G.R.
G.R. No. No. 195580 195580 April April 21, 21, 20142014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
MINING AND DEVELOPMENT, INC., and
MINING AND DEVELOPMENT, INC., and MCARTHUR MINING,MCARTHUR MINING,
INC.
INC. vs. vs. REDMONT REDMONT CONSOLIDATED CONSOLIDATED MINES MINES CORP.CORP.
Principle:
Principle: The "control test" is still the prevailing mode ofThe "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the exploration, development Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When and utilization of the natural resources of the Philippines. When in the mind of the Court, there is doubt in the 60-40 Filipino equity in the mind of the Court, there is doubt in the 60-40 Filipino equity ownership in the corporation, then it may apply
ownership in the corporation, then it may apply the "grandfatherthe "grandfather rule".
rule". Facts: Facts:
Redmont is a domestic corporation interested in the mining and Redmont is a domestic corporation interested in the mining and exploration of some
exploration of some areas in Palawan. areas in Palawan. Upon learning that thoseUpon learning that those areas were covered by MPSA applications of other three areas were covered by MPSA applications of other three (allegedly Filipino) corporations
(allegedly Filipino) corporations – – Narra, Tesoro, and MacArthur, Narra, Tesoro, and MacArthur, it filed a petition before the P
it filed a petition before the Panel of Arbitrators of DENR seekinganel of Arbitrators of DENR seeking to deny their permits on the ground that these corporations are to deny their permits on the ground that these corporations are in reality for
in reality foreign-owned. eign-owned. MBMI, a 100% Canadian MBMI, a 100% Canadian corporation,corporation, owns 40% of the shares of PLMC (which owns 5,997 shares of owns 40% of the shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro).
5,997 shares of Tesoro).
Aside from the MPSA, the three corporations also applied for Aside from the MPSA, the three corporations also applied for FTAA with the
FTAA with the Office of the PreOffice of the President. sident. In their answIn their answer, theyer, they countered that (1) the liberal Control Test must be used in countered that (1) the liberal Control Test must be used in determining the nationality of a corporation as bas
determining the nationality of a corporation as bas ed on Sec 3 ofed on Sec 3 of the Foreign Investment Act
the Foreign Investment Act – – which as which as they claimed they claimed admits ofadmits of corporate layering schemes, and that (2) the nationality question corporate layering schemes, and that (2) the nationality question is no longer material because of
is no longer material because of their subsequent application fortheir subsequent application for FTAA.
FTAA. Issue:
Issue: Whether Whether or or not not the the Grandfather Grandfather Rule Rule should should be be appliedapplied in determining the nationality of petitioner corporations.
in determining the nationality of petitioner corporations. Held: Yes.
Held: Yes.
Rationale: The "control test" is still the prevailing mode of Rationale: The "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the exploration, Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the development and utilization of the natural resources of the Philippines. When in the mind of the
Philippines. When in the mind of the Court, there is doubt in theCourt, there is doubt in the 60-40 Filipino equity ownership in the corporation, then it may 60-40 Filipino equity ownership in the corporation, then it may apply the "grandfather rule".
apply the "grandfather rule". The SC citing the SEC Ruling vis: The SC citing the SEC Ruling vis:
The SEC en banc applied the Grandfather Rule despite The SEC en banc applied the Grandfather Rule despite the fact that the subject corporations ostensibly have the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino equity
satisfied the 60-40 Filipino equity requirement. The SECrequirement. The SEC en banc held that to attain the Constitutional objective en banc held that to attain the Constitutional objective of reserving to Filipinos the utilization of natural of reserving to Filipinos the utilization of natural resources, one should not stop
resources, one should not stop where the percentage ofwhere the percentage of the capital stock is 60%.Thus:
the capital stock is 60%.Thus:
Doubt, we believe, exists in the instant case because the Doubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all the foreign investor, MBMI, provided practically all the funds of the remaining appellee-corporations.
funds of the remaining appellee-corporations.
Applying the "Grandfather Rule" in the instant case, the result is Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign equity in the investing as follows: x x x the total foreign equity in the investing corporation is 58% while the Filipino equity is only 42%, in the corporation is 58% while the Filipino equity is only 42%, in the investing corporation Hence does not meet the 60%-40% investing corporation Hence does not meet the 60%-40% Filipino-Foreign equity requirement under the Constitution. Filipino-Foreign equity requirement under the Constitution. Good to Know:
Good to Know:
The Control Test can be, as it has been, applied jointlyThe Control Test can be, as it has been, applied jointly with the Grandfather Rule to determine the observance with the Grandfather Rule to determine the observance of foreign ownership restriction in nationalized of foreign ownership restriction in nationalized economic activities.
economic activities.
The Grandfather Rule, standing alone, should not beThe Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in used to determine the Filipino ownership and control in a corporation, as it could result in an otherwise foreign a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized corporation rendered qualified to perform nationalized or partly nationalized activities.
or partly nationalized activities.
Hence, it is only when the Control Test is first compliedHence, it is only when the Control Test is first complied with that the Grandfather Rule may be
with that the Grandfather Rule may be applied.applied.
