical personality of a
corporation begins from the date the SEC issues a certificate of incorporation under its official seal. Consequently, even if
the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To emphasize the fact the
LGVHAI was registered as the sole homeowners' association in the Loyola Grand Villas, private respondents point out that
membership in the LGVHAI was an "unconditional restriction in the deeds of sale signed by lot buyers." cdtai
In its reply to private respondents' comment on the petition, petitioner reiterates its argument that the word "must" in
Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate Appellate
Court could be applied to this case, this Court must first resolve the issue of whether or not the provisions of P.D. No. 902-A
prescribing the rules and regulations to implement the Corporation Code can "rise above and change" the substantive
provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of controversy in this case states:
"Sec. 46. Adoption of by-laws. — Every corporation formed under this Code, must within one (1)
month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For
the adoption of by-laws by the corporation, the affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stock
corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for
them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders
or members during office hours; and a copy thereof, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators
and submitted to the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust company,
insurance company, public utility, educational institution or other special corporations governed by special
laws, unless accompanied by a certificate of the appropriate government agency to the effect that such
by-laws or amendments are in accordance with law."
As correctly postulated by the petitioner, interpretation of this provision of law begins with the determination of the
meaning and import of the word "must" in this section. Ordinarily, the word "must" connotes an imperative act or operates to
impose a duty which may be enforced. 9 It is synonymous with "ought" which connotes compulsion or mandatoriness. 10
However, the word "must" in a statute, like "shall," is not always imperative. It may be consistent with an exercise of
discretion. In this jurisdiction, the tendency has been to interpret "shall" as the context or a reasonable construction of the
statute in which it is used demands or requires. 11 This is equally true as regards the word "must." Thus, if the language of
a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the
words "shall" and "must" to be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are illuminating:
"MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to understand here, Mr. Speaker,
that by-laws must immediately be filed within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure of
the corporation to file these by- laws within one month?
MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes
the consequences of violations of any provision of this Code. One such consequence is the dissolution of
the corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by
merely failing to file the by-laws within one month. Supposing the corporation was late, say, five days,
what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution
of the corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a
quo warranto action is brought, one takes to account the gravity of the violation committed. If the by-laws
were late — the filing of the by-laws were late by, perhaps, a day or two, I would suppose that might be a
tolerable delay, but if they are delayed over a period of months — as is happening now — because of the
absence of a clear requirement that by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences." 13
This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on
time was never the intention of the legislature. Moreover, even without resorting to the records of deliberations of the
Batasang Pambansa, the law itself provides the answer to the issue propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum), 14 Section 46 aforequoted reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word ''must" in the first sentence thereof. Note should be taken of the second paragraph of the
law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules
out mandatory compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of
the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that
failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code
and related statutes. 15 There are in fact cases where by-laws are unnecessary to corporate existence or to the valid
exercise of corporate powers, thus:
"In the absence of charter or statutory provisions to the contrary, by-laws are not necessary
either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly
in all cases where the charter sufficiently provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to
exercise the power will be ascribed to mere nonaction which will not render void any acts of the
corporation which would otherwise be valid." 16 (Emphasis supplied.)
As Fletcher aptly puts it:
"It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws
have been adopted the corporation may not be able to act for the purposes of its creation, and that the
first and most important duty of the members is to adopt them. This would seem to follow as a matter of
principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter
of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of
a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation
organized for specific purposes. And the statute or general laws from which the corporation derives its
corporate existence may expressly require it to make and adopt by-laws and specify to some extent what
they shall contain and the manner of their adoption. The mere fact, however, of the existence of power in
the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power
essential to its corporate life, or to the validity of any of its acts." 17
Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of
the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state:
"SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
xxx xxx xxx
(I) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds provided by law,
including the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be
conducted by the Commission or by a Commissioner or by such other bodies, boards, committees and/or
any officer as may be created or designated by the Commission for the purpose. The decision, ruling or
order of any such Commissioner, bodies, boards, committees and/or officer may be appealed to the
Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision,
ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings,
hearings and appeals of cases falling within its jurisdiction. cdpr
The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc
to the Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of
Court."
Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution
simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation
Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due
process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to
explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D.
No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the
Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of
jurisprudence. 18
As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own
actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among
themselves in their relation to it," 19 by-laws are indispensable to corporations in this jurisdiction. These may not be
essential to corporate birth but certainly, these are required by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution
of a corporation.
In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio v.
Intermediate Appellate Court, 20 as follows:
". . . Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation
but is now considered only a ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code,
provided that the powers of the corporation would cease if it did not formally organize and commence the
transaction of its business or the continuation of its works within two years from date of its incorporation.
Section 20, which has been reproduced with some modifications in Section 46 of the Corporation Code,
expressly declared that 'every corporation formed under this Act, must within one month after the filing of
the articles of incorporation with the Securities and Exchange Commission, adopt a code of by-laws.'
Whether this provision should be given mandatory or only directory effect remained a controversial
question until it became academic with the adoption of PD 902-A. Under this decree, it is now clear that
the failure to file by-laws within the required period is only a ground for suspension or revocation of the
certificate of registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section
6(I) of PD 902-A, the SEC is empowered to 'suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of a corporation' on the ground inter alia of 'failure to file by-laws
within the required period.' It is clear from this provision that there must first of all be a hearing to
determine the existence of the ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter. In fact, under the rules and regulations
of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an
administrative fine without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance with conditions subsequent
will suffice to perfect corporate personality. Organization and commencement of transaction of corporate
business are but conditions subsequent and not prerequisites for acquisition of corporate personality.
The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation
Code, a corporation commences its corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues certificate of incorporation
under its official seal. This may be done even before the filing of the by-laws, which under Section 46 of
the Corporation Code, must be adopted 'within one month after receipt of official notice of the issuance of
its certificate of incorporation.'" 21
That the corporation involved herein is under the supervision of the HIGC does not alter the result of this case. The
HIGC has taken over the specialized functions of the former Home Financing Corporation by virtue of Executive Order No.
90 dated December 17, 1986. 22 With respect to homeowners associations, the HIGC shall "exercise all the powers,
authorities and responsibilities that are vested on the Securities and Exchange Commission . . ., the provision of Act 1459,
as amended by P.D. 902-A, to the contrary notwithstanding." 23
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision of the
Court of Appeals AFFIRMED. This Decision is immediately executory. Costs against petitioner. cdaSO ORDERED.
||| (Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, G.R. No. 117188, [August 7, 1997], 342
PHIL 651-669)

[G.R. No. 23241. March 14, 1925.]

HENRY FLEISCHER, plaintiff-appellee, vs. BOTICA NOLASCO CO., INC., defendant-appellant.

Antonio Gonzalez for appellant.


Emilio M. Javier for appellee.

SYLLABUS

1. CORPORATIONS; CORPORATE STOCK; RIGHT OF CORPORATIONS TO IMPOSE A LIMITATION ON


TRANSFERS OF STOCK. — A stock corporation in adopting by-laws governing the transfer of shares of stock should
take into consideration the specific provisions of the Corporation Law. The by-laws of corporations should be made to
harmonize with the provisions of the Corporation Law. By-laws must not be inconsistent with the provisions of the
Corporation Law. By-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects
of the corporations provided they are not contradictory to the general policy of the laws of the land. Under a statute
authorizing by-laws for the transfer of stock of a corporation, it can do more than prescribe a general mode of transfer
on the corporate books and cannot justify an unreasonable restriction upon the right to sell. The shares of stock of a
corporation are personal property and the holder thereof may transfer the same without unreasonable restrictions.
2. ID.; TRANSFER OF SHARES OF STOCK. — The power to enact by-laws restraining the sale and transfer of
stock must be found in the governing statute or charter. Restrictions upon the traffic in stock must have their source in
legislative enactments, as the corporation itself cannot create such impediments. By-laws of a corporations are intended
merely for the protection of the corporation, and prescribe regulations and not restrictions; they are always subject to
the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass
upon the legality of the transaction by which its stock passes from one person to another, nor can it question the
consideration upon which a sale is based. A by-law of a corporation cannot take away or abridge the substantial rights
of stockholders. Courts will carefully scrutinize any attempt in the on a part of a corporation to impose restrictions or
limitations upon the right of stockholders to sell and assign their stock. Restrictions cannot be imposed upon a
stockholder by a by-law without statutory or charter authority. The owner of a corporate stock has the same
uncontrollable right to sell or alienate, which attaches to the ownership of any other species of property.

DECISION

JOHNSON, J p:

This action was commenced in the Court of First Instance of the Province of Oriental Negros on the 14th day of
August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation duly organized and existing under
the laws of the Philippine Islands. the plaintiff prayed that said board of directors be ordered to register in the books of
the corporation five shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said body to register the share of stock in question. the
defendant filed the demurrer on the ground that the facts alleged in the complaint did not constitute sufficient cause of
action, and that the action was not brought against the proper party, which was the Botica Nolasco, Inc. the demurrer
was sustained, and the plaintiff was granted five days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that
he became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel
Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in the
books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which refusal
caused him damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in
his name in the books of the corporation the five shares of stock recorded in said books in the name of Manuel
Gonzales, and to indemnity him in the sum of P500 as damages, and to pay the costs. The defendant again filed a
demurrer in the ground that the amended complaint did not state facts sufficient to constitute a cause of action, and that
said amended complaint was ambiguous, unintelligence, uncertain, which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and specifically each and every one of the
material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its by-laws,
had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as dividends
corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment
absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of
stock in question, and to pay damages in the sum of P500, and the costs.
Upon the issued presented by the pleadings above stated, the cause was brought in for trial, at the conclusion
of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, in his opinion, article 12 of the by-laws
of the corporation which gives it preferential right to buy its shares from retiring stockholders, is in conflict with Act No.
1459 (Corporation Law), especially with section 34 thereof; and rendered a judgment ordering the defendant
corporation, through its board of directors, to register in the books of said corporation the said five shares of stock in the
name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof instead of the original owner, Manuel
Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several assignments of error, all of which, in
substance, raise the question whether or not article 12 of the by-laws of the corporation is in conflict with the provisions
of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are simple and may be stated as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in question, No. 16, 17, 18, 19 and 20
of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five shares to the plaintiff, Henry
Fleischer, by accomplishing the form of endorsement provided in the back thereof, together with other credits, in
consideration of a large sum of money owed by Gonzalez to Fleischer (Exhibit A, B, B-1, B-2, B-3, B-4); that on March
13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry
Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500; that by virtue
of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel
Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the defendant; that the plaintiff requested
Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in
contravention of the by-laws of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days after the assignment of th shares
to the plaintiff, Manuel Gonzalez made a written statement to the Botica Nolasco, Inc., requesting that the five shares of
stock sold by him to Henry Fleischer be not transferred to Fleischer's name. He also acknowledged in said written
statement the preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote
a letter to the Botica Nolasco, withdrawing and cancelling his written statement On March 14, 1923 (Exhibit C), to which
letter the Botica Nolasco , in June 15, 1923, replied, declaring that his written statement was in conformity with the by-
laws of the corporation that his letter of June 14th was of no effect, and that the shares in question had been registered
in the name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or not article of the by-laws of the
Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No. 1459). Appellant invoked said
article as its ground for denying the request of th plaintiff that the shares in question be registered in his(plaintiff's)
name, and for claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez.
Appellant now contends that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459. Said
article is as follows:
"ART. 12. Las acciones de la Corporacion peden ser transferidas a otra person, pero para que
estas transferencias tengan validez legal, deben constar en los registros de la Corporacion con el debido
endoso del accionista a cuyo nombre se ha expedido la accion o acciones que se tranfieran, o un
documento de transferencia. Entendiendose que, ningun accionista transferira accion alguna a otra rero.
En igualdad de condiciones, la sociedad tendra el derecho de adquirir par si la accion o acciones que se
traten de transferir." (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc., governing the
transfer of shares of stock of said corporation. The latter part of said article creates in favor of the Botica Nolasco, a
preferential right to buy, under the same conditions, the share or shares of stock of a retiring shareholder. Has said
corporation any power, under the Corporation Law (Act No. 1459), to adopt such by-laws?
The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

"Sec 13. Every corporation has the power:


xxx xxx xxx
"(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the
number of its officers and directors within the limits prescribed by law, of its corporate affairs, etc.
xxx xxx xxx
"Sec 35. The capital stock corporations shall be divided into shares for which certificate signed
by the president or the vice-president, countersigned by the secretary or clerk and sealed of the
corporation, shall be issued in accordance with the by-laws. Share of stock so issued are personal
property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact
or other person legally authorized to make transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred.
"No share of stock against which the corporation holds any unpaid claim shall be transferable on
the books of the corporation."
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not
inconsistent with any existing law, for the transferring of its stock. It follows from said provision, that a by-
law adopted by a corporation relating to transfer of stock should be in harmony with the law in the subject
of transfer of stock. The law on this subject is found in section 35 of Act No. 1459 above quoted. Said
section 35 specifically provides that the shares of stock "are personal property and may be transferred by
delivery of the certificate indorsed by the owner, etc. Said section 35 defines the nature, character and
transferability of shares of stock. Under said section they are personal property and may be transferred
as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold.
It does not suggest that any discrimination may be created by the corporation in favor or against a certain
purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to
dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of
shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and
said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the corporation by section 13,
paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the limits fixed by law in the
same section, and has not taken into consideration the provisions of section 35 of Act No. 1459.
As general rule, the ly-laws of a corporation are valid if they are reasonable and calculated to carry into effect
the objects of the corporation, and are not contradictory to the general policy of the laws of the land. (Supreme
Commandery of the Knights of the Golden Rule vs. Ainswoth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for a
corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and
the general laws of the land. They must infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep.,
332.) They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial
rights of stockholder or member, affect rights of property or create obligations unknown to the law. (People's Home
Savings Bank vs. Superior Court, 104 Cal., Co., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St.
Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs. Rhodes,
25 Fla., 40.)
"The power to enact by-laws restraining the sale and transfer of stock must be found in the
governing statute or the charter. Restrictions upon the traffic in stock must have their source in legislative
enactment, as the corporation itself cannot create such impediments. By-laws are intended merely for the
protection of the corporation, and prescribed regulation and not restriction; they are always subject to the
charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into
or pass upon the legality of the transaction by which its stock passes from one person to another, nor can
it question the consideration upon which a sale is based. A by-law cannot take away or abridge the
substantial rights of stockholder. Under a statute authorizing by-laws for the transfer of stock, a
corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot
justify an unreasonable restriction upon the right of sale." (4 Thompson on Corporations, Sec. 4137, p.
674.)
"The right of unrestrained transfer of shares inheres in the very nature of a corporation, and
courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right of
stockholders to sell and assign their stock. The right to impose any restraint in this respect must be
conferred upon the corporation either by the governing statute or by the articles of the corporation. It
cannot be done by a by-law without statutory or charter authority." (4 Thompson on Corporations, sec.
4334, pp. 818, 819.)
"The jus disponendi, being an incident of the ownership of property, the general rule (subject to
exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same
uncontrollable right to alien them which attaches to the ownership of any other species of property. A
shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal
interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains
and profits." (10 Cyc., p. 577.)
"It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of
its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion
follows from the further consideration that by-laws or other regulations restraining such transfers, unless
derived from authority expressly granted by the legislature, would be regarded as impositions in restraint
of trade." (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this question. They hold the power of a
corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or
charter of the corporation, but such power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No.
1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation, the to show the names of the parties to the transaction, the date
of transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order
that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of
officers, in calling meetings of stockholders, and for other purposes. But any restriction of the nature of that imposed in
the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.
And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of
such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration.
He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to
the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal
contract, although his assignor knew of the by-law and took part in its adoption." (10 Cyc., 579; Ireland
vs. Globe Milling Co., 21 R. I., 9.)
"When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not
affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris Trust & Savings Co.
vs. Home Lumber Co., 118 Mo., 447.)
"The assignment of shares of stock in a corporation by one who has assented to an unauthorized
by-law has only the effect of a contract by, and enforceable against, that assignor; the assignee is not
bound by such by-law by virtue of the assignment alone." (Ireland vs. Globe Milling Co., 21 R.I., 9.)
"A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for the protection
of the corporation against worthless stockholders, cannot be made available to defeat the rights of third
persons." (Farmers' & Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of action against
the defendant corporation, but against the president and secretary thereof, inasmuch as the signing and registration of
shares is incumbent upon said officers pursuant to section 35 of the Corporation Law. This contention cannot be
sustained now. The question should have been raised in the lower court. It is too late to raise it now in this appeal.
Besides, as stated above, the corporation was made defendant in this action upon the demurrer of the attorney of the
original defendant in the lower court, who contended that the Botica Nolasco, Inc., should be made the party defendant
in this action. Accordingly, upon order of the court, the complaint was amended and the said corporation was made the
party defendant .

Whenever the corporation refuses to transfer and register stock in case like the present, mandamus will lie to
compel the officers of the corporation to transfer said stock upon the books of the corporation. (26 Cyc., 347; Hager vs.
Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court is in
accordance with law and should be and is hereby affirmed, with costs. So ordered.
||| (Fleischer v. Botica Nolasco Co., Inc., G.R. No. 23241, [March 14, 1925], 47 PHIL 583-594)

[G.R. No. 26649. July 13, 1927.]


THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General), plaintiff,
vs. EL HOGAR FILIPINO, defendant.

Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.


Fisher, DeWitt, Perkins & Brady; Camus, Delgado & Recto and Antonio Sanz for defendant.
Wm. J. Rohde as amicus curiae.

SYLLABUS

1. CORPORATIONS; HOLDING OF REAL PROPERTY FOR PERIOD IN EXCESS OF THAT ALLOWED BY


LAW; FORFEITURE OF FRANCHISE. — The extreme penalty of the forfeiture of its franchise will not be visited upon a
corporation for holding a piece of real property for a period slightly in excess of the time allowed by law, where the
conduct of the corporation does not appear to have been characterized by obduracy or pertinacity in contempt of law.
2. ID.; ID.; DEDUCTION OF PERIOD DURING WHICH CORPORATION IS UNDER CONTRACT TO SELL. —
In estimating the period during which a corporation may be allowed to hold property purchased at its own foreclosure
sale, deduction should be made of any period during which the corporation was under obligation to sell the land to a
particular person by reason of the acceptance by the corporation of his offer to buy, the sale having been made
nugatory by virtue of the failure of the purchaser to carry out the contract.
3. ID.; ID.; FORFEITURE OF FRANCHISE; DISCRETION OF COURT. — In an action of quo warranto the
courts have a discretion with respect to the infliction of, capital punishment upon corporations, and there are certain
misdemeanors and misusers of franchises which are insufficient to justify dissolution.
4. ID.; ID.; ID.; ID.; EFFECT OF SECTION 3 OF ACT NO. 2792. — Section 3 of Act NO. 2792 has not
abrogated the discretion of the courts with respect to the application of the remedy of quo warranto to corporations
which are alleged to have violated the provisions of the Corporation Law (Act No. 1459).
5. CONSTITUTIONAL LAW; TITLE OF ACT NOT EXPRESSING SUBJECT OF BILL.— The title to Act No.
2792 is defective for failure to express the subject-matter of section 3 of said Act, with the result that said section 3 is
invalid for repugnance to constitutional requirement.
6. CORPORATIONS; BUILDING AND LOAN ASSOCIATION; POWER TO ACQUIRE AND HOLD REAL.
PROPERTY; OFFICE BUILDING. — A building and loan association may acquire and hold a lot in the financial district
of the city where it has its principal place of business and may erect thereon a suitable building as the site of its offices.
7. ID.; ID.; ID.; ID.; LEASING OF EXCESS OFFICE SPACE TO PUBLIC. — The circumstance that the building
so erected by the association has office accommodations in excess of its own needs and that such offices are rented to
the public by the association for its benefit and profit does not make the ownership and holding of such office building
an ultra vires act. Having acquired the property under lawful authority, the corporation is entitled to the full beneficial use
thereof.
8. ID.; ID.; POWER OF ASSOCIATION TO ADMINISTER MORTGAGED PROPERTY FOR PURPOSE OF
SATISFYING OBLIGATIONS OF DELINQUENT SHAREHOLDERS. — When the shareholders of a building and loan
association become delinquent in the performance of their obligations, the association may take over the management
of the mortgaged property and administer it for the purpose of applying the income to the obligations of the debtor party,
provided authority so to do is conferred in the contract of mortgage.
9. ID.; I D.; ASSOCIATION WITHOUT POWER TO UNDERTAKE MANAGEMENT OF PROPERTY IN
GENERAL. — A building and loan association has no authority to conduct the business of a real estate agent, as by
managing and administering property not mortgaged to it; and the fact that the owner of such property may have
become a shareholder of the association for the purpose of supposedly qualifying himself to receive such service from
the association does not change the ease.
10. ID.; ID.; INVALID BY-LAW; FORFEITURE OF FRANCHISE. — The circumstance that one of the provisions
contained in the by-laws of a building and loan association is invalid as conflicting with the express provision of statute
is not a misdemeanor on the part of the corporation for which the association can be penalized by the forfeiture of its
charter.
11. ID.; ID.; FAILURE OF SHAREHOLDERS TO ATTEND ANNUAL MEETING. — The circumstance that the
shareholders of a building and loan association do not attend the annual meetings in sufficient number to constitute a
quorum does not render the corporation subject to dissolution.
12. ID.; ID.; FILLING OF VACANCIES IN DIRECTORATE; TERM OF OFFICE OF DIRECTORS. — The
directors of a building and loan association may lawfully fill vacancies occurring in the board of directors in conformity
with a by-law to this effect. Such officials, as well as the original directors, hold until qualification of their successors.
13. ID.; ID.; COMPENSATION OF DIRECTORS. — The power to fix the compensation of the directors of a
building and loan association pertains to the corporation, to be determined in its by-laws; and where the amount of the
compensation to be paid is thus fixed, the court will not concern itself with the question of the propriety and wisdom of
the measure of compensation adopted.
14. ID.; ID.; CONTRACT FOR COMPENSATION OF MANAGER. — Where a building and loan association
makes a contract with its promoter and manager — which contract is expressly ratified in the by-laws of the association,
— by which the association concedes to him, in consideration of valuable services rendered and to be rendered, a right
to receive 5 per centum of the net earnings of the association, this court will not, in a quo warranto proceeding where
there is no allegation that the contract was ultra vires or vitiated by fraud, order the dissolution of the corporation for
entering into such contract, on the mere ground that the compensation granted is excessive; nor will the court enjoin the
association from performing the same.
15. ID.; ID.; BY LAW DEFINING QUALIFICATIONS OF DIRECTORS; BY LAW DISABLING DIRECTORS
FROM RECEIVING LOANS. — The shareholders of a corporation may in the by-laws define the qualifications of
directors and require that shares of a specified value shall be put up as security for their action. A provision in the by-
laws disabling the directors from receiving loans from the association is also valid.
16. ID.; ID.; VALIDITY OF SPECIAL SHARES. — Severino vs. El Hogar Filipino, G. R. NO. 24926, 1 and
related cases followed with respect to validity of special shares issued by respondent association.
17. ID.; ID.; ID.; STATUTORY AUTHORITY FOR PREPAYMENT OF DUES. — Under a statutory provision
authorizing a building and loan association to receive payment of dues in advance, the association is authorized to
issue the two kinds of special shares described in the opinion.
18. ID.; ID.; AUTHORITY OF DIRECTORATE TO ALLOW FOR DEPRECIATION. — The directorate of a
building and loan association has a discretion, in determining the results of the operations of the association for any
year, to write off from the assets a reasonable amount for depreciation, with a view to the determination of the real
profits.
19. ID.; ID.; AUTHORITY OF DIRECTORATE TO MAINTAIN RESERVES. — Under the by-laws of the
respondent building and loan association, the directorate has the power to maintain a general reserve and a special
reserve, whenever in their judgment it is advisable to do so, conformably with the by-laws.
20. ID.; ID.; PURPOSE OF LOAN; HOMEBUILDING. — While the creation of building and loan associations
was intended to serve the beneficent purpose of enabling people to procure homes of their own, and such associations
have been fostered with this end in view, nevertheless the lawmaker in this jurisdiction has not limited the activities of
building and loan associations to the exclusive function of making loans for the building of homes. Home building is only
one of several purposes proposed in the creation of such associations; and a building and loan association cannot be
dissolved in a quo warranto proceeding, on the ground that it has made loans without reference to the purpose for
which the money was intended to be used.
21. ID.; ID.; DISCRETION OF BOARD AS TO SIZE OF LOAN. — The law sets no limit upon the amount of the
loans which may be made to particular persons or entities; and a building and loan association cannot be dissolved on
the ground that some of its loans have been made in large amounts. The matter of the size of the loan is confided to the
discretion of the board of directors.
22. ID., ID., FINAL DISTRIBUTION OF ASSETS. — A by-law of a building and loan association declaring that,
upon the final liquidation of the association, the funds shall be applied to the repayment of shares and the balance, if
any, distributed in the manner established for the distribution of annual profits, is valid.
23. ID., ID.; LOANS TO ARTIFICIAL ENTITIES VALID. — Where the statute says that "any person" may
become a stockholder in a building and loan association, a loan made to an artificial entity, such as a corporation or
partnership, cannot be declared invalid; nor is the admission of such entity to the status of stockholder an ultra vires act,
especially in the absence of any allegation that the particular entity so admitted is prohibited by the law of its own
organization from entering into such contracts.
24. ID., ID.;. SALE OF REAL PROPERTY BY ASSOCIATION. — In making sales of land which has been
bought in by the association at its own foreclosure sales, the association may lawfully sell to a purchaser who obligates
himself to pay in installments. The law does not require such sales to be made for cash; nor does the purchaser have to
be a shareholder of the association.