A corporation that complies with the 60-40 Filipino toA corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has Filipino corporation if there is no doubt as to who has the "beneficial ownership" and "control" of the the "beneficial ownership" and "control" of the corporation. In that instance, there is no need for a corporation. In that instance, there is no need for a dissection or further inquiry on the ownership of the dissection or further inquiry on the ownership of the corporate shareholders in both the investing and corporate shareholders in both the investing and investee Corporation or the application of the investee Corporation or the application of the Grandfather Rule.
Grandfather Rule.
"significant indicators of the dummy status""significant indicators of the dummy status" o
o 1. That the foreign investors provide practically1. That the foreign investors provide practically all the funds for the joint investment all the funds for the joint investment undertaken by these Filipino businessmen and undertaken by these Filipino businessmen and their foreign partner;
their foreign partner; o
o 2. That the foreign investors undertake to2. That the foreign investors undertake to provide practically all the technological provide practically all the technological support for the joint venture;
support for the joint venture; o
o 3. That the foreign investors, while being3. That the foreign investors, while being minority stockholders, manage the company minority stockholders, manage the company and prepare all economic viability studies. and prepare all economic viability studies.
D. CORPORATE JURIDICAL PERSONALITY D. CORPORATE JURIDICAL PERSONALITY G.R. No. 194964-65
G.R. No. 194964-65
UNIVERSITY OF MIN
UNIVERSITY OF MINDANAO, INC. DANAO, INC. vs. BANGKO SENTRAL NGvs. BANGKO SENTRAL NG
PILIPINAS, ET AL.
PILIPINAS, ET AL.
Corporate Juridical Personality Corporate Juridical Personality Principle:
Principle: A A corporation corporation may may exercise exercise its its powers powers onlyonly within the express provisions of their Articles of
within the express provisions of their Articles of Incorporations orIncorporations or by-laws. The only exception to this rule is
by-laws. The only exception to this rule is when acts are necessarywhen acts are necessary and incidental to carry out a corporation’s purposes, and to the and incidental to carry out a corporation’s purposes, and to the
exercise of powers conferred by the Corporation Code and under a corporat ion’s articles of incorporation.
FACTS: University of Mindanao is an educational institution. Its Board of trustees was chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao’s Assistant Treasurer. The spouses Torres incorporated and operated two (2) thrift banks: (1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI). Mr. Torres requested respondent BSP to issue a P1.9M standby emergency credit to FISLAI. This was secured by a deed of real estate mortgage over Petitioner UM’s property in CDO. BSP subsequently granted an additional loan in favor of Mr. Torres and was secured with another real estate mortgage over UM’s two properties in iligan City.
FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum of Agreement intended to rehabilitate the thrift banks, which had been suffering from their depositors’ heavy withdrawals. Among the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later became known as Mindanao Savings and Loan Association, Inc. (MSLAI). MSLAI failed to recover from its losses and was liquidated.
Respondent BSP sent a letter to petitioner University of Mindanao, informing it that the bank would foreclose its properties if MSLAI’s total outstanding obligation of P12,534,907.73 remained unpaid.24
In its reply to Bangko Sentral ng Pilipinas, University of Mindanao denied that University of Mindanao’s properties were mortgaged. It also denied having received any loan proceeds from Bangko Sentral ng Pilipinas. Moreover, as an educational institution, it cannot mortgage its properties to secure another person’s debts.
ISSUE: Whether or not petitioner University of Mindanao is bound by the real estate mortgage contracts executed in favor of respondent BSP.
HELD: NO.Rationale: Corporations are artificial entities granted legal personalities upon their creation by their incorporators in accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with corporations cannot assume that corporations have powers. It is up to those persons dealing with corporations to determine their competence as expressly defined by the law and their a rticles of incorporation. A corporation may exercise its powers only within those definitions. Corporate acts that are outside those express definitions under the law or articles of incorporation or those "committed outside the object for which a corporation is created"76are ultra vires.
The only exception to this rule is when acts are necessary and incidental to carry out a corporation’s purposes, and to the
exercise of powers conferred by the Corporation Code and under a corporation’s articles of incorporation.
Petitioner does not have the power to mortgage its properties in order to secure loans of other persons. As an educational institution, it is limited to developing human capital through formal instruction. It is not a corporation engaged in the business of securing loans of others. Securing loans is not an adjunct of the educational institution’s conduct of business. Petitioner has no business in securing FISLAI, DSLAI, or MSLAI’s loans. This activity is not compatible with its business of providing quality instruction to its constituents.
Good to know:
The separate personality of corporations means that they are "vest[ed] [with] rights, powers, and attributes [of their own] as if they were natural persons [.]"106Their assets and liabilities are their own and not
their officers’, shareholders’, or another corporation’s. In the same vein, the assets and liabilities of their officers and shareholders are not the corporations’. Obligations incurred by corporations are not obligations of their officers and shareholders. Obligations of officers and shareholders are not obligations of corporations.107In other words, corporate interests are separate from the personal interests of the natural persons that comprise corporations.
Acts of an officer that are not authorized by the board of directors/trustees do not bind the cor poration unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on its behalf. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those "committed outside the object for which a corporation is created" are ultra vires.
3. GR No. 205061, Jun 08, 2016
EMERTIA G. MALIXI v. MEXICALI PHILIPPINES Corporate Juridical Personality
Principle: A corporation is an artificial being invested with a personality separate and distinct from those of the stockholders and from other corporations to which it may be connected or related.
Facts: Petitioner alleged that she was hired by respondents as a team leader assigned at the delivery service, receiving a daily wage of Three Hundred Eighty Two Pesos (P382.00) sans employment contract and identification card (ID). Mexicali's training officer, Jay Teves (Teves), informed her of the management's intention to transfer and appoint her as store manager at a newly opened branch in Alabang Town Center, which is a joint venture between Mexicali and Calexico Food
Corporation (Calexico), due to her satisfactory performance. She was apprised that her monthly salary as the new store manager would be Fifteen Thousand Pesos (P15,000,00) with service charge, free meal and side tip. She then subsequently submitted a resignation letter. She started working as the store manager of Mexicali in Alabang Town Center although, again, no employment contract and ID were issued to her. However, she was compelled by Teves to sign an end-of-contract letter by reason of a criminal complaint for sexual harassment she filed against Mexicali's operations manager, John Pontero (Pontero), for the sexual advances made against her during Pontero's visits at Alabang branch. She refused to sign the said contract and upon her vehement refusal to sign, she was informed by Luna that it was her last day of work.
Respondents, however, denied responsibility over petitioner's alleged dismissal. They averred that petitioner has resigned from Mexicali and hence, was no longer Mexicali's employee at the time of her dismissal but rather an employee of Calexico, a franchisee of Mexicali located in Alabang Town Center which is a separate and distinct corporation.
LA – Petitioner was illegally dismissed. By piercing the veil of corporate fiction, the Labor Arbiter ruled that Mexicali and Calexico are one and the same with interlocking board of directors.
NLRC - Sustained respondents' contention that Mexicali and Calexico are separate and distinct entities, Calexico being the true employer of petitioner at the time of her dismissal. Petitioner voluntarily resigned from Mexicali to transfer to Calexico in consideration of a higher pay and upon doing so severed her employment ties with Mexicali.
CA – affirmed the NLRC Decision.
Issue: Whether or not piercing of the veil of corporate fiction was properly applied upon the alleged one and the same corporations, Mexicali and Calexico.
Held: No.
Rationale: We rule otherwise. The Labor Arbiter's f inding that the two corporations are one and the same with interlocking board of directors has no factual basis . It is basic that "a corporation is an artificial being invested with a personality separate and distinct from those of the stockholders and from other corporations to which it may be connected or related." Clear and convincing evidence is needed to warrant the application of the doctrine of piercing the veil of corporate fiction, In our view, the Labor Arbiter failed to provide a clear justification for the application of the doctrine. The Articles of Incorporation and By-Laws of both corporations show that they have distinct business locations and distinct business purposes. It can also be gleaned therein that they have a different set of incorporators or directors since only two out of the five directors of Mexicali are also directors of Calexico. At any rate, the Court has ruled that the existence of interlocking directors, corporate officers and shareholders is not enough justification to disregard the
separate corporate personalities. To pierce the veil of corporate fiction, there should be clear and convincing proof that fraud, illegality or inequity has been committed against third persons. For while respondents' act of not issuing employment contract and ID may be an indication of the proof required, however, this, by itself, is not sufficient evidence to pierce the corporate veil between Mexicali and Calexico.
Good to know:
There was no existing employer-employee relationship between petitioner and Mexicali. To prove petitioner's claim of an employer-employee relationship, the following should be established by competent evidence: "(1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power of control over the employee's conduct." "Although no particular form of evidence is required to prove the existence of the relationship, and any competent and relevant evidence to prove the relationship may be admitted, a finding mat the relationship exists must nonetheless rest on substantial evidence, which is that amount of relevant evidence that a reasonable mind might accept as adequate to justify a conclusion."
5. CONSTANTE AMOR DE CASTRO and CORAZON AMOR DE CASTRO, petitioners, vs. COURT OF APPEALS and FRANCISCO ARTIGO, respondents.
[G.R. No. 115838. July 18, 2002] Facts:
De castro were co-owners of four (4) lots. In a letter, Artigo was authorized by appellants to act as real estate broker in the sale of these properties and five percent (5%) of which will be given to the agent as commission. It was appellee who first found Times Transit Corporation, who bought 2 lots. Artigo felt short of his commission. Hence, he sued below to collect the balance. De Castro’s then moved for the dismissal for failure to implead other co-owners as indispensable parties. The De Castros claim that Artigo always knew that the two lots were co-owned with their other siblings and failure to implead such indispensable parties is fatal to the complaint since Artigo, as agent of all the four owners, would be paid with funds owned by the four co-owners.
Issue: WON the complaint merits dismissal for failure to implead other co-owners as indispensable parties
Ruling: Devoid of merit.
Art. 1915. If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable to the agent for all the consequences of the agency.
The rule in this article applies even when the appointments were made by the principals in separate acts, provided that they are for the same transaction. The solidarity arises from the common interest of the principals, and not from the act of constituting the agency. By virtue of this solidarity, the agent can recover from any principal the whole compensation and indemnity owing to him by the others. The parties, however, may, by express agreement, negate this solidary responsibility. The solidarity does not disappear by the mere partition effected by the principals after the accomplishment of the agency.
When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in a contract of agency, each obligor may be compelled to pay the entire obligation. The agent may recover the whole compensation from any one of the co-principals, as in this case.