DECISION

STREET, J p:

This is a quo warranto proceeding instituted originally in this court by the Government of the Philippine Islands
on the relation of the Attorney-General against the building and loan association known as El Hogar Filipino, for the
purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a
final dissolution of said corporation. The complaint enumerates seventeen distinct causes of action, to all of which the
defendant has answered upon the merits, first admitting the averments of the first paragraph in the statement of the first
cause of action, wherein it is alleged that the defendant was organized in the year 1911 as a building and loan
association under the laws of the Philippine Islands, and that, since its organization, the corporation has been doing
business in the Philippine Islands, with its principal office in the City of Manila. Other facts alleged in the various causes
of action in the complaint are either denied in the answer or controverted in legal effect by other facts.
After issue had been thus joined upon the merits, the attorneys entered into an elaborate agreement as to the
facts, thereby removing from the field of dispute such matters of fact as are necessary to the solution of the controversy.
It follows that we are here confronted only with the legal questions arising upon the agreed statement.
On March 1, 1906, the Philippine Commission enacted what is known as the Corporation Law (Act No. 1459)
effective upon April 1 of the same year. Sections 171 to 190, inclusive, of this Act are devoted to the subject of building
and loan associations, defining their objects and king various provisions governing their organization and administration,
and providing for the supervision to be exercised over them. These provisions appear to be adopted from American
statutes governing building and loan associations and they of course reflect the ideals and principles found in American
law relative to such associations. The respondent, El Hogar Filipino, was apparently the first corporation organized in
the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The
articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been
subscribed to the amount of P150,000, of which the sum of P10,620 had been paid in. Under the law as it then stood,
the capital of the association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23,
1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten
millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that
the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number
of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826
shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence
prior to the date last above-mentioned the association paid to withdrawing stockholders the amount of P7,618,257.72;
and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81.
First cause of action.— The first cause of action is based upon the alleged illegal holding by the respondent of
the title to real property for a period in excess of five years after the property had been bought in by the respondent at
one of its own foreclosure sales. The provision of law relevant to the matter is found in section 75 of Act of Congress of
July 1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law). In both of these provisions it is in
substance declared that while corporations may loan funds upon real estate security and purchase real estate when
necessary for the collection of loans, they shall dispose of real estate so obtained within five years after receiving the
title.
In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a recorded mortgage
upon a tract of land in the municipality of San Clemente, Province of Tarlac, as security for a loan of P24,000 to the
shareholders of El Hogar Filipino who were the owners of said property. The borrowers having defaulted in their
payments, El Hogar Filipino foreclosed the mortgage and purchased the land at the foreclosure sale for the net mount
of the indebtedness, namely, the sum of P23,744.18. The auction sale of the mortgaged property took place November
18, 1920, and the deed conveying the property to El Hogar Filipino was executed and delivered December 22, 1920. On
December 27, 1920, the deed conveying the property to El Hogar Filipino was sent to the register of deeds of the
Province of Tarlac, with the request that the certificate of title then standing in the name of the former owners be
cancelled and that a new certificate of title be issued in the name of El Hogar Filipino. Said deed was received in the
office of the register of deeds of Tarlac on December 28, 1920, together with the old certificate of title and thereupon the
register made upon the said deed the following annotation:
"The foregoing document was received in this office at 4.10 p. m., December 28, 1920, according
to entry 1898, page 50 of Book One of the Day Book and registered on the back of certificate of title No.
2211 and its duplicate, folio 193 of Book A-10 of the register of original certificate. Tarlac, Tarlac, January
12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds."
For months no reply was received by El Hogar Filipino from the register of deeds of Tarlac, and letters were
written to him by El Hogar Filipino on the subject in March and April, 1921, requesting action. No answer having been
received to these letters, a complaint was made by El Hogar Filipino to the Chief of the General Land Registration
Office; and on May 7, 1921, the certificate of title to the San Clemente land was received by El Hogar Filipino from the
register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution authorizing Vicente
Bengzon, an agent of the corporation, to endeavor to find a buyer for the San Clemente land. On July 27, 1921, El
Hogar Filipino authorized one Jose Laguardia to endeavor to find a purchaser for the San Clemente land for the sum of
P23,000, undertaking to pay the said Laguardia a commission of 5 per centum of the selling price for his services, but
no offers to purchase were obtained through this agent or through the agent Bengzon. In July, 1923, plans of the San
Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as prospective purchasers,
but no offers were received from them. In January, 1926, the agents not having succeeded in finding a buyer, the San
Clemente land was advertised for sale by El Hogar Filipino in El Debate, La Vanguardia and Taliba, three newspapers
of general circulation in the Philippine Islands published in the City of Manila. On March 16, 1926, the first offer for the
purchase of the San Clemente land was received by El Hogar Filipino. This offer was made to it in writing by one
Alcantara, who offered to buy it for the sum of P4,000, Philippine currency, payable P500 in cash, and the remainder
within thirty days. Alcantara's offer having been reported by the manager of El Hogar Filipino to its board of directors, it
was decided, by a resolution adopted at a meeting of the board held on March 25, 1926, to accept the offer, and this
acceptance was communicated to the prospective buyer. Alcantara was given successive extensions of the time, the
last of which expired April 30, 1926, within which to make the payment agreed upon; and upon his failure to do so El
Hogar Filipino treated the contract with him as rescinded, and efforts were made at once to find another buyer. Finally
the land was sold to Dona Felipa Alberto for P6,000 by a public instrument executed before a notary public at Manila, P.
I., on July 30, 1926.
Upon consideration of the facts above set forth it is evident that the strict letter of the law was violated by the
respondent; but it is equally obvious that its conduct has not been characterized by obduracy or pertinacity in contempt
of the law. Moreover, several facts connected with the incident tend to mitigate the offense. The Attorney-General points
out that the respondent acquired title on December 22, 1920, when the deed was executed and delivered, by which the
property was conveyed to it as purchaser at its foreclosure sale, and this title remained in it until July 30, 1926, when
the property was finally sold to Felipa Alberto. The interval between these two conveyances is thus more than five
years; and it is contended that, as a consequence, the respondent has become amenable to dissolution. For the
respondent it is contended that the five-year period did not begin to run against the respondent until May 7, 1921, when
the register of deeds of Tarlac delivered the new certificate of title to the respondent pursuant to the deed by which the
property was acquired. As an equitable consideration affecting the case this contention, though not decisive, is in our
opinion more than respectable. It has been held by this court that a purchaser of land registered under the Torrens
system cannot acquire the status of an innocent purchaser for value unless his vendor is able to place in his hands an
owner's duplicate showing the title of such land to be in the vendor (Director of Lands vs. Addison, 49 Phil., 19;
Rodriguez vs. Llorente, G. R. No. 26615 ). It results that prior to May 7, 1921, El Hogar Filipino was not really in a
position to pass an indefeasible title to any purchaser. In this connection it will be noted that section 75 of the Act of
Congress of July 1, 1902, and the similar provision in section 13 of the Corporation Law, allow the corporation "five
years after receiving the title," within which to dispose of the property. A fair interpretation of these provisions would
seem to indicate that the date of the receiving of the title in this case was the date when the respondent received the
owner's certificate, or May 7, 1921, for it was only after that date that the respondent had an unequivocal and
unquestionable power to pass a complete title. The failure of the respondent to receive the certificate sooner was not
due in any wise to its fault, but to unexplained delay on the part of the register of deeds. For this delay the respondent
cannot be held accountable.
Again, it is urged for the respondent that the period between March 25, 1926, and April 30, 1926, should not be
counted as part of the five-year period. This was the period during which the respondent was under obligation to sell the
property to Alcantara, prior to the rescission of the contract by reason of Alcantara's failure to make the stipulated first
payment. Upon this point the contention of the respondent is, in our opinion, well founded. The acceptance by it of
Alcantara's offer obligated the respondent to Alcantara; and if it had not been for the default of Alcantara, the effective
sale of the property would have resulted. The respondent was not at all chargeable with the collapse of these
negotiations; and hence in any equitable application of the law this period should be deducted from the five-year period
within which the respondent ought to have made the sale. Another circumstance explanatory of the respondent's delay
in selling the property is found in the fact that it purchased the property for the full amount of the indebtedness due to it
from the former owner, which was nearly P24,000. It was subsequently found that the property was not salable for
anything like that amount and in the end it had to be sold for P6,000, notwithstanding energetic efforts on the part of the
respondent to find a purchaser upon better terms.
The question then arises whether the failure of the respondent to get rid of the San Clemente property within
five years after it first acquired the deed thereto, even supposing the five-year period to be properly counted from that
date, is such a violation of law as should work a forfeiture of its franchise and require a judgment to be entered for its
dissolution in this action of quo warranto. Upon this point we do not hesitate to say that in our opinion the corporation
has not been shown to have offended against the law in a manner that should entail a forfeiture of its charter. Certainly
no court with any discretion to use in the matter would visit upon the respondent and its thousands of shareholders the
extreme penalty of the law as a consequence of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure, as applied
by this court in Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15). This
section (212), in prescribing the judgment to be rendered against a corporation in an action of quo warranto, among
other things says:
" . . . When it is found and adjudged that a corporation has offended in any matter or manner
which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power
not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be ousted from the continuance of such offense or the exercise of such
power."
This provision clearly shows that the court has a discretion with respect to the infliction of capital punishment
upon corporations and that there are certain misdemeanors and misusers of franchises which should not be recognized
as requiring their dissolution. In Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38
Phil., 15), it was found that the offending corporation had been largely (though indirectly) engaged in the buying and
holding of real property for speculative purposes in contravention of its charter and contrary to the express provisions of
law. Moreover, in that case the offending corporation was found to be still interested in the properties so purchased for
speculative purposes at the time the action was brought. Nevertheless, instead! of making an absolute and
unconditional order for the dissolution of the corporation, the judgment of ouster was made conditional upon the failure
of the corporation to discontinue its unlawful conduct within six months after final decision. In the case before us the
respondent appears to have rid itself of the San Clemente property many months prior to the institution of this action. It
is evident from this that the dissolution of the respondent would not be an appropriate remedy in this case. We do not of
course undertake to say that a corporation might not be dissolved for offenses of this nature perpetrated in the past,
especially if its conduct had exhibited a willful obduracy and contempt of law. We content ourselves with holding that
upon the facts here before us the penalty of dissolution would be excessively severe and fraught with consequences
altogether disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land was
to prevent the revival of the entail (mayorazgo) or other similar institution by which land could be fettered and its
alienation hampered over long periods of time. In the case before us the respondent corporation has in good faith
disposed of the piece of property which appears to have been in its hands at the expiration of the period fixed by law,
and a fair explanation is given of its failure to dispose of it sooner. Under these circumstances the destruction of the
corporation would bring irreparable loss upon the thousands of innocent shareholders of the corporation without any
corresponding benefit to the public. The discretion permitted to this court in the application of the remedy of quo
warranto forbids so radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in matters like that now before us has
been expressly taken away by the third section of Act No. 2792, and that the dissolution of the corporation is obligatory
upon the court upon a mere finding that the respondent has violated the provisions of the Corporation Law in any
respect. This makes it necessary to examine the Act last above-mentioned with some care. Upon referring thereto, we
find that it consists of three sections under the following style:
"No. 2792. — An Act to amend certain sections of the Corporation Law, Act Numbered Fourteen
hundred and fifty-nine, providing for the publication of the assets and liabilities of corporations registering
in the Bureau of Commerce and Industry, determining the liability of the officers of corporations with
regard to the issuance of stock or bonds, establishing penalties for certain things, and for other
purposes."
The first two sections contain amendments to the Corporation Law with respect to matters with which we are
not here concerned. The third section contains a new enactment to be inserted as section 190(A) in the corporation Law
immediately following section 190. This new section reads as follows:
"SEC. 190. (A). Penalties.— The violation of any of the provisions of this Act and its amendments
not otherwise penalized therein, shall be punished by a fine of not more than one thousand pesos, or by
imprisonment for not more than five years, or both, in the discretion of the court. If the violation is
committed by a corporation, the same shall, upon such violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any provincial fiscal, by order of said
Attorney-General: Provided, That nothing in this section provided shall be construed to repeal the other
causes for the dissolution of corporations prescribed by existing law, and the remedy provided for in this
section shall be considered as additional to the remedies already existing."
The contention for the plaintiff is to the effect that the second sentence in this enactment has entirely abrogated
the discretion of this court with respect to the application of the remedy of quo warranto, as expressed in section 212 of
the Code of Civil Procedure, and that it is now mandatory upon us to dissolve any corporation whenever we find that it
has committed any violation of the Corporation Law, however trivial. In our opinion this radical view of the meaning of
the enactment is untenable. When the statute says, "If the violation is committed by a corporation, the same shall, upon
such violation being proved, be dissolved by quo warranto proceedings . . . ," the intention was to indicate that the
remedy against the corporation shall be by action of quo warranto. There as no intention to define the principles
governing said remedy, and it must be understood that in applying the remedy the court is still controlled by the
principles established in immemorial jurisprudence. The interpretation placed upon this language in the brief of the
Attorney- General would be dangerous in the extreme, since it would actually place the life of all corporate investments
in the country within the absolute power of a single Government official. No corporate enterprise of any moment can be
conducted perpetually without some trivial misdemeanor against corporate law being committed by some one or other
of its numerous employees. As illustrations of the preposterous effects of the provision, in the sense con- tended for by
the Attorney-General, the attorneys for the respondent have called attention to the fact that under section 52 of the
Corporation Law, a business corporation is required to keep a stock book and a transfer book in which the names of
stockholders shall be kept in alphabetical order. Again, under section 94, railroad corporations are required to cause all
employees working on passenger trains or at a station for passengers to wear a badge on his cap or hat which will
indicate his office. Can it be supposed that the Legislature intended to penalize the violation of such provisions as these
by dissolution of the corporation involved? Evidently such could not have been the intention; and the only way to avoid
the consequence suggested is to hold, as we now hold, that the provision now under consideration has not impaired the
discretion of this court in applying the writ of quo warranto
Another way to put the same conclusion is to say that the expression "shall be dissolved by quo warranto
proceedings" means in effect, "may be dissolved by quo warranto proceedings in the discretion of the court." The
proposition that the word "shall" may be construed as "may," when addressed by the Legislature to the courts, is well
supported in jurisprudence. In the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of
Pennsylvania had under consideration a statute providing as follows:
"It shall be the duty of the court . . . to examine, inquire and ascertain whether such corporation
does in fact possess the right or franchise to do the act from which such alleged injury to private rights or
to the rights and franchises of other corporations results; and if such rights or franchises have not been
conferred upon such corporations, such courts, if exercising equitable power, shall, by injunction, at suit
of the private parties or other corporations, restrain such injurious acts."
In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. But this was denied,
the court saying:
"Notwithstanding, therefore, the use of the imperative 'shall,' the injunction is not to be granted
unless a proper case for injunction be made out, in accordance with the principles and practice of equity.
The word 'shall' when used by the legislature to a court, is usually a grant of authority and means 'may,'
and even if it be intended to be mandatory it must be subject to the necessary limitation that a proper
case has been made out for the exercise of the power."
Other authorities amply sustain this view ( People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West Wisconsin R.
Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095; State vs. West, 3
Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J.
Law [1 Southard], 387, 394; Whipple vs. Eddy, 161 Ill., 114; 43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co.,
38 Cal., 505, 506; Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-matter of this
section is not expressed in the title of the Act, with the result that the section is invalid. This criticism is in our opinion
well founded. Section 3 of our organic law (Jones Bill) declares, among other things, that "No bill which may be enacted
into law shall embrace more than one subject, and that subject shall be expressed in the title of the bill." Any law or part
of a law passed by the Philippine Legislature since this provision went into effect and offending against its requirement
is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are successively dealt
with in the first three sections of the Act. But it will be noted that these three matters all relate to the Corporation Law;
and it is at once apparent that they might properly have been embodied in a single Act if a title of sufficient unity and
generality had been prefixed thereto. Furthermore, it is obvious, even upon casual inspection, that the subject-matter of
each of the first two sections is expressed and defined with sufficient precision in the title. With respect to the subject-
matter of section 3 the only words in the title which can be taken to refer to the subject- matter of said section are these,
"An Act . . . establishing penalties for certain things, and for other purposes." These words undoubtedly have sufficient
generality to cover the subject-matter of section 3 of the Act. But this is not enough. The Jones Law requires that the
subject-matter of the bill "shall be expressed in the title of the bill."
When reference is had to the expression "establishing penalties for certain things," it is obvious that these
words express nothing. The constitutional provision was undoubtedly adopted in order that the public might be informed
as to what the Legislature is about while bills are in process of passage. The expression "establishing penalties for
certain things" would give no definite information to anybody as to the project of legislation intended under this
expression. An examination of the decided cases shows that courts have always been indulgent of the practices of the
Legislature with respect to the form and generality of title, for if extreme refinements were indulged by the courts, the
work of legislation would be unnecessarily hampered. But, as has been observed by the California court, there must be
some reasonable limit to the generality of titles that will be allowed. The measure of legality is whether the title is
sufficient to give notice of the general subject of the proposed legislation to the persons and interests likely to be
affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise the Code of Civil
Procedure of the State of California, by amending certain sections, repealing others, and adding certain new sections."
This title was held to embrace more than one subject, which were not sufficiently expressed in the title. In discussing the
question the court said:
". . . It is apparent that the language of the title f the act in question, in and of itself, expresses no
subject whatever. No one could tell from the title alone what subject of legislation was dealt with in the
body of the act; such subject, so far as the title of the act informs us, might have been entirely different
from anything to be found in the act itself. . . .
"We cannot agree with the contention of some of respondent's counsel — apparently to some
extent countenanced by a few authorities — that the provision of the constitution in question can be
entirely avoided by the simple device of putting into the title of an act words which denote a subject
'broad' enough to cover everything. Under that view, the title, 'An act concerning the laws of the state,'
would be good, and the convention and people who framed and adopted the constitution would be
convicted of the folly of elaborately constructing a grave constitutional limitation of legislative power upon
a most important subject, which the legislature could at once circumvent by a mere verbal trick. The word
'subject' is used in the constitution in its ordinary sense; and when it says that an act shall embrace but
'one subject,' it necessarily implies what everybody knows — that there are numerous subjects of
legislation, and declares that only one of these subjects shall be embraced in any one act. All subjects
cannot be conjured into one subject by the mere magic of a word in a title. . . ."
In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey made the following
observation:
". . . It is true, that it may be difficult to indicate, by a formula, how specialized the title of a statute
must be; but it is not difficult to conclude that it must mean something in the way of being a notice of what
is doing. Unless it does this, it can answer no useful end. It is not enough that it embraces the legislative
purpose — it must express it; and where the language is too general, it will accomplish the former, but
not the latter. Thus, a law entitled 'An act for a certain purpose,' would embrace any subject, but would
express none, and, consequently, it would not stand the constitutional test."
The doctrine properly applicable in matters of this kind is, we think, fairly summed up in a current repository of
jurisprudence in the following language:
". . . While it may be difficult to formulate a rule by which to determine the extent to which the title
of a bill must specialize its object, it may be safely assumed that the title must not only embrace the
subject of proposed legislation, but also express it clearly and fully enough to give notice of the legislative
purpose." (25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for other purposes" found at the end of the caption of
Act No. 2792, must be land completely out of consideration. They express nothing, and amount to nothing as a
compliance with the constitutional requirement to which attention has been directed. This expression ("for other
purposes") is frequently found in the title of acts adopted by the Philippine Legislature; and its presence in our laws is
due to the adoption by our Legislature of the style used in Congressional legislation. But it must be remembered that the
legislation of Congress is subject to no constitutional restriction with respect to the title of bills. Consequently, in
Congressional legislation the words "and for other purposes" at least serve the purpose of admonishing the public that
the bill whose heading contains these words contains legislation upon other subjects than that expressed in the title.
Now, so long as the Philippine Legislature was subject to no restriction with respect to the title of bills intended for
enactment into general laws, the expression "for other purposes" could be appropriately used in titles, not precisely for
the purpose of conveying information as to the matter legislated upon, but for the purpose of admonishing the public
that any bill containing such words in the title might contain other subjects than that expressed in the definitive part of
the title. But, when Congress adopted the Jones Law, the restriction with which we are now dealing became effective
here and the words "for other purposes" could no longer be appropriately used in the title of legislative bills.
Nevertheless, the custom of using these words has still been followed, although they can no longer serve to cover
matter not germane to the bill in the title of which they are used. But the futility of adding these words to the style of any
act is now obvious (Cooley, Const. Lims., 8th ed., p. 302).
In the brief for the plaintiff it is intimated that the constitutional restriction which we have been discussing is
more or less of a dead letter in this jurisdiction; and it seems to be taken for granted that no court would ever presume
to hold a legislative act or part of a legislative act invalid for non-compliance with the requirement. This is a mistake; and
no utterance of this court can be cited as giving currency to any such notion. On the contrary the discussion contained
in Central Capiz vs. Ramirez (40 Phil., 883), shows that when a case arises where a violation of the restriction is
apparent, the court has no alternative but to declare the legislation affected thereby to be invalid.
Second cause of action. — The second cause of action is based upon a charge that the respondent is owning
and holding a business lot, with the structure thereon, in the financial district of the City of Manila in excess of its
reasonable requirements and in contravention of subsection 5 of section 13 of the Corporation Law. The facts on which
this charge is based appear to be these:
On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of Juan Luna Street
and the Muelle de la Industria, in the City of Manila, immediately adjacent to the building then occupied by the
Hongkong and Shanghai Banking Corporation. At the time the respondent acquired this lot there stood upon it a
building, then nearly fifty years old, which was occupied in part by the offices of an importing firm and in part by
warehouses of the same firm. The material used in the construction was Guadalupe stone and hewn timber, and the
building contained none of the facilities usually found in a modern office building.
In pursuance of a design which had been formed prior to the purchase of the property, the directors of the El
Hogar Filipino caused the old building to be demolished; and they erected thereon a modern reinforced concrete office
building. As at first constructed the new building was three stories high in the main, but in 1920, in order to obtain
greater advantage from the use of the land, an additional story was added to the building, making a structure of four
stories except in one corner where an additional story was placed, making it five stories high over an area of 117.52
square meters. It is admitted in the plaintiff's brief that this "noble and imposing structure" — to use the words of the
Attorney-General — "has greatly improved the aspect of the banking and commercial district of Manila and has greatly
contributed to the movement and campaign for the Manila Beautiful." It is also admitted that the completed building is
reasonably proportionate in value and revenue producing capacity to the value of the land upon which it stands. The
total outlay of the respondent for the land and the improvements thereon was P690,000 and at this valuation the
property is carried on, the books of the company, while the assessed valuation of the land and improvements is at
P786,478.
Since the new building was completed the respondent has used about 324 square meters of floor space for its
own offices and has rented the remainder of the office space in said building, consisting of about 3,175 square meters,
to other persons and entities. In the second cause of action of the complaint it is supposed that the acquisition of this
lot, the construction of the new office building thereon, and the subsequent renting of the same in great part to third
persons, are ultra vires acts on the part of the corporation, and that the proper penalty to be enforced against it in this
action is that of dissolution.
With this contention we are unable to agree. Under subsection 5 of section 13 of the Corporation Law, every
corporation has the power to purchase, hold and lease such real property as the transaction of the lawful business of
the corporation may reasonably and necessarily require. When this property was acquired in 1916, the business of El
Hogar Filipino had developed to such an extent, and its prospects for the future were such as to justify its directors in
acquiring a lot in the financial district of the City of Manila and in constructing thereon a suitable building as the site of its
offices; and it cannot be fairly said that the area of the lot — 1,413 square meters — was in excess of its reasonable
requirements. The law expressly declares that corporations may acquire such real estate as is reasonably necessary to
enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association
such as the respondent was at the time this property was acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end
but would retard industrial growth and be inimical to the best interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent,
it is entitled to the full beneficial use thereof. No legitimate principle can be discovered which would deny to one owner
the right to enjoy his (or its) property to the same extent that is conceded to any other owner; and an intention to
discriminate between owners in this respect is not lightly to be imputed to the Legislature. The point here involved has
been the subject of consideration in many decisions of American courts under statutes even more restrictive than that
which prevails in this jurisdiction; and the conclusion has uniformly been that a corporation whose business may
properly be conducted in a populous center may acquire an appropriate lot and construct thereon an edifice with
facilities in excess of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared that the respondent
corporation owned and controlled a large ten-story business block in the City of Chicago, worth $2,000,000, and that it
occupied only about one-fourth thereof for its own purposes, leasing the remainder to others at heavy rentals. The
corporate charter merely permitted the holding of such real estate by the respondent as might be necessary for the
successful prosecution of its business. An attempt was made to obtain the dissolution of the corporation in a quo
warranto proceeding similar to that now before us, but the remedy was denied.
In Rector vs. Hartford Deposit Co. (190 Ill., 380; 60 N. E., 528), a question was raised as to the power of the
Deposit Company to erect and own a fourteen-story building — containing eight storerooms, one hundred suites of
offices, and one safety deposit vault, under a statute authorizing the corporation to possess so much real estate "as
shall be necessary for the transaction of their business." The court said:
"That the appellee company possessed ample power to acquire real property and construct a
building thereon for the purpose of transacting therein the legitimate business of the corporation is
beyond the range of debate. Nor is the contrary contented, but the insistence is that, under the guise of
erecting a building for corporate purposes, the appellee company purposely constructed a much larger
building than its business required, containing many rooms intended to be rented to others for offices and
business purposes, — among them, the basement rooms contracted to be leased to the appellant, —
and that in so doing it designedly exceeded its corporate powers. The position of appellant, therefore, is
that the appellee corporation has flagrantly abused its general power to acquire real estate and construct
a building thereon . . . It was within the general scope of the express powers of the appellee corporation
to own and possess a building necessary for its proper corporate purposes. In planning and constructing
such a building, as was said in People vs. Pullman's Palace Car Co., supra, the corporation should not
necessarily be restricted to a building containing the precise number of rooms its then business might
require, and no more, but that the future probable growth and volume of its business might be considered
and anticipated, and a larger building, and one containing more rooms than the present volume of
business required be erected, and the rooms not needed might be rented by the corporation, — provided,
of course, such course should be taken in good faith, and not as a mere evasion of the public law and the
policy of the state relative to the ownership of real estate by corporations. In such state of case the
question is whether the corporation has abused or excessively and unjustifiably used the power and
authority granted it by the state to construct buildings and own real estate necessary for its corporate
purposes."
In Home Savings Building Association vs. Driver (129 Ky., 754), one of the questions before the court was
precisely the same as that now before us. Upon this point the Supreme Court of Kentucky said:
"The third question is, has the association the right to erect, remodel, or own a building of more
than sufficient capacity to accommodate its own business and to rent out the excess? There is nothing in
the Constitution, charter of the association, or statutes placing any limitation upon the character of a
building which a corporation may erect as a home in which to conduct its business. A corporation
conducting a business of the character of that in which appellant is engaged naturally expects its
business to grow and expand from time to time, and, in building a home, it would be exercising but a
short-sighted judgment if it did not make provision for the future by building a home large enough to take
care of its expanding business, and hence, even if it should build a house larger and roomier than its
present needs or interests require, it would be acting clearly within the exercise of its corporate right and
power. The limitation which the statute imposes is that it shall not own more real estate than is necessary
for the proper conduct of its business, but it does not attempt to place any restriction or limitation upon
the right of the corporation or association as to the character of building it shall erect on said real estate;
and, while the Constitution and the statutes provide that no corporation shall engage in any business
other than that expressly authorized by its charter, we are of opinion that, in renting out the unoccupied
and unused portions of the building so erected, the association could not be said to be engaged in any
other business than that authorized by its charter. The renting of the unused portions of the building is a
mere incident in the conduct of its real business. We would not say that a building association might
embark in the business of building houses and renting or leasing them, but there is quite a difference in
building or renting a house in which to conduct its own business and leasing the unused portion thereof
for the time being, or until such time as they may be needed by the association, and in building houses
for the purpose of renting or leasing them. The one might properly be said to be the proper exercise of a
power incident to the conduct of its legitimate business, whereas the other would be a clear violation of
that provision of the statute which denies to any corporation the right to conduct any business other than
that authorized by its charter. To hold otherwise would be to charge most of the banking institutions, trust
companies and other corporations, such as title guaranty companies, etc., doing business in the state,
and especially in the large cities, with violating the law; for it is well known that there are few of such
institutions that do not, at times, rent out or lease the unneeded portions of the building occupied by them
as homes. We do not think that in so doing they are violating any provisions of the law, but that the
renting out of the unused or unoccupied portions of their buildings is but an incident in the conduct of
their business."
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a stockholder sought to enjoin the
bank from building a six-story building on a lot then owned by the bank in the commercial district of Hagerstown of
which only the first story was to be used by the bank, the remaining stories to be rented out for offices and places of
business, on the theory that such action was ultra vires and in violation of the provisions of the national banking act
confining such corporations to the holding, only, of such real estate "as shall be necessary for its immediate
accommodation in the transaction of its business.
The injunction was denied, the court adopting the opinion of the lower court in which the following was said:
" 'The other ground urged by the complainant is that the proposed action is violative of the
restriction which permits a national bank to hold only such real estate as shall be necessary for its
immediate accommodation in the transaction of its business, and that, therefore, the erection of a
building which will contain offices not necessary for the business of the bank is not permitted by the law,
although that method of improving the lot may be the most beneficial use that can be made of it. It is
matter of common knowledge that the actual practice of national banks is to the contrary. Where ground
is valuable, it may probably be truly said that the majority of national bank buildings are built with
accommodations in excess of the needs of the bank for the purpose of lessening the bank's expense by
renting out the unused portion. If that were not allowable, many smaller banks in cities would be driven to
become tenants as the great cost of the lot would be prohibitive of using it exclusively for the banking
accommodation of a single bank. As indicative of the interpretation of the how commonly received and
acted upon, reference may be made to the reply of the Comptroller of the Currency to the inquiry by the
bank in this case asking whether the law forbids the bank constructing such a building as was
contemplated.
" 'The reply was as follows: "Your letter of the 9th instant received, stating that the directors
contemplate making improvements in the bank building and inquiring if there is anything in the national
banking laws prohibiting the construction of a building which will contain floors for offices to be rented out
by the bank as well as the banking room. Your attention is called to the case of Brown vs. Schleier, 118
Fed., 981 [55 C. C. A., 475], in which the court held that: 'If the land which a national bank purchases or
leases for the accommodation of its business is very valuable it may exercise the same rights that belong
to other landowners of improving it in a way that will yield the largest income, lessen its own rent, and
render that part of its funds which are invested in realty most productive.' " This seems to be the common
sense interpretation of the act of Congress and is the one which prevails.' "
It would. seem to be unnecessary to extend the opinion by lengthy citations upon the point under consideration,
but Brown vs. Schleier (118 Fed., 981), may be cited as being in harmony with the foregoing authorities. In ealing with
the powers of a national bank the court, in this case, said:
"When an occasion arises for an investment in real property for either of the purposes specified
in the statute, the national bank act permits banking associations to act as any prudent person would act
in making an investment in real estate, and to exercise the same measure of judgment and discretion.
The act ought not to be construed in such a way as to compel a national bank, when it acquires real
property for a legitimate purpose, to deal with it otherwise than a prudent landowner would ordinarily deal
with such property."
In the brief of the Attorney-General reliance is placed almost entirely upon two Illinois cases, namely, Africani
Home Purchase and Loan Association vs. Carroll (267 Ill., 380), and First Methodist Episcopal Church of Chicago vs.
Dixon (178 Ill., 260). In our opinion these cases are either distinguishable from that now before us, or they reflect a view
of the law which is incorrect. At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the
validity of the acts alleged in the second cause of action to have been done by the respondent in excess of its powers
that we refrain from commenting at any length upon said cases. The ground stated in the second cause of action is in
our opinion without merit.
Third cause of action. — Under the third cause of action the respondent is charged with engaging in activities
foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends. The
specifications under this cause of action relate to three different sorts of activities. The first consists of the administration
of the offices in the El Hogar building not sed by the respondent itself and the renting of such offices to the public. As
stated in the discussion connected with the second cause of action, the respondent uses only about ten per cent of the
office space in the El Hogar building for its own purposes, and it leases the remainder to strangers. In the years 1924
and 1925 the respondent received as rent for the leased portions of the building the sums of P75,395.06 and
P58,259.27, respectively. The activities here criticised clearly fall within the legitimate powers of the respondent, as
shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us.
If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the
beneficial administration by it of such parts of the building as are let to others must necessarily be lawful.
The second specification under the third cause of action has reference to the administration and management
of properties belonging to delinquent shareholders of the association. In this connection it appears that in case of
delinquency on the part of its shareholders in the payment of interest, premiums, and dues, the association has been
accustomed (pursuant to clause 8 of its standard mortgage) to take over and manage the mortgaged property for the
purpose of applying the income to the obligations of the debtor party. For these services the respondent charges a
commission at the rate of 2 1/2 per centum on sums collected. The case for the Government supposes that the only
remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of
the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that,
according to said section, the association may treat the whole indebtedness as due, "at the option of the board of
directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes the security for the delinquent debt and to manage it
with a view to the satisfaction of the obligations due to the association. Such course is certainly more favorable to the
debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be
taken appears to us to be not open to doubt. The second specification under this cause of action is therefore without
merit, as was true of the first.
The third specification under this cause of action relates to certain activities which are described in the following
paragraphs contained in the agreed statement of facts:
"El Hogar Filipino has undertaken the management of some parcels of improved real estate
situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by
advertisement as prepared to do so. The number of properties so managed during the years 1921 to
1925, inclusive, was as follows:

1921 eight properties

1922 six properties

1923 ten properties

1924 fourteen properties

1925 fourteen properties

"This service is limited to shareholders; but some of the persons whose properties are so
managed for them became shareholders only to enable them to take advantage thereof.
"The services rendered in the management of such improved real estate by El Hogar Filipino
consist in the renting of the same, the payment of real estate taxes and insurance for the account of the
owner, causing the necessary repairs for upkeep to be made, and collecting rents due from tenants. For
the services so rendered in the management of such properties El Hogar Filipino receives compensation
in the form of commissions upon the gross receipts from such properties at rates varying from two and
one-half per centum to five per centum of the sums so collected, according to the location of the property
and the effort involved in its management.
"The work of managing real estate belonging to non-borrowing shareholders administered by El
Hogar Filipino is carried on by the same members of the staff who attend to the details of the
management of properties administered by the manager of El Hogar Filipino under the provisions of
paragraph 8 of the standard mortgage form, and of properties bought in on foreclosure of mortgage."
The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by
law. Such was the view taken by the bank examiner of the Treasury Bureau in his report to the Insular Treasurer on
December 21, 1925, wherein the practice in question was criticised. The administration of property in the manner
described is more befitting to the business of a real estate agent or trust company than to the business of a building and
loan association. The practice to which this criticism is directed relates of course solely to the management and
administration of properties which are not mortgaged to the association. The circumstance that the owner of the
property may have been required to subscribe to one or more shares of the association with a view to qualifying him to
receive this service is of no significance. It is a general rule of law that corporations possess only such express powers
as are actually conferred and such implied powers as are reasonably necessary to the exercise of the express powers.
The management and administration of the property of the shareholders of the corporation is not expressly authorized
by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the
exercise of any of the granted powers. The corporation, upon the point now under criticism, has clearly extended itself
beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it
will merely be enjoined from further activities of this sort.
Fourth cause of action.— It appears that among the by-laws of the association there is an article (No. 10) which
reads as follows:
"The board of directors of the association, by the vote of an absolute majority of its members, is
empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation
thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the
owners of such shares is not desirable."
This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the
Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender
and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for
delinquency. It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever
been made by the board of directors to make use of the power therein conferred. In November, 1923, the Acting Insular
Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the view
that said article was invalid. It was therefore suggested that the article in question should be eliminated from the by-
laws. At the next meeting of the board of directors the matter was called to their attention and it was resolved to
recommend to the shareholders that in their next annual meeting the article in question be abrogated. It appears,
however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of
shareholders to constitute a quorum, with the result that the provision referred to has not been eliminated from the by-
laws, and it still stands among the bylaws of the association, notwithstanding its patent conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this article among the bylaws of the
association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to
concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to
attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws
of a corporation; and if there were such, the hazards incident to corporate effort would certainly be largely increased.
There is no merit in this cause of action.
Fifth cause of action.— In section 31 of the Corporation Law it is declared that, "at all elections of directors
there must be present, either in person or by representative authorized to act by written proxy, the owners of the
majority of the subscribed capital stock entitled to vote, . . .." Conformably with this requirement it is declared in article
61 of the by-laws of El Hogar Filipino that, "the attendance in person or by proxy of shareholders owning one-half plus
one of the shareholders shall be necessary to constitute a quorum for the election of directors. At the general annual
meetings of the El Hogar Filipino held in the years 1911 and 1912, there was a quorum of shares present or
represented at the meetings and directors were duly elected accordingly. As the corporation has grown, however, it has
been found increasingly difficult to get together a quorum of the shareholders, or their proxies, at the annual meetings;
and with the exception of the annual meeting held in 1917, when a new directorate was elected, the meetings have
failed for lack of quorum. It has been foreseen by the officials in charge of the respondent that this condition of affairs
would lead to embarrassment, and a special effort was made by the management to induce a sufficient number of
shareholders to attend the annual meeting for February, 1923. In addition to the publication of notices in the
newspapers, as required by the by-laws, a letter of notification was sent to every shareholder at his last known address,
together with a blank form of proxy to be used in the event the shareholder could not personally attend the meeting.
Notwithstanding these special efforts the meeting was attended only by shareholders, in person and by proxy,
representing 3,889 shares, out of a total of 106,491 shares then outstanding and entitled to vote.
Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it
has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in article 71 of the by-laws, which reads as follows:
"ART. 71. The directors shall elect from among the share-holders members to fill the vacancies
that may occur in the board of directors until the election at the general meeting."
The persons thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been experienced
and successful business and professional men of means, enjoying earned incomes of from P12,000 to P50,000 per
annum, with an annual average of P30,000 in addition to such income as they derive from their properties. Moreover, it
appears that several of the individuals constituting the original directorate and persons chosen to supply vacancies
therein belong to prominent Filipino families, and that they are more or less related to each other by blood or marriage.
In addition to this it appears that it has been the policy of the directorate to keep thereon some member or another of a
single prominent American law firm in the City.
It is supposed in the statement of the fifth cause of action in the complaint that the failure of the corporation to
hold annual meetings and the filling of vacancies in the directorate in the manner described constitute misdemeanors on
the part of the respondent which justify the resumption of the franchise by the Government and dissolution of the
corporation; and in this connection it is charged that the board of directors of the respondent has become a permanent
and self perpetuating body composed of wealthy men instead of wage earners and persons of moderate means. We
are unable to see the slightest merit in the charge. No fault can be imputed to the corporation on account of the failure
of the shareholders to attend the annual meetings; and their non-attendance at such meetings is doubtless to be
interpreted in part as expressing their satisfaction at the way in which things have been conducted. Upon failure of a
quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is
chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become
vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to
hold over until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms
of existing officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs.
Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining Company,
71 Pac., 865; Youree vs. Home Town Mutual Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H. & P. Turnpike
Road Co., 10 Ky. L. R., 486). The doctrine above stated finds expression in article 66 of the by-laws of the respondent
which declares in so many words that directors shall hold office "for the term of one year or until their successors shall
have been elected and taken possession of their offices."
It results that the practice of the directorate of filling vacancies by the action of the directors themselves is valid.
Nor can any exception be taken to the personality of the individuals chosen by the directors to fill vacancies in the body.
Certainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of
electing poor persons to so responsible a position. The possession of means does not disqualify a man for filling
positions of responsibility in corporate affairs.
Sixth cause of action. — Under the sixth cause of action it is alleged that the directors of El Hogar Filipino,
instead of serving without pay, or receiving nominal pay or a fixed salary, — as the complaint supposes would be
proper, — have been receiving large compensation, varying in amount from time to time, out of the profits of the
respondent. The facts relating to this cause of action are in substance these:
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance
sheet is distributed to the directors in proportion to their attendance at meetings of the board. The compensation paid to
the directors from time to time since the organization was organized in 1910 to the end of the year 1925, together with
the number of meetings of the board held each year, is exhibited in the following table:

Year Compensation Number of

paid directors meetings Rate per meet-

as a whole held ing as a whole


1911 P4,167.96 25 P166.71

1912 10,511.87 29 362.47

1913 15,479.29 27 573.30

1914 19,164.72 27 709.80

1915 24 032.85 25 961.31

1916 27 539.50 28 983.55

1917 31,327.00 26 1,204.88

1918 32,858.35 20 1,642.91

1919 36,318.78 21 1,729.46

1920 63,517.01 28 2,268.46

1921 36,815.33 25 1,472.61

1922 43,133.73 25 1,725.34

1923 39,773.61 27 1,473.09

1924 38,651.92 26 1,486.61

1925 35.719.27 26 1.373.81

It will be noted that the compensation above indicated as accruing to the directorate as a whole has been
divided among the members actually present at the different meetings. As a result of this practice, and the liberal
measure of compensation adopted, we find that the attendance of the membership at the board meetings has been
extraordinarily good. Thus, during the years 1920 to 1925, inclusive, when the board was composed of nine members,
the attendance has regularly been eight at each meeting with the exception of two years when the average attendance
was seven. It is insisted in the brief for the Attorney-General that the payment of the compensation indicated is
excessive and prejudicial to the interests of the shareholders at large. For the respondent, attention is directed to the
fact that the liberal policy adopted by the association with respect to the compensation of the directors has had highly
beneficial results, not only in securing a constant attendance on the part of the membership, but in obtaining their
intelligent attention to the affairs of the association. Certainly, in this connection, the following words from the report of
the Government examiners for 1918 to the Insular Treasurer contain matter worthy of consideration:
"The management of the association is entrusted to men of recognized ability in financial affairs
and it is believed that they have long foreseen all possible future contingencies and that under such men
the interests of the stockholders are duly protected. The steps taken by the directorate to curtail the influx
of unnecessary capital into the Association's coffers, as mentioned above, reveals how the men at the
helm of the Association are always on the lookout to grasp the situation and to apply the necessary
remedy as the circumstances may require. The accounts and documents were found in the same
excellent condition as in the previous examination."
In so far as this court is concerned the question here before us is not one concerning the propriety and wisdom
of the measure of compensation adopted by the respondent but rather the question of the validity of the measure. Upon
this point there can, it seems to us, be no difference of intelligent opinion. The Corporation Law does not undertake to
prescribe the rate of compensation for the directors of corporations. The power to fixed the compensation they shall
receive, if any, is left to the corporation, to be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this
authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already
stated. The justice and propriety of this provision was a proper matter for the shareholders when the by-laws were
framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the directors
has increased beyond what would probably be necessary to secure adequate service from them is a matter that cannot
be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even for
enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted in
the by-laws has been found to work harmful results, the remedy is in the hands of the stockholders who have power at
any lawful meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in
a court proceeding. The sixth cause of action is in our opinion without merit.
Seventh cause of action.— It appears that the promoter and organizer of El Hogar Filipino was Mr. Antonio
Melian, and in the early stages of the organization of the association the board of directors authorized the association to
make a contract with him with regard to the services to be rendered by him and the compensation to be paid to him
therefor. Pursuant to this authority the president of the corporation, on January 11, 1911, entered into a written
agreement with Mr. Melian, which is reproduced in the agreed statement of facts and of which the important clauses are
these:
"1. The corporation 'El Hogar Filipino Sociedad Mutua de Construccion y Prestamos,' and on its
behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio Melian the office of manager
of said association for the period of one year from the date of this contract.
"2. Don Antonio Melian accepts said office and undertakes to render the services thereto
corresponding for the period of one year, as prescribed by the by-laws of the corporation, without salary.
"3. Don Antonio Melian furthermore undertakes to pay, for his own account, all the expenses
incurred in the organization of the corporation.
"4. Don Antonio Melian further undertakes to lend to the corporation, without interest, the sum of
six thousand pesos (P6,000), Philippine currency, for the purpose of meeting the expense of rent, office
supplies, etcetera, until such time as the association has sufficient funds of its own with which to return
this loan: Provided, nevertheless, That the maximum period thereof shall not exceed three (3) years.
"5. Don Antonio Melian undertakes that the capital of the association shall amount to the sum of
four hundred thousand pesos (P400,000), Philippine currency, par value, during the first year of its
duration.
"6. In compensation of the studies made and services rendered by Don Antonio Melian for its
organization, the expenses incurred by him to that end, and in further consideration of the said loan of six
thousand pesos (P6,000), and of the services to be rendered by him as manager, and of the obligation
assumed by him that the nominal value of the capital of the association shall reach the sum of four
hundred thousand pesos (P400,000) during the first year of its duration, the corporation 'El Hogar Filipino
Sociedad Mutua de Construccion y Prestamos' hereby grants him five per centum (5%) of the net profits
to be earned by it in each year during the period fixed for the duration of the association by its articles of
incorporation; Provided, That this participation in the profits shall be transmitted to the heirs of Senor
Melian in the event of his death; And provided further, That the performance of all the obligations
assumed by Senor Melian in favor of the association, in accordance with this contract, shall and does
constitute a condition precedent to the acquisition by Senor Melian of the right to the said participation in
the profits of the association, unless the non-performance of such obligations shall be due to a fortuitous
event or force majeure."
In conformity with this agreement there was inserted in section 92 of the by-laws of the association a provision
recognizing the rights of Mr. Melian, as founder, to 5 per centum of the net profits shown by the annual balance sheet,
payment of the same to be made to him or his heirs during the life of the association. It is declared in said article that
this portion of the earnings of the association is conceded to him in compensation for the studies, work and
contributions made by him for the organization of El Hogar Filipino, and the performance on his part of the contract of
January 11, 1911, above quoted. During the whole life of the association, thus far, it has complied with the obligations
assumed by it in the contract above-mentioned; and during the years 1911 to 1925, inclusive, it paid to him as founder's
royalty the sum of P459,011.19, in addition to compensation received from the association by him in remuneration of
services to the association in various official capacities.
As a seventh cause of action it is alleged in the complaint that this royalty of the founder is "unconscionable,
excessive and out of all proportion to the services rendered, besides being contrary to and incompatible with the spirit
and purpose of building and loan associations." It is not alleged that the making of this contract was beyond the powers
of the association (ultra vires); nor is it alleged that it is vitiated by fraud of any kind in its procurement. Nevertheless, it
is pretended that in making and observing said contract the respondent committed an offense requiring its dissolution,
or, as is otherwise suggested, that the association should be enjoined from preforming the agreement.
It is our opinion that this contention is entirely without merit. Stated in its true simplicity, the primary question
here is whether the making of a (possibly) indiscreet contract is a capital offense in a corporation,— a question which
answers itself. No possible doubt exists as to the power of a corporation to contract for services rendered and to be
rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with
promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time
this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now
appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in
recent years.
If the Melian contract had been clearly ultra vires— which is not charged and is certainly untrue— its continued
performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere
matter for an action of nullity? an injunction can- not be obtained in this action because Melian is not a party. It is
rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as
defendants. Moreover, the proper party to bring such an action is either the corporation itself, or some shareholder who
has an interest to protect.
The mere fact that the compensation paid under this contract is in excess of what, in the full light of history, may
be considered appropriate is not a proper consideration for this court, and supplies no ground for interfering with its
performance. In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995), which was before this court nearly ten years
ago, this court held that the El Hogar Filipino is a mutual benefit society and that the existence of this contract with Mr.
Melian did not affect the association's legal character. The inference is that the contract under consideration was then
considered binding, and it occurred to no one that it was invalid. It would be a radical step indeed for a court to attempt
to substitute its judgment for the judgment of the contracting parties and to hold, as we are invited to hold under this
cause of action, that the making of such a contract as this removes the respondent association from the pale of the law.
The majority of the court is of the opinion that our traditional respect for the sanctity of the contract obligation should
prevail over the radical. and innovating tendencies which find acceptance with some and which, if given full rein, would
go far to sink legitimate enterprise in the Islands into the pit of populism and bolshevism. The seventh count is not
sustainable.
Eighth cause of action. — Under the fourth cause of ac- tion we had a case where the alleged ground for the
revocation of the respondent's charter was based upon the presence in the by-laws of article 10 that was found to be
inconsistent with the express provisions of law. Under the eighth cause of action the alleged ground for putting an end
to the corporate life of the respondent is found in the presence of other articles in the by-laws, namely, articles 70 and
76, which are alleged to be unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in
effect requires that persons elected to the board of directors must be holders of shares of the paid up value of P5,000,
which shall be held as security for their action; but it is added that said security may be put up in the behalf of any
director by some other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors waive
their right as shareholders to receive loans from the association.
It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the requirement for
security, a poor member, or wage-earner, cannot serve as director, irrespective of other qualifications, and that as a
matter of fact only men of means actually sit on the board. Article 76 is criticized on the ground that the provision
requiring directors to renounce their right to loans unreasonably limits their rights and privileges as members. There is
nothing of value in either of these suggestions. Section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors; and the requirement of security from them for the
proper discharge of the duties of their office, in manner prescribed in article 70, is highly prudent and in conformity with
good practice. Article 76, prohibiting directors from making loans to themselves, is of course designed to prevent the
possibility of the looting of the corporation by unscrupulous directors. A more discreet provision to insert in the by-laws
of a building and loan association would be hard to imagine. Clearly, the eighth cause of action cannot be sustained.
Ninth cause of action.— The specification under this head is in effect that the respondent has abused its
franchise in issuing "special" shares. The issuance of these shares is alleged to be illegal and inconsistent with the plan
and purposes of building and loan associations; and in particular, it is alleged that they are, in the main, held by well-to-
do people purely for purposes of investment and not by wage-earners for accumulating their modest savings for the
building of homes.
In the articles of incorporation we find the special shares described as follows:
" 'Special' shares shall be issued upon the payment of 80 per cent of their par value in cash, or in
monthly dues of P10. The 20 per cent remaining of the par value of such shares shall be completed by
the accumulation thereto of their proportionate part of the profits of the corporation. At the end of each
quarter the holders of special shares shall be entitled to receive in cash such part of the net profits of the
corporation corresponding to the amount on such date paid in by the holders of special shares, on
account thereof, as shall be determined by the directors, and at the end of each year the full amount of
the net profits available for distribution corresponding to the special shares. The directors shall apply
such part as they deem advisable to the amortization of the subscription to capital with respect to shares
not fully paid up, and the remainder of the profits, if any, corresponding to such shares, shall be delivered
to the holders thereof in accordance with the provisions of the by-laws."
The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not
mentioned in the Corporation Law as one of the forms of security which may be issued by the association. In the agreed
statement of facts it is said that special shares are issued upon two plans. By the first, the subscriber pays to the
association, upon subscribing, P160 in cash, on account of each share. By the second, the shareholder, upon
subscribing, pays in cash P10 for each share taken, and undertakes to pay P10 a month, as dues, until the total so paid
in amounts to P160 per share. On December 31, 1925, there were outstanding 20,844 special shares of a total paid
value (including accumulations) of P3,680,162.51. The practice of El Hogar Filipino, since 1915, has been to
accumulate to each special share, at the end of the year, one-tenth of the dividend declared and to pay the remainder of
the dividend in cash to the holders of shares. Since the same year dividends have been declared on the special and
common shares at the rate of 10 per centum per annum. When the amount paid in upon any special share plus the
accumulated dividends accruing to it, amounts to the par value of the share (P200), such share matures and ceases to
participate further in the earnings. The amount of the par value of the share (P200) is then returned to the shareholder
and the share cancelled. Holders of special and ordinary shares participate ratably in the dividends declared and
distributed, the part pertaining to each share being computed on the basis of the capital paid in, plus the accumulated
dividends pertaining to each share at the end of the year. The total number of shares of El Hogar Filipino outstanding on
December 31, 1925, was 125,760, owned by 5,826 shareholders, and divided into classes as follows:

Preferred shares 1,503

Special shares 20,884

Ordinary shares 103,363

The matter of the propriety of the issuance of special shares by El Hogar Filipino has been before this court in
two earlier cases, in both of which the question has received the fullest consideration from this court. In El Hogar
Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of such shares constituted a departure on the part
of the association from the principle of mutuality; and it was claimed by the Collector of Internal Revenue that this
rendered the association liable for the income tax to which other corporate entities are subject. It was held that this
contention was untenable and that El Hogar Filipino was a legitimate building and loan association notwithstanding the
issuance of said shares. In Severino vs. El Hogar Filipino (G. R. No. 24926), 1 and the related cases of Gervasio
Miraflores and Gil Lopez against the same entity, it was asserted by the plaintiffs that the emission of special shares
deprived the herein respondent of the privileges and immunities of a building and loan association and that as a
consequence the loans that had been made to the plaintiffs in those cases were usurious. Upon an elaborate review of
the authorities, the court, though divided, adhered to the principle announced in the earlier case and held that the
issuance of the special shares did not affect the respondent's character as a building and loan association nor make its
loans usurious. In view of the lengthy discussion contained in the decisions above-mentioned, it would appear to be an
act of supererogation on our part to go over the same ground again. The discussion will therefore not be repeated, and
what is now to be said should be considered supplemental thereto.
Upon examination of the nature of the special shares in the light of American usage, it will be found that said
shares are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance-
payment shares; and if close attention be paid to the language used in the last sentence of section 178 of the
Corporation Law, it will be found that special shares were evidently created for the purpose of meeting the conditions
caused by the prepayment of dues that is there permitted. The language of this provision is as follows: "Payments of
dues or interest may be made in advance, but the corporation shall not allow interest on such advance payments at a
greater rate than six per centum per annum nor for a longer period than one year." In one sort of special shares the
dues are prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share,
and the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid.
It will not escape notice that the provision quoted says that interest shall not be allowed on advance payments
at a greater rate than 6 per centum per annum nor for a longer period than one year. The word "interest" as there used
must be taken in its true sense of compensation for the use of money loaned, and it must not be confused with the dues
upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we
infer that no interest is ever paid by the association in any amount for the advance payments made on these shares;
and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in
accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance
payments made by him; and no other incentive is necessary to induce investors to purchase the stock.
It will be observed that the final 20 per centum of the par value of each special share is not paid for by the
shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation
in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the
portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It
follows that the emission of the special shares does not involve any violation of the principle that the shares must be
sold at par.
From what has been said it will be seen that there is express authority, even in the very letter of the law, for the
emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be
baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming
that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The
complaint consequently fails also as regards the ground stated in the ninth cause of action.
Tenth cause of action. — Under this head of the complaint it is alleged that the defendant is pursuing a policy of
depreciating, at the rate of 10 per centum per annum, the value of the real properties acquired by it at its sales; and it is
alleged that this rate is excessive. From the agreed statement it appears that since its organization in 1910 El Hogar
Filipino, prior to the end of the year 1925, had made 1,373 loans to its shareholders secured by first mortgages on real
estate as well as by the pledge of the shares of the borrowers. In the same period the association has purchased at
foreclosure sales the real estate constituting the security for 54 of the aforesaid loans. In making these purchases the
association has always bid the full amount due to it from the debtor, after deducting the withdrawal value of the shares
pledged as collateral, with the result that in no case has the shareholder been called upon to pay a deficiency judgment
on foreclosure.
El Hogar Filipino places real estate so purchased in its inventory at actual cost, as determined by the amount
bid on foreclosure sale; and thereafter until sold the book value of such real estate is depreciated at the rate fixed by the
directors in accordance with their judgment as to each parcel, the annual average depreciation having varied from
nothing to a maximum of 14.138 per cent. The book value of such real estate is not followed in making sales thereof,
but sales are made for the best prices obtainable, whether greater or less than the book value.
It is alleged in the complaint that depreciation is charged by the association at the rate of 10 per centum per
annum. The agreed statement of facts on this point shows that the annual average varies from nothing to a maximum of
something over 14 per centum. We are thus left in the dark as to the precise depreciation allowed from year to year. It is
not claimed for the Government that the association is without power to allow some depreciation; and it is quite clear
that the board of directors possesses a discretion in this matter. There is no positive provision of law prohibiting the
association from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real
profits; and article 74 of its by-laws expressly authorizes the board of directors to determine each year the amount to be
written down upon the expenses of installation and the property of the corporation. There can be no question that the
power to adopt such a by-law is embraced within the power to make by-laws for the administration of the corporate
affairs of the association and for the management of its business, as well as the care, control and disposition of its
property (Act No. 1459, sec. 13 [7]). But the Attorney-General questions the exercise of the discretion confided to the
board; and it is insisted that the excessive depreciation of the property of the association is objectionable in several
respects, but mainly because it tends to increase unduly the reserves of the association, thereby frustrating the right of
the shareholders to participate annually and equally in the earnings of the association.
This count of the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in
determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General
upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should
supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations.
Certainly this court cannot undertake to control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well
founded.
Eleventh and twelfth causes of action. — The same comment is appropriate with respect to the eleventh and
twelfth causes of action, which are treated together in the briefs, and will be here combined. The specification in the
eleventh cause of action is that the respondent maintains excessive reserve funds, and in the twelfth cause of action
that the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 per centum,
regardless of losses suffered and profits made by the corporation and in contravention of the requirements of section
188 of the Corporation Law. The facts relating to these two counts in the complaint, as set forth in the stipulation, are
these:
In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net profits earned each
year, as shown by the annual balance sheet shall be carried to a reserve fund. The fund so created is called the-
General Reserve. Article 93 of the by-laws authorizes the directors to carry funds to a Special Reserve, whenever in
their judgment it is advisable to do so, provided that the annual dividend in the year in which funds are carried to special
reserve exceeds 8 per centum. It appears to have been the policy of the board of directors for several years past to
place in the special reserve any balance in the profit and loss account after the satisfaction of preferential charges and
the payment of a dividend of 10 per centum to all special and ordinary shares (with accumulated dividends). As things
stood in 1926 the General Reserve contained an amount equivalent to about 5 per centum of the paid-in value of
shares. This fund has never been drawn upon for the purpose of maintaining the regular annual dividend; but recourse
has been had to the Special Reserve on three different occasions to make good the amount necessary to pay
dividends. It appears that in the last five years the reserves have declined from something over 9 per cent to something
over 7.
It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the
case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the
Corporation Law. Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is
in effect a guaranty by the association of a fixed dividend which is contrary to the intention of the statute.
Upon careful consideration of the questions involved we find no reason to doubt the right of the respondent to
maintain these reserves. It is true that the Corporation Law does not expressly grant this power, but we think it is to be
implied. It is a fact of common observation that all commercial enterprises encounter periods when earnings fall below
the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to
neglect one of the primary canons of good business practice. Building and loan associations, though among the most
solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly
detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies
the surest foundation of public confidence.
The question now under consideration is not new in jurisprudence, for the American courts have been called
upon more than once to consider the legality of the maintenance of reserves by institutions of this or similar character.
In Greeff vs. Equitable Life Assurance Society (160 N. Y., 19; 73 Am. St. Rep., 659), the court had under
consideration a charter provision of a life insurance company, organized on the mutual plan, in its relation to the power
of the company to provide reserves. There the statute provided that "the officers of the company, within sixty days from
the expiration of the first five years, from December 31, 1859, and within the first sixty days of every subsequent period
of five years, shall cause a balance to be struck of the affairs of the company, which shall exhibit its assets and
liabilities, both present and contingent, and also the net surplus, after deducting a sufficient amount to cover all
outstanding risks and other obligations. Each policy holder shall be credited with an equitable share of the said surplus."
The court said:
"No prudent person would be inclined to take a policy in a company which had so improvidently
conducted its affairs that it only retained a fund barely sufficient to pay its present liabilities, and,
therefore, was in a condition where any change by the reduction of interest upon, or depreciation in, the
value of its securities, or any increase of mortality, would render it insolvent and subject to be placed in
the hands of a receiver. The evident purpose of the provisions of the defendant's charter and policy
relating to this subject was to vest in the directors of the corporation a discretion to determine the
proportion of its surplus which should be divided each year."
In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Bohemian Bldg. and Loan Association V.5.
Knolt, the court, in commenting on the nature of these reserves, said:
"The apparent function of this fund is to insure the stockholders against losses. Its purpose is not
unlike that of the various forms of insurance now in such common use. . . . This contribution is as
legitimate an item of expense as are the premiums paid on any insurance policy." (See Clarks and
Chase, Building and Loan Associations, footnote, page 344.)
In commenting on the necessity of such funds, Sundheim says:
"It is optional with the association whether to maintain such a fund or not, but justice and good
business policy seem to require it. The retiring stockholder must be paid the value of his stock in cash
and leave for those remaining a large number of securities and perhaps some real estate purchased to
protect the association's interest. How much will be realized on these securities, or real estate, no human
foresight can tell. Further, the realizing on these securities may entail considerable litigation and expense.
There are many other contingencies which might cause a shrinkage in the association's assets, such as
defective titles, undisclosed defalcations on the part of an officer, a miscalculation of assets and liabilities,
and many other errors and omissions which must always be reckoned with in the conduct of human
affairs.
"The contingent fund is merely insurance against possible loss. That losses may occur from time
to time seems almost inevitable and it is, therefore, inequitable that the remaining stockholders should be
compelled to accept all securities at par, so, to say the least, the maintenance of this fund is justified. The
association teaches the duty of providing for the proverbial rainy day. Why should it not provide for the
hour of adversity? The reserve fund has protected the maturing or withdrawing member during the period
of his membership. In case of loss it has or would have, reimbursed him and, at all times, it has protected
him and given strength and standing to the association. Losses may occur, after his membership ceases,
that arose from some mistake or mismanagement committed during the period of his membership, and in
fairness and equity the remaining members should have some protection against this." (Sundheim, Law
of Building and Loan Associations, sec. 53.)
The Government insists, we think, upon an interpretation of section 188 of the Corporation Law that is
altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually
apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the
reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the
board of directors; and this means that they shall exercise the usual discretion of good businessmen in allocating a
portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution
of earnings and losses after other legitimate obligations have been met.
Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and
twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive,
the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of
administrative matters which have been confided to the discretion of the board of directors. The causes of action under
discussion must be pronounced to be without merit.
Thirteenth cause of action. — The specification under this head is, in effect, that the respondent association
has made loans which, to the knowledge of the association's officers, were intended to be used by the borrowers for
other purposes than the building of homes. In this connection it appears that, though loans have been made by the
association exclusively to its shareholders, no attempt has been made by it to control the borrowers with respect to the
use made of the borrowed funds, the association being content to see that the security given for the loan in each case is
sufficient. On December 31, 1925, the respondent had five hundred forty-four loans outstanding secured by mortgages
upon real estate and by the pledge of the borrowers' shares in an amount sufficient at maturity to amortize the loans.
With respect to the nature of the real estate upon which these loans were made it appears that three hundred fifty-one
loans were secured by mortgages upon city residences, seven by mortgages upon commercial building in cities, and
three by mortgages upon unimproved city lots. At the same time one hundred eighty-three of the loans were secured by
mortgages upon improved agricultural property consisting of coconut groves, sugar land, and rice land, with a total area
of about 7,558 hectares. From information gathered by the association from voluntary statements of borrowers given at
the time of application with respect to the use intended to be made of the borrowed funds, it appears that the amount of
P693,200 was borrowed to redeem real property from existing mortgages or pactos de retro, P280,800 to buy real
estate, P449,100 to erect buildings, P24,000 to improve and repair buildings, P1,480,900 for agricultural purposes,
while the amount of P5,763,700 was borrowed for purposes not disclosed.
Upon these facts an elaborate argument has been constructed in behalf of the plaintiff to the effect that in
making loans for other purposes than the building of residential houses the association has illegally departed from its
charter and made itself amenable to the penalty of dissolution. Aside from being directly opposed to the decision of this
court in Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil., 249), this
contention finds no substantial support in the prevailing decisions made in American courts; and our attention has not
been directed to a single case wherein the dissolution of a building and loan association has been decreed in a quo
warranto proceeding because the association allowed its borrowers to use the loans for other purposes than the
acquisition of homes.
The case principally relied upon for the Government appears to be Pfeister vs. Wheeling Building Association
(19 W. Va., 676, 716), which involved the question whether a building and loan association could recover the full
amount of a note given to it by a member and secured by a mortgage from a stranger. At the time the case arose there
was a statute in force in the State of West Virginia expressly forbidding building and loan associations to use or direct
their funds for or to any other object or purpose than the buying of lots or houses or in building and repairing houses,
and it was declared that in case the funds should be improperly directed to other objects, the offending association
should forfeit all rights and privileges as a corporation. Under the statute so worded the court held that the plaintiff could
only recover the amount actually advanced by it with lawful interest and fines, without premium; and judgment was
given accordingly. The suggestion in that case that the result would have been the same even in the absence of statute
was mere dictum and is not supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon Mc-Cauley vs. Building & Saving Association (97 Tenn., 421).
The statute in force in the State of Tennessee at the time this action arose provided that all loans should be made to the
members of the association at open stated meetings and that the money should be lent to the highest bidder.
Inconsistently with this provision, there was inserted in the by-laws of the association a provision to the effect that no
loan should be made at a greater premium than 30 per cent, nor at a less premium than 29 7/8 per cent. It was held that
this by-law made free and open competition impossible and that it in effect established a fixed premium. It was
accordingly held, in the case cited, that an association could not recover such part of the loan as had been applied by it
to the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result reached in either of the two decisions cited, but it is apparent that
much of the discussion contained in the opinions in those cases does not reflect the doctrine now prevailing in the
United States; and much less are those decisions applicable in this jurisdiction. There is no statute here expressly
declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the
building of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building
and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorizes
the board of directors of the association from time to time to fix the premium to be charged.
In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the
idea is developed that the primary design of building and loan associations should be to help poor people to procure
homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be denied that
they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not
to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers
must in the end approve itself to the business community. Judging from the past history of these institutions it can be
truly said that they have done more to encourage thrift, economy and having among the people at large than any other
institution of modern times, not excepting even the savings banks. In this connection Mr. Sundheim, in a late treatise
upon the subject of the law of building and loan associations, makes the following comment:
"They have grown to such an extent in recent years that they no longer restrict their money to the
home buyer, but loan their money to the mere investor or dealer in real estate. They are the holders of
large mortgages se- cured upon farms, factories and other business properties and rows of stores and
dwellings. This is not an abuse of their powers or a departure from their main purposes, but only a natural
and proper expansion along healthy and legitimate lines." (Sundheim, Building and Loan Associations,
sec. 7.)
Speaking of the purposes for which loans may be made, the same author adds:
"Loans are made for the purpose of purchasing a homestead, or other real estate, or for any
lawful purpose or business, but there is no duty or obligation of the association to inquire for what
purpose the loan is obtained, or to require any stipulation from the borrower as to what use he will make
of the money, or in any manner to supervise or control its disbursement." (Sundheim, Building and Loan
Associations, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil., 249), this
court had before it the question whether a loan made by the respondent association upon the security of a mortgage
upon agricultural land, — where the loan was doubtless used for agricultural purposes, — was usurious or not; and the
case turned upon the point whether, in making such loans, the association had violated the law and departed from its
fundamental purposes. The conclusion of the court was that the loan was valid and could be lawfully enforced by a
nonjudicial foreclosure in conformity with the terms of the contract between the association and the borrowing member.
We now find no reason to depart from the conclusion reached in that case, and it is unnecessary to repeat what was
then said. The thirteenth cause of action must therefore be pronounced unfounded.
Fourteenth cause of action. — The specification under this head is that the loans made by the defendant for
purposes other than building or acquiring homes have been extended in extremely large amounts and to wealthy per-
sons and large companies. In this connection attention is directed to eight loans made at different times in the last
several years to different persons or entities, ranging in amounts from P120,000 to P390,000 and to two large loans
made to the Roxas Estate and to the Pacific Warehouse Company in the amounts of P1,122,000 and P2,320,000,
respectively. In connection with the larger of the two loans just mentioned it is shown that for about ten months after this
loan was made the available funds of El Hogar Filipino were reduced to the point that the association was compelled to
take advantage of certain provisions of its by-laws authorizing the postponement of the payment of claims resulting from
withdrawals, whereas previously the association had always settled these claims promptly from current funds. At no
time was there apparently any delay in the payment of matured shares; but in four or five cases there was as much as
ten months delay in the payment of withdrawal applications.
There is little that can be said upon the legal aspects of this cause of action. In so far as it relates to the
purposes for which these loans were made, the matter is covered by what was said above with reference to the
thirteenth cause of action; and in so far as it relates to the personality of the borrowers, the question belongs more
directly to the discussion under the sixteenth cause of action, which will be found below. The point, then, which remains
for consideration here is whether it is a suicidal act on the part of a building and loan association to make loans in large
amounts. If the loans which are here the subject of criticism had been made upon inadequate security especially in case
of the largest two, the consequences certainly would have been disastrous to the association in the extreme; but no
such fact is alleged; and it is to be assumed that none of the ten borrowers have defaulted in their contracts.
Now, it must be admitted that two of these loans at least are of a very large size, considering the average range
of financial transactions in this country; and the making of the largest loan was followed, as we have already seen, with
unpleasant consequences to the association in dealing with current claims. Nevertheless the agreed statement of facts
shows that all of the loans referred to are only ten out of a total of five hundred forty-four outstanding on December 31,
1925; and the average of all the loans taken together is modest enough. It appears that the chief examiner of banks and
corporations of the Philippine Treasury, after his examination of El Hogar Filipino at the end of the year 1925, made a
report concerning this association as of January 31, 1926, in which he criticized the Pacific Warehouse Company loan
as being so large that it temporarily crippled the lending power of the association for some time. This criticism was
apparently justified as proper comment on the activities of the association; but the question for us here to decide is
whether the making of this and the other large loans constitutes such a misuser of the franchise as would justify us in
depriving the association of its corporate life. This question appears to us to be so simple as almost to answer itself.
The law states no limit with respect to the size of the loans to be made by the association. That matter is confided to the
discretion of the board of directors; and this court cannot arrogate to itself a control over the discretion of the chosen
officials of the company. If it should be thought wise in the future to put a limit upon the amount of loans to be made to a
single person or entity, resort should be had to the Legislature; it is not a matter amenable to judicial control. The
fourteenth cause of action is therefore obviously without merit.
Fifteenth cause of action.— The criticism here comes back to the supposed misdemeanor of the respondent in
maintaining its reserve funds, — a matter already discussed under the eleventh and twelfth causes of action. Under the
fifteenth cause of action it is claimed that upon the expiration of the franchise of the association through the effluxion of
time, or earlier liquidation of its business, the accumulated reserves and other properties will accrue to the founder, or
his heirs, and the then directors of the corporation and to those persons who may at that time to be holders of the
ordinary and special shares of the corporation. In this connection we note that article 95 of the by-laws reads as follows:
"ART. 95. The funds obtained by the liquidation of the association shall be applied in the first
place to the repayment of shares and the balance, if any, shall be distributed in accordance with the
system established for the distribution of annual profits."
It will be noted that the cause of action with which we are now concerned is not directed to any positive
misdemeanor supposed to have been committed by the association. It has exclusive relation to what may happen some
thirty-five years hence when the franchise expires, supposing of course that the corporation should not be reorganized
and continued after that date. There is nothing in article 95 of the by-laws which is, in our opinion, subject to criticism.
The real point of criticism is that upon the final liquidation of the corporation years hence there may be in existence a
reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation of the company. It
seems to us that this is a matter that may be left to the prevision of the directors or to legislative action if it should be
deemed expedient to require the gradual suppression of the reserve funds as the time for dissolution approaches. It is
no matter for judicial interference, and much less could the resumption of the franchise on this ground be justified.
There is no merit in the fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint assigns as cause of action that various loans now
outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some
instances subscribed to shares in the respondent for the sole purpose of obtaining such loans. In this connection it
appears from the stipulation of facts that of the 5,826 shareholders of El Hogar Filipino, which composed its
membership on December 31, 1925, twenty-eight are juridical entities, comprising sixteen corporations and fourteen
partnerships; while of the five hundred forty-four loans of the association outstanding on the same date, nine had been
made to corporations and five to partnerships. It is also admitted that some of these juridical entities became
shareholders merely for the purpose of qualifying themselves to take loans from the association, and the same is said
with respect to many natural persons who have taken shares in the association. Nothing is said in the agreed statement
of facts on the point whether the corporations and partnerships that have taken loans from the respondent are qualified
by law governing their own organization to enter into these contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any person" may become a stockholder in building and
loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context
to indicate that the expression is used in the restricted sense of "natural person." It should therefore be taken to include
both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word
"person," or "persons," is to be taken in this broad sense in every part of the Corporation Law. For instance, it would
seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is
said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as
the common sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173,
that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may
not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these
loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing
corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were
without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the
stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were
competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action, or
in the facts developed in connection therewith, that would justify us in granting the relief.
Seventeenth cause of action. — Under the seventeenth cause of action, it is charged that in disposing of real
estates purchased by it in the collection of its loans, the defendant has on various occasions sold some of the said real
estate on credit, transferring the title thereto to the purchaser; that the properties sold are then mortgaged to the
defendant to secure the payment of the purchase price, said amount being considered as a loan, and carried as such in
the books of the defendant, and that several such obligations are still outstanding. It is further charged that the persons
and entities to which said properties are sold under the condition charged are not members or shareholders nor are
they made members or shareholders of the defendant.
This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the
discussion is the provision of the Corporation Law requiring loans to be made to stockholders only and on the security
of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent
sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the
obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which
it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does
not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation.
Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes
a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of
a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan in law. The contention
of the Government under this head is untenable.
In conclusion, the respondent is enjoined in the future from administering real property not owned by itself,
except as may be permitted to it by contract when a borrowing shareholder defaults in his obligation. In all other
respects the complaint is dismissed, without costs. So ordered.
||| (Government of the Philippine Islands v. El Hogar Filipino, G.R. No. 26649, [July 13, 1927], 50 PHIL 399-477)