REPUBLIC VS. MEGA PACIFIC eSOLUTIONS INC. FACTS:
Republic Act No. 8436 authorized the COMELEC to use an automated election system for the May 1998 elections. However, the automated system failed to materialize and votes were canvassed manually during the 1998 and the 2001 elections. For the 2004 elections, the COMELEC again attempted to implement the automated election system. For this purpose, it invited bidders to apply for the procurement of supplies, equipment, and services. Respondent MPEI, as lead company, purportedly formed a joint venture - known as the Mega Pacific Consortium (MPC) - together with We Solv, SK C & C, ePLDT, Election.com and Oracle. Subsequently, MPEI, on behalf of MPC, submitted its bid proposal to COMELEC. After due assessment, the Bids and Awards Committee (BAC) recommended that the project be awarded to MPC. The COMELEC favorably acted on the recommendation and issued Resolution No. 6074, which awarded the automation project to MPC. Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003 the Automated Counting and Canvassing Project Contract (automation contract)5 for the aggregate amount of P1,248,949,088. MPEI agreed to supply and deliver 1,991 units of ACMs and such other equipment and materials necessary for the computerized electoral system in the 2004 elections. Pursuant to the automation contract, MPEI delivered 1,991 ACMs to the COMELEC. The latter, for its part, made partial payments to MPEI in the aggregate amount of P1.05 billion. This Court in its 2004 Decision declared the contract null and void.6 We held that the COMELEC committed a clear violation of law and jurisprudence, as well as a reckless disregard of its own bidding rules and procedure. All in all, Comelec subverted the essence of public bidding: to give the public an opportunity for fair competition and a clear basis for a precise comparison of bids. Complaint for
Damages filed by respondents with the RTC Makati and petitioner's Answer with Counterclaim, with an application for a writ of preliminary attachment, from which the instant case arose Upon the finality of the declaration of nullity of the automation contract, respondent MPEI filed a Complaint for Damages before the RTC Makati, arguing that, notwithstanding the nullification of the automation contract, the COMELEC was still bound to pay the amount of P200,165,681.89. This amount represented the difference between the value of the ACMs and the support services delivered on one hand, and on the other, the payment previously made by the COMELEC. By way of a counterclaim, petitioner demanded from respondents the return of the payments made pursuant to the automationcontract.26 It argued that individual respondents, being the incorporators of MPEI, likewise ought to be impleaded and held accountable for MPEI's liabilities. The creation of MPC was, after all, merely an ingenious scheme to feign eligibility to bid. Pursuant to Section 1(d) of Rule 57 of the Rules of Court, petitioner prayed for the issuance of a writ of preliminary attachment against the properties of MPEI and individual respondents. The application was grounded upon the fraudulent misrepresentation of respondents as to their eligibility to participate in the bidding for the COMELEC automation project and the failure of the ACMs to comply with mandatory technical requirements.
The trial court denied the prayer for the issuance of a writ of preliminary attachment,29 ruling that there was an absence of factual allegations as to how the fraud was actually committed. The trial court further ruled that the allegations of fraud on the part of MPEI were not supported by the COMELEC, the office in charge of conducting the bidding for the election automation contract. It was likewise held that there was no evidence that respondents harbored a preconceived plan not to comply with the obligation; neither was there any evidence that MPEI's corporate fiction was used to perpetrate fraud. Thus, it found no sufficient basis to pierce the veil of corporate fiction or to cause the attachment of the properties owned by individual respondents.
Petitioner moved to set aside the trial court's Order denying the writ of attachment,30 but its motion was denied.
Aggrieved, petitioner filed an appeal with the CA.
The CA in its First Decision32 reversed and set aside the trial court's Orders and ruled that there was sufficient basis for the issuance of a writ of attachment in favor of petitioner.
The appellate court explained that the averments of petitioner in support of the latter's application actually reflected pertinent conclusions reached by this Court in its 2004 Decision. It held that the trial court erred in disregarding the following findings of fact, which remained unaltered and unreversed: (1) C OMELEC bidding rules provided that the eligibility and capacity of a bidder may be proved through financial documents including, among others,
audited financial statements for the last three years; (2)MPEI was incorporated only on 27 February 2003, or 11 days prior to the bidding itself; (3) in an attempt to disguise its ineligibility, MPEI participated in the bidding as lead company of MPC, a putative consortium, and submitted the incorporation papers and financial statements of the members of the consortium; and (4) no proof of the joint venture agreement, consortium agreement, memorandum of agreement, or business plan executed among the members of the purported consortium was ever submitted to the COMELEC.
According to the CA, the foregoing were glaring indicia or badges of fraud, which entitled petitioner to the issuance of the writ. Respondents moved for reconsideration36 of the First Decision of the CA.
The CA reconsidered its First Decision37 and directed the remand of the case to the RTC Makati for the reception of evidence of allegations of fraud and to determine whether attachment should necessarily issue.
ISSUE(S)
WON a writ of preliminary attachment may be issued against the properties of individual respondents, considering that they were not parties to the 2004 case.
HELD: Yes, petition is meritorious. A writ of preliminary attachment should issue in favor of petitioner over the properties of respondents MPEI, Willy Yu (Willy) and the remaining individual respondents, namely: Bonnie S. Yu (Bonnie), Enrique T. Tansipek (Enrique), Rosita Y. Tansipek (Rosita),Pedro O. Tan (Pedro), Johnson W. Fong (Johnson), Bernard I. Fong (Bernard), and Lauriano Barrios (Lauriano). The bases for th e writ are the following: Fraud on the part of respondent MPEI was sufficiently established by the factual findings of this Court in its 2004 Decision and subsequent pronouncements.
A writ of preliminary attachment may issue over the properties of the individual respondents using the doctrine of piercing the corporate veil.
The factual findings of this Court that have become final cannot be modified or altered, much less reversed, and are controlling in the instant case. The delivery of 1,991 units of ACMs does not negate fraud on the part of respondents MPEI and Willy. Estoppel does not lie against the state when it acts to rectify mistakes, errors or illegal acts of its officials and agents.
The findings of the Ombudsman are not controlling in the instant case.
A writ of preliminary attachment is a provisional remedy issued upon the order of the court where an action is pending. Through the writ, the property or properties of the defendant may be
levied upon and held thereafter by the sheriff as security for the satisfaction of whatever judgment might be secured by the attaching creditor against the defendant.61 The provisional remedy of attachment is available in order that the defendant may not dispose of the property attached, and thus prevent the satisfaction of any judgment that may be secured by the plaintiff from the former.
The purpose and function of an attachment or garnishment is twofold. First, it seizes upon property of an alleged debtor in advance of final judgment and holds it subject to appropriation, thereby preventing the loss or dissipation of the property through fraud or other means. Second, it subjects the property of the debtor to the payment of a creditor's claim, in those cases in which personal service upon the debtor cannot be obtained.63 This remedy is meant to secure a contingent lien on the defendant's property until the plaintiff can, by appropriate proceedings, obtain a judgment and have the property applied to its satisfaction, or to make some provision for unsecured debts in cases in which the means of satisfaction thereof are liable to be removed beyond the jurisdiction, or improperly disposed of or concealed, or otherwise placed beyond the reach of creditors. Section 1(d), Rule 57 of the Rules of Court
Section 1. Grounds upon which attachment may issue. At the commencement of the action or at any time before entry of judgment, a plaintiff or any proper party may have the property of the adverse party attached as security for the satisfaction of any judgment that may be recovered in the following cases: xxxx(d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring the obligation upon which the action is brought, or in the performance thereof. (Emphasis supplied)
For a writ of preliminary attachment to issue under the above-quoted rule, the applicant must sufficiently show the factual circumstances of the alleged fraud.
Metro, Inc. v. Lara's Gift and Decors, Inc., To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given. To constitute a ground for attachment in Section 1(d), Rule 57 of the Rules of Court, fraud should be committed upon contracting the obligation sued upon. A debt is fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to pay, as it is in this case. x xx.
The applicant for a writ of preliminary attachment must sufficiently show the factual circumstances of the alleged fraud because fraudulent intent cannot be inferred from the debtor's
mere non-payment of the debt or failure to comply with his obligation.(Emphasis supplied)
An amendment to the Rules of Court added the phrase "in the performance thereof" to include within the scope of the grounds for issuance of a writ of preliminary attachment those instances relating to fraud in the performance of the obligation.
In the case at bar, petitioner has sufficiently discharged the burden of demonstrating the commission of fraud by respondent MPEI in the execution of the automation contract in the two ways:
Respondent MPEI had perpetrated a scheme against petitioner to secure the automation contract by using MPC as supposed bidder and eventually succeeding in signing the automation contract as MPEI alone, an entity which was ineligible to bid in the first place.
Fraud on the part of respondent MPEI was further shown by the fact that despite the failure of its ACMs to pass the tests conducted by the DOST, respondent still acceded to being awarded the automation contract.
14. ERIC GODFREY STANLEY LIVESEY, v. BINSWANGER PHILIPPINES, INC. AND KEITH ELLIOT
[G.R. No. 177493, March 19, 2014]
Doctrine: Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for non – legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.
FACTS: Petitioner Livesey filed a complaint for illegal dismissal with money claims against Chesterton Blumenauer Binswanger Philippines Strategic Property Services, Inc. (CBB) and Keith Elliot. CBB was a domestic corporation engaged in real estate brokerage and Keith Elliot was its President. Livesey alleged that CBB failed to pay him a significant portion of his salary. For this reason, he was compelled to resign. He claimed CBB owed him unpaid salaries.CBB denied liability. It alleged that it engaged Livesey as a corporate officer. It claimed that Livesey was later designated as Managing Director when it became an extension office of its principal in Hongkong. CBB posited that the labor arbiter (LA) had no jurisdiction as the complaint involved an
intra –corporate dispute. LA ordered CBB to reinstate Livesey to his former position as Managing Director and to pay him US$23,000.00 in accrued salaries.
The parties entered into a compromise agreement. Under the agreement, Livesey was to receive US$31,000.00. Further, the agreement provided that unless and until the agreement is fully satisfied, CBB shall not sell, alienate, or otherwise dispose of all or substantially all of its assets or business; suspend its business operations; substantially change the nature of its business; and declare bankruptcy or insolvency.