[G.R. No. L-18216. October 30, 1962.]

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants, vs. REGISTER OF


DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernandez for petitioner-appellants.


Solicitor General for respondent-appellee.

SYLLABUS

1. CORPORATIONS; LIQUIDATION AND DISTRIBUTION OF ASSETS FOR TRANSFER TO


STOCKHOLDERS; CERTIFICATE OF LIQUIDATION IN THE NATURE OF TRANSFER OR CONVEYANCE. — Where
the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the
corporation to the stockholders in proportion to their shareholdings, that transfer cannot be affected without the
corresponding deed of conveyance from the corporation to the stockholders, and the certificate should be considered as
one in the nature of a transfer or conveyance.

DECISION

BAUTISTA ANGELO, J p:
On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of
liquidation of the assets of the corporation reciting, among other things, that by virtue of a resolution of the stockholders
adopted on September 17, 1960, dissolving the corporation, they have distributed among themselves in proportion to
their shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in Manila.
The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration on
seven grounds, of which the following were disputed by the stockholders:
"3. The number of parcels not certified to in the acknowledgment;
"5. P430.50 Reg. fees need be paid;
"6. P940.45 documentary stamps need be attached to the document;
"7. The judgment of the Court approving the dissolution and directing the disposition of the assets of the
corporation need be presented (Rules of Court, Rule 104, Sec. 3)."
Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled ground
No. 7 and sustained requirements Nos. 3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three grounds
on which the denial of the registration of the certificate of liquidation was predicated hinges on whether or not that
certificate merely involves a distribution of the corporation assets or should be considered a transfer or conveyance.
Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a distribution of
the assets of the corporation which has ceased to exist for having been dissolved. This is apparent in the minutes of
dissolution attached to the document. Not being a conveyance the certificate need not contain a statement of the
numbers of parcels of land involved in the distribution in the acknowledgment appearing therein. Hence the amount of
documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds.
Neither is it correct to require appellants to pay the amount of P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the view
expressed by the register of deeds to the effect that the certificate of liquidation in question, though it involves a
distribution of the corporation's assets, in the last analysis represents a transfer of said assets from the corporation to
the stockholders. Hence, in substance it is a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property, they do not represent property of the corporation.
The corporation has property of its own which consists chiefly of real estate (Nelson vs. Owen, 113 Ala., 372, 21 So. 75;
Morrow vs. Gould, 145 Iowa 1, 123 N. W. 743). A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley
vs. Alabama Terminal, 173 Ala., 398, 56 So., 235), but its holder is not the owner of any part of the capital of the
corporation (Bradley vs. Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its
property or assets (Gottfried vs. Miller, 104 U.S., 521; Jones vs. Davis, 35 Ohio St., 474). The stockholder is not a co-
owner or tenant in common of the corporate property (Harton vs. Johnston, 166 Ala., 317, 51 So., 992).
On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of the F.
Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of community property, but
rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of the
liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the
stockholders in proportion to their shareholdings, — and this is in effect the purpose which they seek to obtain from the
Register of Deeds of Manila, — that transfer cannot be effected without the corresponding deed of conveyance from the
corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the
nature of a transfer or conveyance.
WHEREFORE, we affirm the resolution appealed from, with costs against appellants.
||| (Stockholders of Guanzon v. Register of Deeds of Manila, G.R. No. L-18216, [October 30, 1962], 116 PHIL 689-692)

[G.R. No. L-48627. June 30, 1987.]


FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioner, vs. THE HONORABLE COURT OF
APPEALS and ALBERTO V. ARELLANO, respondents.

DECISION

CRUZ, J p:

We gave limited due course to this petition on the question of the solidary liability of the petitioners with their co-defendants
in the lower court 1 because of the challenge to the following paragraph in the dispositive portion of the decision of the
respondent court: **
"1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of P50,000.00 for
the preparation of the project study and his technical services that led to the organization of the
defendant corporation, plus P10,000.00 attorney's fees;" 2
The petitioners claim that this order has no support in fact and law because they had no contract whatsoever with the
private respondent regarding the above-mentioned services. Their position is that as mere subsequent investors in the
corporation that was later created, they should not be held solidarily liable with the Filipinas Orient Airways, a separate
juridical entity, and with Barretto and Garcia, their co-defendants in the lower court, *** who were the ones who requested
the said services from the private respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not appealed the decision of the respondent court
and may, for this reason, be presumed to have accepted the same. For purposes of resolving this case before us, it is not
necessary to determine whether it is the promoters of the proposed corporation, or the corporation itself after its
organization, that shall be responsible for the expenses incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners themselves are also and personally liable for
such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this wise:
"As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the preparation of
the project study and the pre-organizational services in the amount of P50,000.00, not only the defendant
corporation but the other defendants including defendants Caram should he jointly and severally liable for
this amount. As we above related it was upon the request of defendants Barretto and Garcia that plaintiff
handled the preparation of the project study which project study was presented to defendant Caram so
the latter was convinced to invest in the proposed airlines. The project study was revised for purposes of
presentation to financiers and the banks. It was on the basis of this study that defendant corporation was
actually organized and rendered operational. Defendants Garcia and Caram, and Barretto became
members of the Board and/or officers of defendant corporation. Thus, not only the defendant corporation
but all the other defendants who were involved in the preparatory stages of the incorporation, who
caused the preparation and/or benefited from the project study and the technical services of plaintiff must
be liable." 4
It would appear from the above justification that the petitioners were not really involved in the initial steps that finally led to
the incorporation of the Filipinas Orient Airways. Elsewhere in the decision, Barretto was described as "the moving spirit."
The finding of the respondent court is that the project study was undertaken by the private respondent at the request of
Barretto and Garcia who, upon its completion, presented it to the petitioners to induce them to invest in the proposed airline.
The study could have been presented to other prospective investors. At any rate, the airline was eventually organized on
the basis of the project study with the petitioners as major stockholders and, together with Barretto and Garcia, as principal
officers.
The following portion of the decision in question is also worth considering:
". . .. Since defendant Barretto was the moving spirit in the pre-organization work of defendant
corporation based on his experience and expertise, hence he was logically compensated in the amount
of P200,000.00 shares of stock not as industrial partner but more for is technical services that brought to
fruition the defendant corporation. By the same token, We find no reason why the plaintiff should not be
similarly compensated not only for having actively participated in the preparation of the project study for
several months and its subsequent revision but also in his having been involved in the pre-organization of
the defendant corporation, in the preparation of the franchise, in inviting the interest of the financiers and
in the training and screening of personnel. We agree that for these special services of the plaintiff the
amount of P50,000.00 as compensation is reasonable." 5
The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the
airline, which were being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to
speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded,
on the strength of the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate
juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a
bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its
officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the compensation
claimed by the private respondent for the services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services that Barretto and Garcia presented to
them and which persuaded them to invest in the proposed airline. The most that can be said is that they benefited from such
services, but that surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and regardless of the amount of their shareholdings, would be equally and
personally liable also with the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our impression is that it is opposed to
the imposition of solidary responsibility upon the Carams but seems to be willing, in a vague, unexpressed offer of
compromise, to accept joint liability. While it is true that it does here and there disclaim total liability, the thrust of the petition
seems to be against the imposition of solidary liability only rather than against any liability at all, which is what it should have
categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and severally, under the first paragraph
of the dispositive portion of the challenged decision. So holding, we find it unnecessary to examine at this time the rules on
solidary obligations, which the parties — needlessly, as it turns out — have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under the challenged decision, which is
hereby modified accordingly. It is so ordered.
||| (Caram, Jr. v. Court of Appeals, G.R. No. L-48627, [June 30, 1987], 235 PHIL 369-374)

[G.R. No. 124293. January 31, 2005.]

J.G. SUMMIT HOLDINGS, INC., petitioner,vs.COURT OF APPEALS; COMMITTEE ON


PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST; and PHILYARDS
HOLDINGS, INC., respondents.

RESOLUTION

PUNO, J p:

For resolution before this Court are two motions filed by the petitioner, J.G. Summit Holdings, Inc. for
reconsideration of our Resolution dated September 24, 2003 and to elevate this case to the Court En Banc.The petitioner
questions the Resolution which reversed our Decision of November 20, 2000, which in turn reversed and set aside a
Decision of the Court of Appeals promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development Corporation (NIDC),a
government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries,
Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management of the Subic National
Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard and Engineering Corporation
(PHILSECO).Under the JVA, the NIDC and KAWASAKI will contribute P330 million for the capitalization
of PHILSECO in the proportion of 60%-40% respectively. One of its salient features is the grant to the
parties of the right of first refusal should either of them decide to sell, assign or transfer its interest in the
joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS
[PHILSECO] to any third party without giving the other under the same terms the right of
first refusal. This provision shall not apply if the transferee is a corporation owned or
controlled by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the
Philippine National Bank (PNB). Such interests were subsequently transferred to the National
Government pursuant to Administrative Order No. 14. On December 8, 1986, President Corazon C.
Aquino issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset
Privatization Trust (APT) to take title to, and possession of, conserve, manage and dispose of non-
performing assets of the National Government. Thereafter, on February 27, 1987, a trust agreement was
entered into between the National Government and the APT wherein the latter was named the trustee of
the National Government's share in PHILSECO. In 1989, as a result of a quasi-reorganization of
PHILSECO to settle its huge obligations to PNB, the National Government's shareholdings in PHILSECO
increased to 97.41% thereby reducing KAWASAKI's shareholdings to 2.59%. CAacTH
In the interest of the national economy and the government, the COP and the APT deemed it
best to sell the National Government's share in PHILSECO to private entities. After a series of
negotiations between the APT and KAWASAKI, they agreed that the latter's right of first refusal under the
JVA be "exchanged" for the right to top by five percent (5%) the highest bid for the said shares. They
further agreed that KAWASAKI would be entitled to name a company in which it was a stockholder, which
could exercise the right to top. On September 7, 1990, KAWASAKI informed APT that Philyards
Holdings, Inc. (PHI) 1 would exercise its right to top.
At the pre-bidding conference held on September 18, 1993, interested bidders were given copies
of the JVA between NIDC and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for
the National Government's 87.6% equity share in PHILSECO. The provisions of the ASBR were
explained to the interested bidders who were notified that the bidding would be held on December 2,
1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public
bidding is the National Government's equity in PHILSECO consisting of 896,869,942
shares of stock (representing 87.67% of PHILSECO's outstanding capital stock),which
will be sold as a whole block in accordance with the rules herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the final approval of
both the APT Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The
Indicative price set for the National Government's 87.67% equity in PHILSECO is
PESOS: ONE BILLION THREE HUNDRED MILLION (P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at
its regular meeting following the bidding, for the purpose of determining whether or not it
should be endorsed by the APT Board of Trustees to the COP, and the latter approves
the same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc.,that the highest bid is acceptable to the National
Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall
then have a period of thirty (30) calendar days from the date of receipt of such advice
from APT within which to exercise their "Option to Top the Highest Bid" by offering a bid
equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.
exercise their "Option to Top the Highest Bid," they shall so notify the APT about such
exercise of their option and deposit with APT the amount equivalent to ten percent (10%)
of the highest bid plus five percent (5%) thereof within the thirty (30)-day period
mentioned in paragraph 6.0 above. APT will then serve notice upon Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. declaring them as the preferred
bidder and they shall have a period of ninety (90) days from the receipt of the APT's
notice within which to pay the balance of their bid price. TIHDAa
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.
fail to exercise their "Option to Top the Highest Bid" within the thirty (30)-day period, APT
will declare the highest bidder as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with appropriate care
these rules, the official bid forms, including any addenda or amendments thereto issued
during the bidding period. The bidder shall likewise be responsible for informing itself
with respect to any and all conditions concerning the PHILSECO Shares which may, in
any manner, affect the bidder's proposal. Failure on the part of the bidder to so examine
and inform itself shall be its sole risk and no relief for error or omission will be given by
APT or COP. ...
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. 2 submitted a bid of
Two Billion and Thirty Million Pesos (P2,030,000,000.00) with an acknowledgment of
KAWASAKI/[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty
(30) days to act on APT's recommendation based on the result of this
bidding. Should the COP approve the highest bid, APT shall advise
Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS]
Holdings, Inc. that the highest bid is acceptable to the National
Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. shall then have a period of thirty (30) calendar days from
the date of receipt of such advice from APT within which to exercise
their "Option to Top the Highest Bid" by offering a bid equivalent to the
highest bid plus five (5%) percent thereof.
As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993
"subject to the right of Kawasaki Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid
by 5% as specified in the bidding rules."
On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its
bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI,
[PHILYARDS],Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four
(4) companies were the losing bidders thereby circumventing the law and prejudicing the weak winning
bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same option to top to PHI
constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public
bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the
proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase
price of the subject bidding. On February 7, 1994, the APT notified petitioner that PHI had exercised its
option to top the highest bid and that the COP had approved the same on January 6, 1994. On February
24, 1994, the APT and PHI executed a Stock Purchase Agreement. Consequently, petitioner filed with
this Court a Petition for Mandamus under G.R. No. 114057. On May 11, 1994, said petition was referred
to the Court of Appeals. On July 18, 1995, the Court of Appeals denied the same for lack of merit. It ruled
that the petition for mandamus was not the proper remedy to question the constitutionality or legality of
the right of first refusal and the right to top that was exercised by KAWASAKI/PHI, and that the matter
must be brought "by the proper party in the proper forum at the proper time and threshed out in a full
blown trial." The Court of Appeals further ruled that the right of first refusal and the right to top are prima
facie legal and that the petitioner, "by participating in the public bidding, with full knowledge of the right to
top granted to KAWASAKI/[PHILYARDS] is ...estopped from questioning the validity of the award given to
[PHILYARDS] after the latter exercised the right to top and had paid in full the purchase price of the
subject shares, pursuant to the ASBR." Petitioner filed a Motion for Reconsideration of said Decision
which was denied on March 15, 1996. Petitioner thus filed a Petition for Certiorari with this Court alleging
grave abuse of discretion on the part of the appellate court. HITEaS