CBB made an initial payment to Livesey but not the next two installments as the company ceased operations. Livesey moved for the issuance of a writ of execution. He learned that CBB, in a clear and willful attempt to avoid their liabilities to complainant x x x have organized another corporation, [Binswanger] Philippines. He claimed that there was evidence showing that CBB and Binswanger Philippines, Inc. (Binswanger ) are one and the same corporation. Invoking the doctrine of piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution be issued against respondents Binswanger and Keith Elliot, CBB’s former President. LA denied Livesey’s motion for an alias writ of execution. He explained that the stockholders of the two corporations were not the same. Livesey filed an appeal which the NLRC granted, reversing the LA Laderas’ order. The Binswanger and Elliot moved for reconsideration. The NLRC denied the motion. They then sought relief from the CA through a petition forcertiorari . The CA granted the petition and reversed the NLRC decision. Livesey moved for reconsideration, but the CA denied the motion.
Livesey prays for a reversal of the CA rulings on the basis of the following arguments: The CA erred in not applying the doctrine of piercing the veil of corporate fiction to the ca se. He insists that CBB and Binswanger are one and the same corporation as shown by the “overwhelming evidence” (a) CBB stands for “Chesterton Blumenauer Binswanger, (b) After executing the compromise agreement with him, through Elliot, CBB ceased operations following a transaction where a substantial amount of CBB shares changed hands (c) Summons served on Binswanger in an earlier labor case was received by Binswanger using CBB’s receiving stamp (d) In a letter dated, Elliot noted a Binswanger bid solicitation for a project with the Philippine National Bank (PNB) which was actually a CBB project as shown by a CBB draft (e) Hazel de Guzman who also filed an illegal dismissal case against the company, attested that Elliot told her of CBB’s plan to close the corporation and to organize another for the purpose of evading CBB’s liabilities. Livesey posits that the closure of CBB and its immediate replacement by Binswanger could not have been possible without Elliot’s guiding hand, such that when CBB ceased operations, Elliot (CBB’s President and CEO) moved to Binswanger in the same position.
ISSUES: Whether the doctrine of piercing the veil of corporate fiction is applicable
Based on the facts of the case, the Court finds this issue to have been rendered academic by the compromise agreement between Livesey and CBB and approved by LA Reyno. That CBB reneged in the fulfillment of its obligation under the agreement is no reason to revive the issue and further frustrate the full settlement of the obligation as agreed upon.
Shortly after Elliot forged the compromise agreement with Livesey, CBB ceased operations, a corporate event that was not disputed by the Binswanger and Elliot. Then Binswanger suddenly appeared. It was established almost simultaneously with CBB’s closure, with no less than Elliot as its President and CEO. A reasonable mind would arrive at the conclusion that Binswanger is CBB’s alter ego or that CBB and Binswanger are one and the same corporation. There are also indications of badges of fraud in Binswanger’s incorporation. It was a business strategy to evade CBB’s financial liabilities, including its outstanding obligation to Livesey. Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes.
In the present case, the Court sees an indubitable link between CBB’s closure and Binswanger’s incorporation. CBB ceased to exist only in name; it re –emerged in the person of Binswanger for an urgent purpose — to avoid payment by CBB of the last two installments of its monetary obligation to Livesey, as well as its other financial liabilities. Xxx It was not just coincidence that Binswanger is engaged in the same line of business CBB embarked on: (1) it even holds office in the very same building and on the very same floor where CBB once stood; (2) CBB’s key officers, Elliot, no less, and Catral moved over to Binswanger (3) the use of Binswanger of CBB’s paraphernalia (receiving stamp) (4) Binswanger’s takeover of CBB’s project with the PNB.
While the ostensible reason for Binswanger’s establishment is to continue CBB’s business operations in the Philippines, which by itself is not illegal, the close proximity between CBB’s disestablishment and Binswanger’s coming into existence was t o evade CBB’s unfulfilled financial obligation to Livesey under the compromise agreement.
This underhanded objective, it must be stressed, can only be attributed to Elliot as it was apparent that Binswanger’s stockholders had nothing to do with Binswanger’s operations as noted by the NLRC and which the respondents did not deny. Elliot was well aware of the compromise agreement that the last two installments of CBB’s obligation to Livesey were due. These installments were not met and the reason is that after the alleged sale of the majority of CBB’s shares of stock, it closed down. The Court, therefore, finds Elliot as liable as Binswanger for CBB’s unfulfilled obligation to Livesey.
Pacific Rehouse Corporation v. Court of Appeals and Export Industry Bank, Inc
G.R. Nos. 199687 & 201537, 24 March 2014 (Reyes, J.)
FACTS: The case has its roots on the complaint against EIB Securities Inc. (E-Securities) for unauthorized sale of 32,180,000 DMCI shares of private respondents Pacific Rehouse Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company (Pacific Rehouse et al.).
RTC Ruling: Directed the defendant [E-Securities] to return to Pacific Rehouse et al. the DMCI shares. On the other hand, Pacific Rehouse at al. are directed to reimburse E-Securities the amount of [P]10,942,200.00, representing the buy back price of the 60,790,000 KPP shares of stocks at [P]0.18 per share. Thi was affirmed by the Supreme Court.
The Writ of Execution was returned unsatisfied. Pacific Rehouse et al. then moved for the issuance of an alias writ of execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as ESecurities is “a wholly-owned controlled and dominated subsidiary of Export and Industry Bank, Inc., (Export Bank)and is thus a mere alter ego and business conduit of the latter. RTC concluded that E-Securities is a mere business conduit or alter ego of petitioner, the dominant parent corporation, which justifies piercing of the veil of corporate fiction. It ratiocinated that being one and the same entity in the eyes o f the law, the service of summons upon EIB Securities, Inc. (E-Securities) has bestowed jurisdiction over both the parent and wholly-owned subsidiary. in such amount as may be sufficient to acquire 32,180,000 DMCI shares of stock to the Philippine Stock or the total amount of PhP1,465,799,000.00.
Export Bank filed before the CA a petition for certiorari with prayer for the issuance of a temporary restraining order (TRO) CA granted Export Bank’s application for the issuance of a writ of preliminary injunction.
CA Ruling: It explained that the alter ego theory cannot be sustained because ownership of a subsidiary by the parent company is not enough justification to pierce the veil of corporate fiction. There must be proof, apart from mere ownership, that Export Bank exploited or misused the corporate fiction of E-Securities. The records also do not show that Export Bank has complete control over the business policies, affairs and/or transactions of E-Securities. It was solely E-Securities that contracted the obligation in furtherance of its legitimate corporate purpose. Hence, Petition.
ISSUE: Whether Export Bank may be held liable for final and executory judgment againt E-Securities in an alias writ by piercing the veil of corporate fiction by declaring the latter being a mere alter ego of the former.
RULING:Petitions DENIED. CA decision affirmed.
In Kukan International Corporation v. Reyes it was held that a corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction over the corporation and, hence, any proceedings taken against that corporation and its property would infringe on its right to due process. Aguedo Agbayani, a recognized authority on Commercial Law, stated as much: “Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after the court has already acquired jurisdiction over the corporation.” If the court has no jurisdiction over the corporation, it follows that the court has no business in piercing its veil of corporate fiction because such action offends the corporation’s right to due process. “Jurisdiction over the defendant is acquired either upon a valid service of summons or the defendant’s voluntary appearance in court. When the defendant does not voluntarily submit to the court’s jurisdiction or when there is no valid service of summons, ‘any judgment of the court which has no jurisdiction over the person of the defendant is null and void.”
As Export Bank was neither served with summons, nor has it voluntarily appeared before the court, the judgment sought to be enforced against E-Securities cannot be made against its parent company, Export Bank. Export Bank has consistently disputed the RTC jurisdiction by commencing from its filing of an Omnibus by way of special appearance during the execution stage until the filing of its Comment before the Court wherein it was pleaded that RTC Makati never acquired jurisdiction over Export [B]ank.
“Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. RTC maintained that the subsequently enumerated factors betray the true nature of E-Securities as a mere alter ego of Export Bank: 1. Defendant EIB Securities, a subsidiary corporation 100% totally owned by Export and Industry Bank, Inc., was only re-activated by the latter in 2002-2003 and the continuance of its operations was geared for no other reason tha[n] to serve as the securities brokerage arm of said parent corporation bank; 2. It was the parent corporation bank that provided and infused the fresh working cash capital needed by defendant EIB Securities which prior thereto was non-operating and severely cash-strapped; 3. defendant EIB Securities and its operating office and staff are all housed in the same building; 4. As shown in the General Information Sheets annually filed with the S.E.C. from 2002 to 2011, both defendant EIB Securities and the bank parent corporation share common key Directors and
corporate officers. Three of the 5-man Board of Directors of defendant EIB Securities are Directors of the bank parent corporation; 5. As admitted by the bank parent corporation in its consolidated audited financial statements[,] EIB Securities is a CONTROLLED SUBSIDIARY, and for which reason its financial condition and results of operations are included and integrated as part of the group’s consolidated financial statements, examined and audited by the same auditing firm; 6. The lawyers handling the suits and legal matters of defendant EIB Securities are the same lawyers in the Legal Department of the bank parent corporation. Being then under the direction and control of the bank parent corporation, the unauthorized disposal of those shares by defendant EIB Securities is attributable to, and the responsibility of the former.
Albeit the RTC bore emphasis on the alleged control exercised by Export Bank upon its subsidiary E-Securities, “[c]ontrol, by itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial and operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case.” Moreover, there was nothing on record demonstrative of Export Bank’s wrongful intent in setting up a subsidiary, E-Securities. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. To justify treating the sole stockholder or holding company as responsible, it is not enough that the subsidiary is so organized and controlled as to make it “merely an instrumentality, conduit or adjunct” of its stockholders. It must further appear that to recognize their separate entities would aid in the consummation of a wrong.
As established in the main case and reiterated by the CA, the subject 32,180,000 DMCI shares which E-Securities is obliged to return to the petitioners were originally bought at an average price of P0.38 per share and were sold for an average price of P0.24 per share. The proceeds were then used to buy back 61,100,000 KPP shares earlier sold by E-Securities. Quite unexpectedly however, the total amount of these DMCI shares ballooned to P1,465,799,000.00. It must be taken into account that this unexpected turnabout did not inure to the benefit of E-Securities, much less Export Bank. Furthermore, ownership by Export Bank of a great majority or all of stocks of E-Securities and the existence of interlocking directorates may serve as badges of control, but ownership of another corporation, per se, without proof of actuality of the other conditions are insufficient to establish an alter ego relationship or connection between the two corporations, which will justify the setting aside of the cover of corporate fiction. The Court has declared
that “mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.” The Court has likewise ruled that the “existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.”TOC
G.R. No. 182770, September 17, 2014
WPM Int’l Trading Inc. & Warlito Manlapaz vs. Fe Corazon Labayen
Corporate Juridical Personality
Facts: The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management and consultant firm. The petitioner, WPM International Trading, Inc. (WPM), is a domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz (Manlapaz) is its president.