On November 20, 2000, this Court rendered ...[a] Decision ruling among others that the Court of
Appeals erred when it dismissed the petition on the sole ground of the impropriety of the special civil
action of mandamus because the petition was also one of certiorari.It further ruled that a shipyard like
PHILSECO is a public utility whose capitalization must be sixty percent (60%) Filipino-owned.
Consequently, the right to top granted to KAWASAKI under the Asset Specific Bidding Rules (ASBR)
drafted for the sale of the 87.67% equity of the National Government in PHILSECO is illegal — not only
because it violates the rules on competitive bidding — but more so, because it allows foreign
corporations to own more than 40% equity in the shipyard. It also held that "although the petitioner had
the opportunity to examine the ASBR before it participated in the bidding, it cannot be estopped from
questioning the unconstitutional, illegal and inequitable provisions thereof." Thus, this Court voided the
transfer of the national government's 87.67% share in PHILSECO to Philyard[s] Holdings, Inc.,and
upheld the right of JG Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The
assailed Decision and Resolution of the Court of Appeals are REVERSED and SET
ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion Thirty Million
Pesos (P2,030,000,000.00),less its bid deposit plus interests upon the finality of this
Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests
from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks
representing 87.6% of PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred
Thirty-One Million Five Hundred Thousand Pesos
(P2,131,500,000.00);and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues
for ...resolution: (1) Whether PHILSECO is a public utility; (2) Whether under the 1977 JVA, KAWASAKI
can exercise its right of first refusal only up to 40% of the total capitalization of PHILSECO; and (3)
Whether the right to top granted to KAWASAKI violates the principles of competitive bidding. 3 (citations
omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of the respondents. On the first issue, we held
that Philippine Shipyard and Engineering Corporation (PHILSECO) is not a public utility, as by nature, a shipyard is not a
public utility 4 and that no law declares a shipyard to be a public utility. 5 On the second issue, we found nothing in the 1977
Joint Venture Agreement (JVA) which prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from
acquiring more than 40% of PHILSECO's total capitalization. 6 On the final issue, we held that the right to top granted to
KAWASAKI in exchange for its right of first refusal did not violate the principles of competitive bidding. 7
On October 20, 2003, the petitioner filed a Motion for Reconsideration 8 and a Motion to Elevate This Case to the
Court En Banc. 9 Public respondents Committee on Privatization (COP) and Asset Privatization Trust (APT), and private
respondent Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit Holdings, Inc.'s (JG Summit's)
Motion for Reconsideration and Motion to Elevate This Case to the Court En Banc on January 29, 2004 and February 3,
2004, respectively. DCcHIS
II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the following:
1. Whether there are sufficient bases to elevate the case at bar to the Court en banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason to warrant a reconsideration of
this Court's Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en banc on the following grounds:
1. The main issue of the propriety of the bidding process involved in the present case has been confused with the
policy issue of the supposed fate of the shipping industry which has never been an issue that is determinative of this case.
10
2. The present case may be considered under the Supreme Court Resolution dated February 23, 1984 which
included among en banc cases those involving a novel question of law and those where a doctrine or principle laid down by
the Court en banc or in division may be modified or reversed. 11
3. There was clear executive interference in the judicial functions of the Court when the Honorable Justice Jose
Isidro Camacho, Secretary of Finance, forwarded to Chief Justice Davide, a memorandum dated November 5, 2001,
attaching a copy of the Foreign Chambers Report dated October 17, 2001, which matter was placed in the agenda of the
Court and noted by it in a formal resolution dated November 28, 2001. 12
Opposing J.G. Summit's motion to elevate the case en banc,PHILYARDS points out the petitioner's inconsistency in
previously opposing PHILYARDS' Motion to Refer the Case to the Court En Banc.PHILYARDS contends that J.G. Summit
should now be estopped from asking that the case be referred to the Court en banc.PHILYARDS further contends that the
Supreme Court en banc is not an appellate court to which decisions or resolutions of its divisions may be appealed citing
Supreme Court Circular No. 2-89 dated February 7, 1989. 13 PHILYARDS also alleges that there is no novel question of
law involved in the present case as the assailed Resolution was based on well-settled jurisprudence. Likewise, PHILYARDS
stresses that the Resolution was merely an outcome of the motions for reconsideration filed by it and the COP and APT and
is "consistent with the inherent power of courts to 'amend and control its process and orders so as to make them
conformable to law and justice.' (Rule 135, sec. 5)" 14 Private respondent belittles the petitioner's allegations regarding the
change in ponente and the alleged executive interference as shown by former Secretary of Finance Jose Isidro Camacho's
memorandum dated November 5, 2001 arguing that these do not justify a referral of the present case to the Court en banc.
CDcaSA
In insisting that its Motion to Elevate This Case to the Court En Banc should be granted, J.G. Summit further argued
that: its Opposition to the Office of the Solicitor General's Motion to Refer is different from its own Motion to Elevate;
different grounds are invoked by the two motions; there was unwarranted "executive interference";and the change in
ponente is merely noted in asserting that this case should be decided by the Court en banc. 15
We find no merit in petitioner's contention that the propriety of the bidding process involved in the present case has
been confused with the policy issue of the fate of the shipping industry which, petitioner maintains, has never been an issue
that is determinative of this case. The Court's Resolution of September 24, 2003 reveals a clear and definitive ruling on the
propriety of the bidding process. In discussing whether the right to top granted to KAWASAKI in exchange for its right of first
refusal violates the principles of competitive bidding, we made an exhaustive discourse on the rules and principles of public
bidding and whether they were complied with in the case at bar. 16 This Court categorically ruled on the petitioner's
argument that PHILSECO, as a shipyard, is a public utility which should maintain a 60%-40% Filipino-foreign equity ratio, as
it was a pivotal issue. In doing so, we recognized the impact of our ruling on the shipbuilding industry which was beyond
avoidance. 17
We reject petitioner's argument that the present case may be considered under the Supreme Court Resolution
dated February 23, 1984 which included among en banc cases those involving a novel question of law and those where a
doctrine or principle laid down by the court en banc or in division may be modified or reversed. The case was resolved
based on basic principles of the right of first refusal in commercial law and estoppel in civil law. Contractual obligations
arising from rights of first refusal are not new in this jurisdiction and have been recognized in numerous cases. 18 Estoppel
is too known a civil law concept to require an elongated discussion. Fundamental principles on public bidding were likewise
used to resolve the issues raised by the petitioner. To be sure, petitioner leans on the right to top in a public bidding in
arguing that the case at bar involves a novel issue. We are not swayed. The right to top was merely a condition or a
reservation made in the bidding rules which was fully disclosed to all bidding parties. In Bureau Veritas, represented by
Theodor H. Hunermann v. Office of the President, et al., 19 we dealt with this conditionality, viz:
...It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et al.,(L-18751, 28
April 1962, 4 SCRA 1245),that in an "invitation to bid, there is a condition imposed upon the bidders to
the effect that the bidding shall be subject to the right of the government to reject any and all bids subject
to its discretion. In the case at bar, the government has made its choice and unless an unfairness or
injustice is shown, the losing bidders have no cause to complain nor right to dispute that choice. This is a
well-settled doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is vested in the Government
agencies entrusted with that function. The discretion given to the authorities on this matter is of such wide
latitude that the Courts will not interfere therewith, unless it is apparent that it is used as a shield to a
fraudulent award (Jalandoni v. NARRA,108 Phil. 486 [1960])....The exercise of this discretion is a policy
decision that necessitates prior inquiry, investigation, comparison, evaluation, and deliberation. This task
can best be discharged by the Government agencies concerned, not by the Courts. The role of the
Courts is to ascertain whether a branch or instrumentality of the Government has transgressed its
constitutional boundaries. But the Courts will not interfere with executive or legislative discretion
exercised within those boundaries. Otherwise, it strays into the realm of policy decision-making.

It is only upon a clear showing of grave abuse of discretion that the Courts will set aside the
award of a contract made by a government entity. Grave abuse of discretion implies a capricious,
arbitrary and whimsical exercise of power (Filinvest Credit Corp. v. Intermediate Appellate Court,No.
65935, 30 September 1988, 166 SCRA 155).The abuse of discretion must be so patent and gross as to
amount to an evasion of positive duty or to a virtual refusal to perform a duty enjoined by law, as to act at
all in contemplation of law, where the power is exercised in an arbitrary and despotic manner by reason
of passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc.,et al[.],L-40867, 26 July 1988, 163 SCRA
489).
The facts in this case do not indicate any such grave abuse of discretion on the part of public
respondents when they awarded the CISS contract to Respondent SGS. In the "Invitation to Prequalify
and Bid" (Annex "C," supra),the CISS Committee made an express reservation of the right of the
Government to "reject any or all bids or any part thereof or waive any defects contained thereon and
accept an offer most advantageous to the Government." It is a well-settled rule that where such
reservation is made in an Invitation to Bid, the highest or lowest bidder, as the case may be, is not
entitled to an award as a matter of right (C & C Commercial Corp. v. Menor,L-28360, 27 January 1983,
120 SCRA 112).Even the lowest Bid or any Bid may be rejected or, in the exercise of sound discretion,
the award may be made to another than the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra,citing
43 Am. Jur.,788).(emphases supplied) STaCIA
Like the condition in the Bureau Veritas case, the right to top was a condition imposed by the government in the bidding
rules which was made known to all parties. It was a condition imposed on all bidders equally, based on the APT's
exercise of its discretion in deciding on how best to privatize the government's shares in PHILSECO.It was not a
whimsical or arbitrary condition plucked from the ether and inserted in the bidding rules but a condition which the APT
approved as the best way the government could comply with its contractual obligations to KAWASAKI under the JVA
and its mandate of getting the most advantageous deal for the government. The right to top had its history in the mutual
right of first refusal in the JVA and was reached by agreement of the government and KAWASAKI.
Further, there is no "executive interference" in the functions of this Court by the mere filing of a memorandum by
Secretary of Finance Jose Isidro Camacho. The memorandum was merely "noted" to acknowledge its filing. It had no
further legal significance. Notably too, the assailed Resolution dated September 24, 2003 was decided unanimously by the
Special First Division in favor of the respondents.
Again, we emphasize that a decision or resolution of a Division is that of the Supreme Court 20 and the Court en
banc is not an appellate court to which decisions or resolutions of a Division may be appealed. 21
For all the foregoing reasons, we find no basis to elevate this case to the Court en banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioner's Motion for Reconsideration. First, that a fair resolution of
the case should be based on contract law, not on policy considerations; the contracts do not authorize the right to top to be
derived from the right of first refusal. 22 Second, that neither the right of first refusal nor the right to top can be legally
exercised by the consortium which is not the proper party granted such right under either the JVA or the Asset Specific
Bidding Rules (ASBR). 23 Third, that the maintenance of the 60%-40% relationship between the National Investment and
Development Corporation (NIDC) and KAWASAKI arises from contract and from the Constitution because PHILSECO is a
landholding corporation and need not be a public utility to be bound by the 60%-40% constitutional limitation. 24
On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not been able to show compelling
reasons to warrant a reconsideration of the Decision of the Court. 25 PHILYARDS denies that the Decision is based mainly
on policy considerations and points out that it is premised on principles governing obligations and contracts and corporate
law such as the rule requiring respect for contractual stipulations, upholding rights of first refusal, and recognizing the
assignable nature of contracts rights. 26 Also, the ruling that shipyards are not public utilities relies on established case law
and fundamental rules of statutory construction. PHILYARDS stresses that KAWASAKI's right of first refusal or even the
right to top is not limited to the 40% equity of the latter. 27 On the landholding issue raised by J.G. Summit, PHILYARDS
emphasizes that this is a non-issue and even involves a question of fact. Even assuming that this Court can take
cognizance of such question of fact even without the benefit of a trial, PHILYARDS opines that landholding by PHILSECO at
the time of the bidding is irrelevant because what is essential is that ultimately a qualified entity would eventually hold
PHILSECO's real estate properties. 28 Further, given the assignable nature of the right of first refusal, any applicable
nationality restrictions, including landholding limitations, would not affect the right of first refusal itself, but only the manner of
its exercise. 29 Also, PHILYARDS argues that if this Court takes cognizance of J.G. Summit's allegations of fact regarding
PHILSECO's landholding, it must also recognize PHILYARDS' assertions that PHILSECO's landholdings were sold to
another corporation. 30 As regards the right of first refusal, private respondent explains that KAWASAKI's reduced
shareholdings (from 40% to 2.59%) did not translate to a deprivation or loss of its contractually granted right of first refusal.
31 Also, the bidding was valid because PHILYARDS exercised the right to top and it was of no moment that losing bidders
later joined PHILYARDS in raising the purchase price. 32
In cadence with the private respondent PHILYARDS, public respondents COP and APT contend:
1. The conversion of the right of first refusal into a right to top by 5% does not violate any provision in the JVA
between NIDC and KAWASAKI. ADcHES
2. PHILSECO is not a public utility and therefore not governed by the constitutional restriction on foreign ownership.
3. The petitioner is legally estopped from assailing the validity of the proceedings of the public bidding as it
voluntarily submitted itself to the terms of the ASBR which included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and the fact that PHILYARDS
formed a consortium to raise the required amount to exercise the right to top the highest bid by 5% does not violate the JVA
or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of lands does not apply to PHILSECO
because as admitted by petitioner itself, PHILSECO no longer owns real property.
6. Petitioner's motion to elevate the case to the Court en banc is baseless and would only delay the termination of
this case. 33
In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the arguments of the public and private
respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing bidders
through the exercise of a right to top, which is contrary to law and the constitution is null
and void for being violative of substantive due process and the abuse of right provision in
the Civil Code.
a. The bidders['] right to top was actually exercised by losing bidders.
b. The right to top or the right of first refusal cannot co-exist with a genuine competitive
bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but is
shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed upon
and at the time of the bidding are most relevant.
d. Whether a shipyard is a public utility is not the core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an inexistent right of first refusal to the
right to top.
a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by law or
against public policy.
b. Deception was patent; the right to top was an attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summit's insistence that the right to top cannot be sourced from the right of first refusal is not new and we
have already ruled on the issue in our Resolution of September 24, 2003. We upheld the mutual right of first refusal in the
JVA. 34 We also ruled that nothing in the JVA prevents KAWASAKI from acquiring more than 40% of PHILSECO's total
capitalization. 35 Likewise, nothing in the JVA or ASBR bars the conversion of the right of first refusal to the right to top. In
sum, nothing new and of significance in the petitioner's pleading warrants a reconsideration of our ruling. DAEaTS
Likewise, we already disposed of the argument that neither the right of first refusal nor the right to top can legally be
exercised by the consortium which is not the proper party granted such right under either the JVA or the ASBR. Thus, we
held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life
Assurance, Mitsui and ICTSI),has joined PHILYARDS in the latter's effort to raise P2.131 billion
necessary in exercising the right to top is not contrary to law, public policy or public morals. There is
nothing in the ASBR that bars the losing bidders from joining either the winning bidder (should the right to
top is not exercised) or KAWASAKI/PHI (should it exercise its right to top as it did),to raise the purchase
price. The petitioner did not allege, nor was it shown by competent evidence, that the participation of the
losing bidders in the public bidding was done with fraudulent intent. Absent any proof of fraud, the
formation by [PHILYARDS] of a consortium is legitimate in a free enterprise system. The appellate court
is thus correct in holding the petitioner estopped from questioning the validity of the transfer of the
National Government's shares in PHILSECO to respondent. 36

Further, we see no inherent illegality on PHILYARDS' act in seeking funding from parties who were losing bidders.
This is a purely commercial decision over which the State should not interfere absent any legal infirmity. It is emphasized
that the case at bar involves the disposition of shares in a corporation which the government sought to privatize. As such,
the persons with whom PHILYARDS desired to enter into business with in order to raise funds to purchase the shares are
basically its business. This is in contrast to a case involving a contract for the operation of or construction of a government
infrastructure where the identity of the buyer/bidder or financier constitutes an important consideration. In such cases, the
government would have to take utmost precaution to protect public interest by ensuring that the parties with which it is
contracting have the ability to satisfactorily construct or operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company, KAWASAKI could
exercise its right of first refusal only up to 40% of the shares of PHILSECO due to the constitutional prohibition on
landholding by corporations with more than 40% foreign-owned equity. It further argues that since KAWASAKI already held
at least 40% equity in PHILSECO, the right of first refusal was inutile and as such, could not subsequently be converted into
the right to top. 37 Petitioner also asserts that, at present, PHILSECO continues to violate the constitutional provision on
landholdings as its shares are more than 40% foreign-owned. 38 PHILYARDS admits that it may have previously held land
but had already divested such landholdings. 39 It contends, however, that even if PHILSECO owned land, this would not
affect the right of first refusal but only the exercise thereof. If the land is retained, the right of first refusal, being a property
right, could be assigned to a qualified party. In the alternative, the land could be divested before the exercise of the right of
first refusal. In the case at bar, respondents assert that since the right of first refusal was validly converted into a right to top,
which was exercised not by KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e., 60% of its shares are
owned by Filipinos), then there is no violation of the Constitution. 40 At first, it would seem that questions of fact beyond
cognizance by this Court were involved in the issue. However, the records show that PHILYARDS admits it had owned land
up until the time of the bidding. 41 Hence, the only issue is whether KAWASAKI had a valid right of first refusal over
PHILSECO shares under the JVA considering that PHILSECO owned land until the time of the bidding and KAWASAKI
already held 40% of PHILSECO's equity.
We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all,
the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA.
This right allows them to purchase the shares of their co-shareholder before they are offered to a third party. The agreement
of co-shareholders to mutually grant this right to each other, by itself, does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino corporations.As PHILYARDS correctly puts it, if PHILSECO still
owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40%
ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent.
The transfer could be made either to a nominee or such other party which the holder of the right of first refusal feels it can
comfortably do business with. Alternatively, PHILSECO may divest of its landholdings, in which case KAWASAKI, in
exercising its right of first refusal, can exceed 40% of PHILSECO's equity. In fact, it can even be said that if the foreign
shareholdings of a landholding corporation exceeds 40%,it is not the foreign stockholders' ownership of the shares which is
adversely affected but the capacity of the corporation to own land — that is, the corporation becomes disqualified to own
land.This finds support under the basic corporate law principle that the corporation and its stockholders are separate
juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own
land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first
refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the
allowed foreign equity, what the law disqualifies is the corporation from owning land. This is the clear import of the following
provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural resources
shall not be alienated. The exploration, development, and utilization of natural resources shall be under
the full control and supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned by such citizens.Such
agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five
years, and under such terms and conditions as may be provided by law. In cases of water rights for
irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial
use may be the measure and limit of the grant. IcAaEH
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the
public domain. 42 (emphases supplied)
The petitioner further argues that "an option to buy land is void in itself (Philippine Banking Corporation v. Lui She,
21 SCRA 52 [1967]). The right of first refusal granted to KAWASAKI, a Japanese corporation, is similarly void. Hence, the
right to top, sourced from the right of first refusal, is also void." 43 Contrary to the contention of petitioner, the case of Lui
She did not that say "an option to buy land is void in itself ," for we ruled as follows:
...To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien
the right to buy real property on condition that he is granted Philippine citizenship.As this Court said in
Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the use of lands for
residential purposes. Since their residence in the Philippines is temporary, they may be
granted temporary rights such as a lease contract which is not forbidden by the
Constitution. Should they desire to remain here forever and share our fortunes and
misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of
which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it
becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself
in stages not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus abutendi)
but also of the right to dispose of it (jus disponendi) — rights the sum total of which make up ownership.It
is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so
on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this
is just exactly what the parties in this case did within this pace of one year, with the result that Justina
Santos'[s] ownership of her property was reduced to a hollow concept. If this can be done, then the
Constitutional ban against alien landholding in the Philippines, as announced in Krivenko vs. Register of
Deeds,is indeed in grave peril. 44 (emphases supplied; Citations omitted)
In Lui She,the option to buy was invalidated because it amounted to a virtual transfer of ownership as the owner could not
sell or dispose of his properties. The contract in Lui She prohibited the owner of the land from selling, donating, mortgaging,
or encumbering the property during the 50-year period of the option to buy. This is not so in the case at bar where the
mutual right of first refusal in favor of NIDC and KAWASAKI does not amount to a virtual transfer of land to a non-Filipino. In
fact, the case at bar involves a right of first refusal over shares of stock while the Lui She case involves an option to buy the
land itself. As discussed earlier, there is a distinction between the shareholder's ownership of shares and the corporation's
ownership of land arising from the separate juridical personalities of the corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO continues to violate the
Constitution as its foreign equity is above 40% and yet owns long-term leasehold rights which are real rights. 45 It cites
Article 415 of the Civil Code which includes in the definition of immovable property, "contracts for public works, and
servitudes and other real rights over immovable property." 46 Any existing landholding, however, is denied by PHILYARDS
citing its recent financial statements. 47 First, these are questions of fact, the veracity of which would require introduction of
evidence. The Court needs to validate these factual allegations based on competent and reliable evidence. As such, the
Court cannot resolve the questions they pose. Second, J.G. Summit misreads the provisions of the Constitution cited in its
own pleadings, to wit:

29.2 Petitioner has consistently pointed out in the past that private respondent is not a 60%-40%
corporation, and this violates the Constitution . . . The violation continues to this day because under the
law, it continues to own real property...
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article XIV of the 1973
Constitution (the JVA was signed in 1977), provided:
"Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold
lands of the public domain."
32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the
public domain are corporations at least 60% of which is owned by Filipino citizens (Sec.
22, Commonwealth Act 141, as amended). (emphases supplied) HSCAIT
As correctly observed by the public respondents, the prohibition in the Constitution applies only to ownership of land. 48
It does not extend to immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would
have a strange situation where the ownership of immovable property such as trees, plants and growing fruit attached to
the land 49 would be limited to Filipinos and Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioner's Motion for Reconsideration is DENIED WITH FINALITY and
the decision appealed from is AFFIRMED. The Motion to Elevate This Case to the Court En Banc is likewise DENIED for
lack of merit. SO ORDERED.
||| (J.G. Summit Holdings Inc. v. Court of Appeals, G.R. No. 124293 (Resolution), [January 31, 2005], 490 PHIL 579-606)

[G.R. No. 111008. November 7, 1994.]

TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners, vs. HON. COURT OF APPEALS AND
MELCHOR DE LA CUESTA, respondents.

DECISION

VITUG, J p:

This petition for review on certiorari challenges the 04th March 1993 of the Court of Appeals and its resolution
of 01 July 1993 denying the motion for reconsideration. prcd
On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries,"
sold to Tramat Mercantile, Inc. (Tramat), one (1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P.
diesel engine. In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00 (apparently
replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn
mower fabricated by it, to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67,000.00. David Ong
caused a stop payment of the check when NAWASA refused to pay the tractor and lawn mower after discovering that,
aside from some stated defects of the attached lawn mower, the engine (sold by de la Cuesta) was a reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of
P10,000.00, and the costs of suit. Ong, in his answer, averred, among other things, that de la Cuesta had no cause of
action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his
personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a
brand new, not as a reconditioned unit.
On 02 November 1989, after the reception of evidence, the trial court rendered a decision, the dispositive
portions of which read:
"WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered:
"1. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of P33,500.00 with
legal interest thereon at the rate of 12% per annum from July 7, 1984 until fully paid; and
"2. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of P10,000.00 as
attorney's fees, and the costs of this suit.
SO ORDERED. 1
An appeal was timely interposed by the defendants. On 04 March 1993, the Court of Appeals affirmed in toto
the decision of the trial court. Defendant-appellants' motion for reconsideration was denied.
Hence, the instant petition.
We could find no reason to reverse the factual findings of both the trial court and the appellate court, particularly
in holding that the contract between de la Cuesta and TRAMAT was one of absolute, not conditional, sale of the tractor
and that de la Cuesta did not violate any warranty on the sale of the tractor to TRAMAT. The appellate court, in its
decision, adequately explained:
"If the perfection of the sale was dependent upon acceptance by the MWSS of the subject tractor
why did the appellants issue a check in payment of the item to the appellee? And long after MWSS had
complained about the defective tractor engine, and after the appellee had failed to remedy the defect,
why did the appellants still draw and deliver a replacement check to the appeal for the increased amount
of P33,500.00?
"These payments argue against the claim now made by the defendants that the sale was
conditional.
"According to the appellee, the additional amount covered the cost of replacing the oil gasket of
the tractor engine when it was repaired in Soledad Cac's gasoline station in Quezon City. The appellants,
on the other hand, claims the amount represented the freight charges for transporting the tractor from
Cauayan, Isabela to Metro Manila. cdrep
"The appellants should have explained why they failed to include the freight charges in the first
check. The tractor was transported from Isabela to Metro Manila as early as April 1984, and the first
check was drawn at about the same time. The freight charges cannot be said to have been incurred
when the tractor engine was delivered back to the supplier for repairs. The appellants admitted that the
engine was not brought back to Isabela. The repairs were done at Soledad Cac's gasoline station in
Quezon City.
"Anent the first assigned error, We sustain the trial court's finding that at the time of the
purchase, the appellants did not reveal to the appellee the true purpose for which the tractor would be
used. Granting that the appellants informed the appellee that they would be reselling the unit to the
MWSS, an entity admittedly not engaged in farming, and that they ordered the tractor without the power
tiller, an indispensable accessory if the tractor would be used in farming, these in themselves would not
constitute the required implied notice to the appellee as seller.
"xxx xxx xxx
"In regard to the second assigned error, We do not agree that the appellee should have been
held liable for the tractor's alleged hidden defects. . . .
"It has to be noted in this regard that, to satisfy the requirements of the MWSS, the appellants
borrowed a lawn mower from the MWSS so they could fabricate one such mower. The appellants'
witness stated that the kind of mid-mounted lawn mower was being manufactured by their competitor,
Alpha Machinery, which had by then stopped supplying the same (tsn, Nov. 29, 1988, pp. 73-74). There
is no showing that the appellants had had any previous experience in the fabrication of this lawn mower.
In fact, as aforesaid, they had to borrow one from the MWSS which they could copy. But although they
made a copy with the same specifications and design, there was no assurance that the copy would
function as well as with the model.
"xxx xxx xxx
"Although the trial court discussed it in a different light, We view the matter in the same way the
trial court did — that the lawn mower as fabricated by the appellants was the root of the parties'
problems.
"Having had no previous experience in the manufacture of lawn mowers of the same type as that
in litigation, and in a possibly patent-infringing effort to undercut their competition, the appellants
gathered enough daring to do the fabrication themselves. But the product might have proved too much
for the subject tractor to power, and the tractor's engine was strained beyond its limits, causing it to
overheat and damage its gaskets.
"No wonder, then, it was a gasket Soledad Cac had to replace, at a cost chargeable to the
appellants. No wonder, furthermore, the appellants' witness declared that even after the replacement of
that one gasket, the engine still leaked oil after being torture-tested. The integrity of the other engine
gaskets might have been impaired, too. Such was the burden placed on the engine. The engine
malfunctioned not necessarily because the engine, as alleged by the appellants, had been a
reconditioned, and not a brand new, one. It malfunctioned because it was made to do what it simply
could not. 2
It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under
the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation,
TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for
and on its behalf, that properly could be made liable thereon. 3
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation
may so validly attach, as a rule, only when —
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or other persons; 4
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto; 5
3. He agrees to hold himself personally and solidarily liable with the corporation; 6 or
4. He is made, by a specific provision of law, to personally answer for his corporate action. 7
In the case at bench, there is no indication that petitioner David Ong could be held personally accountable
under any of the abovementioned cases.
WHEREFORE, the petition is given DUE COURSE and the decision of the trial court, affirmed by the appellate
court, is MODIFIED insofar as it holds petitioner David Ong jointly and severally liable with Tramat Mercantile, Inc.,
which portion of the questioned judgment is SET ASIDE. In all other respects, the decision appealed from is
AFFIRMED. No costs. SO ORDERED.
||| (Tramat Mercantile, Inc. v. Court of Appeals, G.R. No. 111008, [November 7, 1994], 308 PHIL 13-18)

[G.R. No. L-5081. February 24, 1954.]

MARVEL BUILDING CORPORATION, ET AL., plaintiffs-appellees, vs. SATURNINO DAVID, in his


capacity as Collector, Bureau of Internal Revenue, defendant-appellant.

SYLLABUS

CORPORATIONS; CIRCUMSTANTIAL EVIDENCE SHOWING ONE-MAN CORPORATION. — the existence


of endorsed certificates discovered by internal revenue agents between 1948 and 1949 in the possession of the
Secretary-Treasurer of a supposed corporation; the fact that twenty-five certificates were signed by its president for no
justifiable reason; the fact that its principal stockholder had made enormous profits and, therefore, had a motive to hide
them to evade the payment of taxes; the fact that the other subscribers had no incomes of sufficient magnitude to justify
their big subscriptions; the fact that the treasurer in the name of the alleged corporation but were kept by the principal
stockholder herself; the fact that the stockholders or the directors never appeared to have ever met to discuss the
business of the corporation; the fact that she advanced big sums of money to the corporation without any previous
arrangement or accounting; and the fact that the books of accounts were kept as if they belonged to her alone — are
circumstantial evidence which are not only convincing but conclusive that she is the sole and exclusive owner of all the
shares of stock of the corporation and that the other partners are her dummies.

DECISION

LABRADOR, J p:

This action was brought by plaintiffs as stockholders of the Marvel Building Corporation to enjoin the defendant
Collector of Internal Revenue from selling at public auction various properties described in the complaint, including three
parcels of land, with the buildings situated thereon, known as the Aguinaldo Building, the Wise Building, and the Dewey
Boulevard-Padre Faura Mansion, all registered in the name of said corporation. Said properties were seized and
distrained by defendant to collect war profits taxes assessed against plaintiff Maria B. Castro (Exhibit B). Plaintiffs allege
that the said three properties (lands and buildings) belong to the Marvel Building corporation and not to Maria B. Castro,
while the defendant claims that Maria B. Castro is the true and sole owner of all the subscribed stock of the Marvel
Building Corporation, including those appearing to have been subscribed and paid for by the other members, and
consequently said Maria B. Castro is also the true and exclusive owner of the properties seized. The trial court held that
the evidence, which is mostly circumstantial, fails to show to its satisfaction that Maria B. Castro is the true owner of all
the stock certificates of the corporation, because the evidence is susceptible of two interpretations and an interpretation
may not be made which would deprive one of property without due process of law.
It appears that on September 15, 1950, the Secretary of Finance, upon consideration of the report of a special
committee assigned to study the war profits tax case of Mrs. Maria B. Castro, recommended the collection of
P3,593,950.78 as war profits taxes for the latter, and on September 22, 1953 the President instructed the Collector that
steps be taken to collect the same (Exhibits 114, 114-A to 114-D). Pursuant thereto various properties, including the
three above mentioned, were seized by the Collector of Internal Revenue on October 31, 1950. On November 13, 1950,
the original complaint in this case was filed. After trial, the Court of First Instance of Manila rendered judgment ordering
the release of the properties mentioned, and enjoined the Collector of Internal Revenue from selling the same. The
Collector of Internal Revenue has appealed to this Court against the judgment.
The following facts are not disputed, or are satisfactorily proved by the evidence:
The Articles of Incorporation of the Marvel Building Corporation is dated February 12, 1947 and according to it
the capital stock is P2,000,000, of which P1,025,000 was (at the time of incorporation) subscribed and paid by the
following incorporators:
Maria B. Castro -------- 250shares ------P250,000.00
Amado A. Yatco ------- 100" ------ 100,000.00
Santiago Tan ----------- 100" ------ 100,000.00
Jose T. Lopez ---------- 90" ------ 90,000.00
Benita Lamagna --------- 90" ------ 90,000.00
C.S. Gonzales ----------- 80" ------ 80,000.00
Maria Cristobal --------- 70" ------ 70,000.00
Segundo Esguerra, Sr. -- 75" ------ 75,000.00
Ramon Sangalang -------- 70" ------ 70,000.00
Maximo Cristobal ------- 55" ------ 55,000.00
Antonio Cristobal ------ 45" ------ 45,000.00
____________
P1,025,000.00.
Maria B. Castro was elected President and Maximo Cristobal, Secretary-Treasurer (Exhibit A).
The Wise Building was purchased on September 4, 1946, the purchase being made in the name of Dolores
Trinidad, wife of Amado A. Yatco (Exhibit V), and the Aguinaldo Building, on January 17, 1947, in the name of Segundo
Esguerra, Sr. (Exhibit M). Both building were purchased for P1,800,00, but as the corporation had only P1,025,000, the
balance of the purchase price was obtained as loans from the Insular Life Assurance Co., Ltd. and the Philippine
Guaranty Co., Inc. (Exhibit C).
Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and Antonio Cristobal are half-
brothers of Maria B. Castro, Manila Cristobal is a half-sister, and Segundo Esguerra, Sr. a brother-in-law, husband of
Maria Cristobal, Maria B. Castro's half-sister. Maximo B. Cristobal did not file any income tax returns before the year
1946, except for the years 1939 and 1940, but in these years he was exempted from the tax. He has not filed any war
profits tax return (Exhibit 54). Antonio Cristobal, Segundo Esguerra, Sr. and Jose T. Lopez did not file any income tax
returns for the years prior to 1946, and neither did they file any war profits tax returns (Exhibit 52). Maria Cristobal filed
income tax returns for the years 1929 to 1942, but they were exempt from the tax (Exhibit 53). Benita A. Lamagna did
not file any income tax returns prior to 1945, except for 1942 which was exempt. Since did not file any war profits tax
(Exhibit 55). Ramon M. Sangalang did not file income tax returns up to 1945 except for the years 1936, 1937, 1938,
1939 and 1940. He has not filed any war profits tax return (Exhibit 56). Santiago Tan did not file any income tax returns
prior to 1945, except for the years 1938, 1939, 1940 and 1942, but all of these were exempt. He did not file any war
profits tax return (Exhibit 57). Amado A. Yatco did not file income tax returns prior to 1945, except for the years 1937,
1938, 1939, 1941 and 1942, but these were exempt. He did not file any war profits tax return (Exhibit 58).
Antonio Cristobal's income in 1946 is P15,630, and in 1947, P4,550 (Exhibits 59-60); Maximo B. Cristobal's
income in 1946 is P19,759.10, in 1947, P9,773.47 (Exhibits 61-62); Segundo Esguerra's income in 1946 is P5,500, in
1947, P7,754.32 (Exhibits 63-64); Jose T. Lopez's income in 1946 is P20,785, in 1947, P14,302.77 (Exhibits 69- 70);
Benita A. Lamagnas income in 1945 is P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her husband's income in
1947 is P10,825.53 (Exhibits 65-68); Ramon M. Sangalang's income in 1945 is P5,500, in 1946, P18,300.00 (Exhibits
71-72); Santiago Tan's income in 1945 is P456, in 1947 is P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); and
Amado Yatco's income in 1945 is P12,600 in 1946, P23,960, and in 1947, P11,160 (Exhibits 76-78).
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal de Esguerra, Maria Cristobal Lopez and
Maximo Cristobal organized the Maria B. Castro, Inc. with a capital stock of P100,00, of which Maria B. Castro
subscribed for P99,600 and all the others for P100 each. This was increased in 1950 to P500,000 and Maria B. Castro
subscribed P76,000 and the others P1,000 each (Exhibit 126).
It does not appear that the stockholders or the board of directors of the Marvel Building Corporation have ever
held a business meeting, for no books thereof or minutes of meeting were ever mentioned by the officers thereof or
presented by them at the trial. The by-laws of the corporation, if any had ever been approved, has not been presented.
Neither does it appear that any report of the affairs of the corporation has been made, either of its transactions or
accounts.
From the book of accounts of the corporation, advances to the Marvel Building Corporation of P125,000 were
made by Maria B. Castro in 1947, P102,916.05 in 1948, and P160,910.96 in 1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B. Castro the owner of all the shares of stock of the
Marvel Building Corporation and the other stockholders mere dummies of hers?
The most important evidence presented by the Collector of Internal Revenue to prove his claim that Maria B.
Castro is the sole and exclusive owner of the shares of stock of the Marvel Building Corporation is the supposed
endorsement in blank of the shares of stock issued in the name of the other incorporators, and the possession thereof
by Maria B. Castro. The existence of said endorsed certificates was testified to by witnesses Felipe Aquino, internal
revenue examiner, Antonio Mariano, examiner, and Crispin Llamado, Under-Secretary of Finance, who declared as
follows: Towards the end of the year of 1948 and about the beginning of the year 1949, while Aquino and Mariano were
examining the books and papers of the Marvel Building Corporation at its place of business, which books and papers
were furnished by its Secretary, Maximo Cristobal, they came across an envelope containing eleven stock certificates,
bound together by an Acco fastener, which (certificates) corresponded in number and in amount on their face to the
subscriptions of the stockholders that all the certificates, except that in the name of Maria B. Castro, were endorsed in
blank by the subscribers; that as two revenue agents could not agree what to do with the certificates, Aquino brought
them to Under-Secretary of Finance Llamado, who thereupon suggested that photostatic copies thereof be taken; that
this was done, and the photostatic copies placed by him in his office safe; that Aquino returned the certificates that
same day after the photostatic copies had been taken; that the photostatic copies taken are Exhibits 4, 5, 6, 7, 8, 9, 10,
11, 12, and 13; and in that July, 1950, copy-cat copies of the above photostats were taken, and said copy-cat copies
are Exhibits 40-49.
Julio Llamado, bookkeeper of the Marvel Building Corporation from 1947 to May, 1948, also testified that he
was the one who had prepared the original certificates, putting therein the number of shares in words in handprint; that
the originals were given to him by Maria B. Castro for comparison with the articles of incorporation; that they were not
yet signed by the President and by the Secretary-Treasurer when he had the certificates; and that after the checking he
returned all of them to Mrs. Castro. He recognized the photostats, Exhibits 4 to 13 as photostats of the said originals.
He also declared that he also prepared a set of stock certificates, similar to the certificates which were copied in the
photostats, filling the blanks for the name of the stockholder, the number of shares, and the date of issue, and that the
certificates he had prepared are Exhibits H, H-1 to H-7 and J (Exhibits 30-38). This set of certificates was made him first
and the set of which photostats were taken, a few days later.
The plaintiffs offered a half-hearted denial of the existence of the endorsed blank certificates, Maximo Cristobal,
secretary of the corporation, saying that no investigation was ever made by Aquino and Mariano in which said
certificates were discovered by the latter. The, however, vigorously attack the credibility of the witnesses for the
defendant, imputing to the Llamados, enmity against Maria B. Castro, and to Aquino and Mariano, a very doubtful
conduct in not divulging the existence of the certificates either to Lobrin, Chief Income Tax Examiner, or to the Collector
of Internal Revenue, both their immediate chiefs. Reliance is also placed on a certificate, Exhibit W, wherein Aquino and
others, declare that the certificates (Exhibits not endorsed when the same were examined. In connection with this
certificate, Exhibit W, we note that it states that the certificates examined were Exhibits 30 to 38, the existence or
character of which are not disputed. But the statement contains nothing to the effect that the above certificates were the
only ones in existence, according to their knowledge. Again the certificate was issued for an examination on September
1949, not by Aquino and Mariano at the end of 1948 or the beginning of 1949. The certificate, therefore, neither denies
the existence of the endorsed certificates, nor that Aquino and Mariano had made an examination of the papers of the
corporation at the end of the year 1948. It can not, therefore, discredit the testimonies of the defendant's witnesses.
As to the supposed enmity of the Llamados towards the plaintiff Maria B. Castro, we note that, supposing that
there really was such enmity, it does not appear that it was of such magnitude or force as could have induced the
Llamados to lie or fabricate evidence against her. It seems that the Llamados and Maria B. Castro were close friends
way back in 1947 and up to 1949; but that at the time of the trial the friendship had been marred by misunderstandings.
We believe that in 1948 and 1949 the Llamados were trusted friends of Maria B. Castro, and this explains why they had
knowledge of her secret transactions. The younger Llamado even made advances for the hand of Maria B. Castro's
daughter, and this at the time when as a bookkeeper he was entrusted with checking up the certificates of stock. When
the older Llamado kept secret the existence of the endorsed certificates, the friendship between the two families was
yet intact; hence, the existence of the endorsed certificates must have been kept to himself by the older Llamado. All
the above circumstances reinforce our belief that the Llamados had personal knowledge of the facts they testified to,
and the existence of this knowledge in turn renders improbable plaintiffs' claim that their testimonies were biased.
Attempt was also made by the plaintiffs to show by expert evidence that the endorsement could have been
super-imposed, i.e., that the signatures made on other papers and these were pasted and thereafter the documents
photographed. Judicial experience is to the effect that expert witnesses can always be obtained for both sides of an
issue, most likely because expert witnesses are no longer impermeable to the influence of fees (II Wigmore, Sec. 563
(2), p. 646). and if parties are capable of paying fees, expert opinion should be received with caution. In the case at bar,
the opinion on the supposed superimposition was merely a possibility, and we note various circumstances which prove
that the signatures were not superimposed and corroborate defendant's claim that they were genuine. In the first place,
the printed endorsement contains a very heavy line at the bottom for the signature of the endorsee. This line in almost
all of the endorsements is as clear as the printed letters above it, and at the points where the letters of the signature
extend down and traverse it (the line), there is no indication that the line is covered by a superimposed paper. Again in
these places both the signatures and the lines are clear and distinct where the cross one another. Had there been
superimpositions the above features could not have been possible. In the second place, Maria B. Castro admitted
having singed 25 stock certificates, but only eleven were issued (t.s.n., p. 662). No explanation is given by her why she
had to sign as many as 25 forms when there were only eleven subscribers and eleven forms to be filled. This
circumstances corroborate the young Llamado's declaration that two sets of certificates had been prepared. The
nineteen issued must be Exhibits H, H-1 to H-7 and J, or Nos. 30 to 38, and the stock certificates endorsed whose
photostatic copies are Exhibits 4 to 13. It is to be remembered also, that it is a common practice among unscrupulous
merchants to carry two sets of books, one set for themselves and another to be shown to tax collectors. This practice
could not have been unknown to Maria B. Castro, who apparently had been able to evade the payment of her war
profits taxes. These circumstances, coupled with the testimony of Julio Llamado that two sets of certificates were given
to him for checking, show to an impartial mind the existence of the set of certificates endorsed in blank, thus confirming
the testimonies of the defendant's witnesses, Aquino, Mariano and Crispin Llamado, and thus discrediting the obviously
partial testimony of the expert presented by plaintiffs. The genuineness of the signatures on the endorsement is not
disputed. How could the defendant had secured these genuine signatures? Plaintiffs offer no explanation for this,
although they do not question them. It follows that the genuine signatures must have been made on the stock
certificates themselves.
Next in importance among the evidence submitted by the defendant collector to prove his contention that Maria
B. Castro is the sole owner of the shares of stock of the Marvel Building Corporation, is the fact that the other
stockholders did not have incomes in such amounts, during the time of the organization of the corporation in 1947, or
immediately thereto, as to enable them to pay in full for their supposed subscriptions. This fact is proved by their income
tax returns, or the absence thereof. Let us take Amado A. Yatco as an example. Before 1945 his returns were exempt
from the tax, in 1945 he had P12,600 and in 1946, P23,000. He has four children. How could he have paid P100,000 in
1945 and 1946? Santiago Tan who also contributed P100,000 had no appreciable income before 1946, and in this year
an income of only P9,167.95. Jose T. Lopez also did not file any income tax returns before 1940 and in 1946 he had an
income of only P20,785, whereas he is supposed to have subscribed P90,000 worth of stock early in 1947. Benita
Lamagna had no returns either up to 1945, except in 1942, which was exempt, and in 1945 she had an income of
P1,550 and in 1946, P6,463.36. In the same situation are all the others, and besides, brothers and sisters and brother-
in- law of Maria B. Castro. On the other hand, Maria B. Castro had been found to have made enormous gains or profits
in her business such that the taxes thereon were assessed at around P3,000,000. There was, therefore, a prima facie
case made out by the defendant collector that Maria B. Castro had furnished all the money that the Marvel Building
Corporation had.
In order to meet the above evidence only three of the plaintiffs testified, namely, Maximo Cristobal, the
corporation's secretary, who made the general assertion on the witness stand that the other stockholders paid for their
shares in full, Maria B. Castro, who stated that payments of the subscriptions were made to her, and C. S. Gonzales,
who admitted that Maria B. Castro paid for his subscription. After a careful study of the above testimonies, however, we
find them subject to various objections. Maximo Cristobal declared that he issued provincial receipts for the
subscriptions supposedly paid to him in 1946; but none of the supposed receipts was presented. If the subscriptions
were really received by him, big as the amounts were, he would have been able to tell specifically, by dates and in fixed
amounts, when and how the payments were made. The general assertion of alleged payments, without the concrete
days and amounts of payments, are, according to our experience, positive indications of untruthfulness, for when a
witness testified to a fact that actually occurs, the act is concretely stated and no generalization is made.
With respect to Maria B. Castro's testimony, we find it to be as untruthful as that of Cristobal. She declared that
payments of the subscriptions took place between July and December, 1946, and that said payments were first
deposited by her in the National City Bank of New York. A study of her account in said bank (Exhibit 82), however, fails
to show the alleged deposit of the subscriptions during the year 1946 (See Exhibits 83-112). This fact completely belies
her assertion. As to the testimony of C. S. Gonzales that Maria B. Castro advanced his subscription, there is nothing in
the evidence to corroborate it, and the circumstances show otherwise. If he had really been a stockholder and Maria B.
Castro advanced his subscription, the agreement between him and Castro should have been put in writing, the amount
advanced being quite considerable (P80,000), and it appearing further that Gonzales is no close relative or confidant of
Castro.

Lastly, it is significant that the plaintiffs, the supposed subscribers, who should have come to court to assert that
they actually paid for their subscriptions, and are not mere dummies, did not do so. They could not have afforded such a
costly indifference, valued at from P70,000 to P100,000 each, if they were not actual dummies. This failure on their part
to take the witness stand to deny or refute the charge that they were mere dummies is to us of utmost significance.
What could have been easier to disprove the charge that they were dummies, than for them to come to court and show
their receipts and testify on the payments they have made on their subscriptions? This they, however, refused to do.
They had it in their power to rebut the charges, but they chose to keep silent. The non-production of evidence that
would naturally have been produced by an honest and therefore fearless claimant permits the inference that its tenor is
unfavorable to the party's cause (II Wigmore, Sec. 285, p. 162). A party's silence to adverse testimony is equivalent to
an admission of its truth (Ibid, Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides, leads us to a conclusion exactly opposite that
arrived at by the trial court. In general the evidence offered by the plaintiffs is testimonial and direct evidence, easy of
fabrication; that offered by defendant, documentary and circumstantial, not only difficult of fabrication but in most cases
found in the possession of plaintiffs. There is very little room for choice as between the two. The circumstantial evidence
is not only convincing; it is conclusive. The existence of endorsed certificates, discovered by the internal revenue agents
between 1943 and 1949 in the possession of the Secretary-Treasurer, the fact that twenty-five certificates were signed
by the president of the corporation, for no justifiable reason, the fact that two sets of certificates were issued, the
undisputed fact that Maria B. Castro had made enormous profits and, therefore, had a motive to hide them to evade the
payment of taxes, the fact that the other subscribers had no incomes of sufficient magnitude to justify their big
subscriptions, the fact that the subscriptions were not receipted for and deposited by the treasurer in the name of the
corporation but were kept by Maria B. Castro herself, the fact that the stockholders or the directors never appeared to
have ever met to discuss the business of the corporation, the fact that Maria B. Castro advanced big sums of money to
the corporation without any previous arrangement or accounting, and the fact that the books of accounts were kept as if
they belonged to Maria B. Castro alone — these facts are of patent and potent significance. What are their necessary
implications? Maria B. Castro would not have asked them to endorse their stock certificates, or be keeping these in her
possession, if they were really the owners. They never would have consented that Maria B. Castro keep the funds
without receipts or accounting, nor that she manages the business without their knowledge or concurrence, were they
owners of the stocks in their own rights. Each and every one of the facts all set forth above, in the same manner, is
inconsistent with the claim that the stockholders, other than Maria B. Castro, owned their shares in their own right. On
the other hand, each and every one of them, and all of them, can point to no other conclusion than that Maria B. Castro
was the sole and exclusive owner of the shares and that they were only her dummies.
In our opinion, the facts and circumstances duly set forth above, all of which have been proved to our
satisfaction, prove conclusively and beyond reasonable doubt (section 89, Rule 123 of the Rules of Court and section
42 of the Provisional law for the application of the Penal Code) that Maria B. Castro is the sole and exclusive owner of
all the shares of stock of the Marvel Building Corporation and that the other partners are her dummies.
Wherefore, the judgment appealed from should be, as it hereby is, reversed and the action filed by plaintiffs-
appellees, dismissed, with costs against plaintiffs-appellees. So ordered.
||| (Marvel Building Corp. v. David, G.R. No. L-5081, [February 24, 1954], 94 PHIL 376-389)

[G.R. No. L-15121. August 31, 1962.]

GREGORIO PALACIO, in his own behalf and in behalf of his minor child MARIO PALACIO,
plaintiffs-appellants, vs. FELY TRANSPORTATION COMPANY, defendant-appellee.

Antonio A. Saba for plaintiff-appellants.


Mercado, Ver & Reyes for defendant-appellee.

SYLLABUS

1. CORPORATIONS; SUBSIDIARY CIVIL LIABILITY FOR DAMAGES; FICTION OF CORPORATE ENTITY


NOT TO USED TO EVADE LIABILITY. — Where the main purpose in forming the corporation was to evade one's
subsidiary civil liability for damages in a criminal case, the corporation may not be heard to say that it has a personality
separate and distinct from its members, because to allow it to do so would be a shield to further an end subversive of
justice. (La Campana Coffee Factory, et al., vs. Kaisahan ng mga Manggagawa, etc., et al., 93 Phil., 160) The Supreme
Court can even substitute the real party in interest in place of the defendant corporation in order to avoid multiplicity of
suits and thereby save the parties unnecessary expenses and delay. (Alonzo vs. Villamor, 16 Phil., 315)

DECISION

REGALA, J p:
This is an appeal by the plaintiffs from the decision of the Court of First Instance of Manila which dismissed
their complaint.
Originally taken to the Court of Appeals, this appeal was certified to this Court on the ground that it raises
purely questions of law.
The parties in this case adopt the following findings of fact of the lower court:
"In their complaint filed with this Court on May 15, 1954, plaintiffs allege, among other things,
'that about December, 1952, the defendant company hired Alfredo Carillo as driver of AC-787 (687) (a
registration for 1952) owned and operated by the said defendant company; that on December 24, 1952,
at about 11:30 a.m., while the driver Alfonso (Alfredo) Carillo was driving AC-687 at Halcon Street,
Quezon City, wilfully, unlawfully and feloniously and in a negligent, reckless and imprudent manner, run
over a child Mario Palacio of the herein plaintiff Gregorio Palacio; that on account of the aforesaid injuries
Mario Palacio suffered a simple fracture of the right temor (sic), complete third, thereby hospitalizing him
at the Philippine Orthopedic Hospital from December 24, 1952, up to January 8, 1953, and continued to
be treated for a period of five months thereafter; that the plaintiff Gregorio Palacio herein is a welder by
occupation and owner of a small welding shop and because of the injuries of his child he has abandoned
his shop where he derives income of P10.00 a day for the support of his big family; that during the period
that the plaintiff's (Gregorio Palacio's) child was in the hospital and when said child was under treatment
for five months in order to meet the needs of his big family, he was forced to sell one air compressor
(heavy duty) and one heavy duty electric drill, for a sacrifice sale of P150.00 which could easily sell at
P350.00; that as a consequence of the negligent and reckless act of the driver Alfredo Carillo of the
herein defendant company, the herein plaintiffs were forced to litigate this case in Court for an agreed
amount of P300.00 for attorney's fee; that the herein plaintiffs have now incurred the amount of P500.00
for actual expenses for transportation, representation and similar expenses for gathering evidence and
witnesses; and that because of the nature of the injuries of plaintiff Mario Palacio, and the fear that the
child might become a useless invalid, the herein plaintiff Gregorio Palacio has suffered moral damages
which could be conservatively estimated at P1,200.00.'
"On May 23, 1956, defendant Fely Transportation Co. filed a Motion to Dismiss on the grounds
(1) that there is no cause of action against the defendant company, and (2) that the cause of action is
barred by prior judgment.
"In its Order, dated June 8, 1956, this Court deferred the determination of the grounds alleged in
the Motion to Dismiss until the trial of this case.
"On June 20, 1956, defendant filed its answer. By way of affirmative defenses, it alleges (1) that
complaint states no cause of action against defendant, and (2) that the sale and transfer of the jeep AC-
687 by Isabelo Calingasan to the Fely Transportation was made on December 24, 1955, long after the
driver Alfredo Carillo of said jeep had been convicted and had served his sentence in Criminal Case No.
Q-1084 of the Court of First Instance of Quezon City, in which both the civil and criminal cases were
simultaneously tried by agreement of the parties in said case. In the Counterclaim of the Answer,
defendant alleges that in view of the filing of this complaint which is a clearly unfounded civil action
merely to harass the defendant, it was compelled to engage the services of a lawyer for an agreed
amount of P500.00.
"During the trial, plaintiffs presented the transcript of the stenographic notes of the trial of the
case of 'People of the Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084,' in the Court of First
Instance of Rizal, Quezon City (Branch IV), as Exhibit 'A'.
"It appears from Exhibit 'A' that Gregorio Palacio, one of the herein plaintiffs, testified that Mario
Palacio, the other plaintiff, is his son; that as a result of the reckless driving of accused Alfredo Carillo, his
child Mario was injured and hospitalized from December 24, 1952, to January 8, 1953; that during all the
time that his child was in the hospital, he watched him during the night and his wife during the day; that
during that period of time he could not work as he slept during the day; that before his child was injured,
he used to earn P10.00 a day on ordinary days and on Sundays from P20 to P50 a Sunday; that to meet
his expenses he had to sell his compressor and electric drill for P150 only; and that they could have been
sold for P300 at the lowest price.
"During the trial of the criminal case against the driver of the jeep in the Court of First Instance of
Quezon City (Criminal Case No. Q-1084), an attempt was unsuccessfully made by the prosecution to
prove moral damages allegedly suffered by herein plaintiff Gregorio Palacio. Likewise an attempt was
made in vain by the private prosecutor in that case to prove the agreed attorney's fees between him and
plaintiff Gregorio Palacio and the expenses allegedly incurred by the herein plaintiffs in connection with
that case. During the trial of this case, plaintiff Gregorio Palacio testified substantially to the same facts.
"The Court of First Instance of Quezon City in its decision in Criminal Case No. 1084 (Exhibit '2')
determined and thoroughly discussed the civil liability of the accused in that case. The dispositive part
thereof reads as follows:
"IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo Carillo y Damaso
guilty beyond reasonable doubt of the crime charged in the information and he is hereby
sentenced to suffer imprisonment for a period of Two Months & One Day of Arresto Mayor; to
indemnify the offended party, by way of consequential damages, in the sum of P500.00 which
the Court, deems reasonable; with subsidiary imprisonment in case of insolvency but not to
exceed 1/3 of the principal penalty imposed; and to pay the costs.'"
On the basis of these facts, the lower court held that the action is barred by the judgment in the criminal case
and, that under Article 103 of the Revised Penal Code, the person subsidiarily liable to pay damages is Isabelo
Calingasan, the employer, and not the defendant corporation.
Against that decision, the plaintiffs appealed, contending that:
"THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE DEFENDANT-APPELLEE
FOR DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF THE COURT OF FIRST
INSTANCE OF QUEZON CITY FOR THE REASON THAT THE INCORPORATORS OF THE FELY
TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, ARE ISABELO
CALINGASAN HIMSELF, HIS SON AND DAUGHTERS;
"THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE INTENTION OF ISABELO
CALINGASAN IN INCORPORATING THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-
APPELLEE HEREIN, WAS TO EVADE HIS CIVIL LIABILITY AS A RESULT OF THE CONVICTION OF
HIS DRIVER OF VEHICLE AC-687 THEN OWNED BY HIM:
"THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF ACTION OF THE
PLAINTIFFS-APPELLANTS IS BARRED BY PRIOR JUDGMENT."
With respect to the first and second assignments of errors, plaintiffs contend that the defendant corporation
should be made subsidiarily liable for damages in the criminal case because the sale to it of the jeep in question, after
the conviction of Alfredo Carillo in Criminal Case No. Q-1084 of the Court of First Instance of Quezon City, was merely
an attempt on the part of Isabelo Calingasan, its president and general manager, to evade his subsidiary civil liability.
The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely Transportation
may be regarded as one and the same person. It is evident that Isabelo Calingasan's main purpose in forming the
corporation was to evade his subsidiary civil liability 1 resulting from the conviction of his driver, Alfredo Carillo. This
conclusion is borne out by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. We believe that this is one case where the defendant corporation should
not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to
sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. (La Campana Coffee
Factory, et al. vs. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May 25, 1953) Furthermore, the failure
of the defendant corporation to prove that it has other property than the jeep (AC-687) strengthens the conviction that its
formation was for the purpose above indicated.
And while it is true that Isabelo Calingasan is not a party in this case, yet, as held in the case of Alonso vs.
Villamor, 16 Phil. 315, this Court can even substitute him in place of the defendant corporation as to the real party in
interest. This is so in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay.
(Sec. 2, Rule 17, Rules of Court; Cuyugan vs. Dizon, 79 Phil., 80; Quison vs. Salud, 12 Phil., 109)
Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily liable for
P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he could not pay on account of
insolvency.
We also sustain plaintiffs' third assignment of error and hold that the present action is not barred by the
judgment of the Court of First Instance of Quezon City in the criminal case. While there seems to be some confusion on
the part of the plaintiffs as to the theory on which the case is based — whether ex-delicto or quasi ex-delicto (culpa
aquiliana) — We are convinced, from the discussion and prayer in the brief on appeal, that they are insisting on the
subsidiary civil liability of the defendant. As a matter of fact, the record shows that plaintiffs merely presented the
transcript of the stenographic notes (Exhibit "A" ) taken at the hearing of the criminal case, which Gregorio Palacio
corroborated, in support of their claim for damages. This rules out the defense of res judicata, because such liability
proceeds precisely from the judgment in the criminal action, where the accused was found guilty and ordered to pay an
indemnity in the sum of P500.00.
WHEREFORE, the decision of the lower court is hereby reversed and defendants Fely Transportation and
Isabelo Calingasan are ordered to pay, jointly and severally, the plaintiffs the amount of P500.00 and the costs.
||| (Palacio v. Fely Transportation Co., G.R. No. L-15121, [August 31, 1962], 116 PHIL 154-160)

[G.R. No. L-20886. April 27, 1967.]

NATIONAL MARKETING CORPORATION (NAMARCO), plaintiff-appellant, vs. ASSOCIATED


FINANCE COMPANY, INC. and FRANCISCO SYCIP, defendant, FRANCISCO SYClP, defendant-
appellee.

Tomas P. Matic, Jr. for plaintiff and appellant.


Francisco Sycip on his behalf as defendant and appellee.

SYLLABUS

1. CORPORATION; STOCKHOLDERS; LIABILITY FOR CORPORATE OBLIGATIONS. — A stockholder is


guilty of fraud where, through false representations, he succeeded in inducing another corporation to enter into an
exchange agreement with the corporation he represented and over whose business he had absolute control knowing
that the letter was in no position to comply with the obligation it had assumed. Consequently, said stockholder cannot
now seek refuge behind the general principle that a corporation has a personality distinct and separate from that of its
stockholders and that the latter are not personally liable for the corporate obligations. Upon the facts proven, the court is
justified in "piercing the veil of corporate fiction" and in holding said stockholder personally liable, jointly and severally
with the corporation, for the sums of money adjudged in favor of the aggrieved party.
2. ID.; WHEN MAY CORPORATE FICTION BE DISREGARDED. — It is settled law in this and other
jurisdictions that when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the
same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an
instrumentality, agency or conduit of another (Koppel Phils. etc. vs. Yatco etc., 43 Off. Gaz., No. 11, November, 1947;
Yutivo Sons etc. vs. Court of Tax Appeals etc., 110 Phil., 751; promulgated on January 28, 1961.)

DECISION

DIZON, J p:

Appeal taken by the National Marketing Corporation — hereinafter referred to as NAMARCO, from the decision
of the Court of First Instance of Manila in Civil Case No. 45770 ordering the Associated Finance Company, Inc. —
hereinafter referred to as the ASSOCIATED — to pay the NAMARCO the sum of P403,514.28, with legal interest
thereon from the date of filing of the action until fully paid, P80,702.26 as liquidated damages, P5,000.00 as attorney's
fees, plus costs, but dismissing the complaint insofar as defendant Francisco Sycip was concerned, as well as the
latter's counterclaim. The appear is only from that portion of the decision dismissing the case as against Francisco
Sycip.
On March 25, 1958, ASSOCIATED, a domestic corporation, through its President, appellee Francisco Sycip,
entered into an agreement to exchange sugar with NAMARCO, represented by its then General Manager, Benjamin
Estrella, whereby the former would deliver to the latter 22,516 bags (each weighing 100 pounds) of "Victorias" and/or
"National" refined sugar in exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw sugar
belonging to NAMARCO, both agreeing to pay liquidated damages equivalent to 20% of the contractual value of the
sugar should either party fail to comply with the terms and conditions stipulated (Exhibit A). Pursuant thereto, on May
19, 1958, NAMARCO delivered to ASSOCIATED 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil"
domestic raw sugar. As ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victorias" and/or "National"
refined sugar agreed upon, latter, an January 12, 1959, demanded in writing from the ASSOCIATED either (a)
immediate delivery thereof before January 20, or (b) payment of its equivalent cash value amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to pay NAMARCO the value of 22,516 bags of
refined sugar at the rate of P15.30 per bag, but the latter rejected the offer. Instead, on January 21 of the same year, it
demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30 per bag, amounting to P118,310.40, and of
the 17,285.08 piculs of "Pasumil" raw sugar at P16.50 per picul, amounting to P285,203.82, or a total price of
P403,514.28 for both kinds of sugar, based on the sugar quotations (Exhibit H) as of March 20, 1958 — the date when
the exchange agreement was entered into.
As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar delivered to it, in spite of
repeated demands therefore, NAMARCO instituted the present action in the lower court to recover the sum of
P403,514.28 in payment of the raw sugar received by defendants from it; P80,702.86; as liquidated damages;
P10,000.00 as attorney's fees, expenses of litigation and exemplary damages, with legal interest thereon from the filing
of the complaint until fully paid.
In their amended answer defendants, by way of affirmative defenses, alleged that the correct value of the sugar
delivered by NAMARCO to them was P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and not
P403,514.58 as claimed by NAMARCO. As counterclaim they prayed for the award of P500,000.00 as moral damages,
P100,000.00 as exemplary damages and P10,000.00 as attorney's fees.
After trial the court rendered the appealed judgment. The appeal was taken to the Court of Appeals, but on
January 15, 1963 the latter certified the case to Us for final adjudication pursuant to sections 17 and 31 of the Judiciary
Act of 1948, as amended, the amount involved being more than P200,000.00, exclusive of interests and costs.
The only issue to be resolved is whether, upon the facts found by the trial court, — which, in our opinion, are
fully supported by the evidence — Francisco Sycip may be held liable, jointly and severally with his co-defendant, for
the sums of money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital stock of ASSOCIATED, Sycip owned P60,000.00 worth of
shares, while his wife — the second biggest stockholder — owned P20,000.00 worth of shares; that the par value of the
subscribed capital stock of ASSOCIATED was only P105,000.00; that negotiations that lead to the execution of the
exchange agreement in question were conducted exclusively by Sycip on behalf of ASSOCIATED; that, as a matter of
fact, in the course of his testimony, Sycip referred to himself as the one who contracted or transacted the business in
his personal capacit