WPM entered into a management agreement with the respondent, by virtue of which the respondent was authorized to operate, manage and rehabilitate Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent looked for a contractor who would renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto St., University Belt, Manila. Pursuant to the agreement, the respondent engaged the services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost of P432,876.02.
Quickbite-Divisoria's renovation was finally completed, and its possession was delivered to the respondent. However, out of the P432,876.02 renovation cost, only the amount of P320,000.00 was paid to CLN, leaving a balance of P112,876.02.
A complaint for collection of sum of money and for damages were filed against WPM and Manlapaz.
In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansaje who was in-charge with the daily operations of the Quickbite outlets; that when Alcansaje left WPM, the remaining directors were compelled to hire the respondent as manager; that the respondent had entered into the renovation agreement with CLN in her own personal capacity; that when he found the amount quoted by CLN too high, he instructed the respondent to either renegotiate for a lower price or to look for another contractor; that since the respondent had exceeded her authority as agent of WPM, the renovation agreement should only bind her; and that since WPM has a separate and distinct personality, Manlapaz cannot be made liable for the respondent's claim.
RTC – Respondent is entitled to indemnity from Manlapaz. CA - WPM and Manlapaz are one and the same being that: (1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz had
complete control over WPM because he concurrently held the positions of president, chairman of the board and treasurer, in violation of the Corporation Code; (3) two of the four other stockholders of WPM are employed by Manlapaz either directly or indirectly; (4) Manlapaz's residence is the registered principal office of WPM; and (5) the acronym "WPM" was derived from Manlapaz's initials. The CA applied the principle of piercing the veil of corporate fiction and agreed with the RTC that Manlapaz cannot evade his liability by simply invoking WPM's separate and distinct personality.
Issue: 1) Whether WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz; (2) Whether Manlapaz is jointly and severally liable with WPM to the respondent for reimbursement, damages and interest.
Held: 1) No.
Rationale: The application of the principle of piercing the veil of corporate fiction is unwarranted in the present case. Application of the Principle of Piercing the Veil of Corporate Fiction: The rule is settled that a corporation has a personality separate and distinct from the persons acting for and in its behalf and, in general, from the people comprising it. Following this principle, the obligations incurred by the corporate officers, or other persons acting as corporate agents, are the direct accountabilities of the corporation they represent, and not theirs. Thus, a director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation; it is only in exceptional circumstances that solidary liability will attach to them.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
In the present case, the attendant circumstances do not establish that WPM is a mere alter ego of Manlapaz. Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was organized and controlled, and its affairs conducted in a manner that made it merely an instrumentality, agency, conduit or adjunct of Manlapaz. That Manlapaz concurrently held the positions of president, chairman and treasurer, or that the Manlapaz's residence is the registered principal office of WPM, are insufficient considerations to prove that he had exercised absolute control over WPM.
The control necessary to invoke the instrumentality or alter ego rule is not majority or even complete stock control but
such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.
The respondent failed to prove that Manlapaz, acting as president, had absolute control over WPM. Even in view of his position as president, chairman and treasurer of the corporation, such control does not necessarily warrant piercing the veil of corporate fiction since there was not a single proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.
2) No. Only WPM is liable.
Rationale: This Court also observed that the CA failed to demonstrate how the separate and distinct personality of WPM was used by Manlapaz to defeat the respondent's right for reimbursement. Neither was there any showing that WPM attempted to avoid liability or had no property against which to proceed.
Since no harm could be said to have been proximately caused by Manlapaz for which the latter could be held solidarily liable with WPM, and considering that there was no proof that WPM had insufficient funds, there was no sufficient justification for the RTC and the CA to have ruled that Manlapaz should be held jointly and severally liable to the respondent for the amount she paid to CLN. Hence, only WPM is liable to indemnify the respondent.
Good to know: As held in Martinez v. Court of Appeals, the mere ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established.
23. PHILIPPINE NATIONAL BANK v. HYDRO RESOURCES CONTRACTORS CORPORATION
G.R. No. 167530, March 13, 2013
(Topic: Doctrine of Piercing the Veil of Corporate Fiction)
FACTS: Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares. As of September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.
Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road Construction Program in 1985 for a total contract price of P35,770,120. After computing the payments already made by NMIC under the program and crediting the NMIC’s receivables from
Hercon, Inc., the latter found that NMIC still has an unpaid balance of P8,370,934.74.10 Hercon, Inc. made several demands on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger.
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and liabilities, including their respective stakes in NMIC. In turn and on even date, the National Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement.
ISSUE: Whether or not there is sufficient ground to pierce the veil of corporate fiction of NMIC and held DBP and PNB solidarily liable with NMIC?
RULING: No.
From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both D BP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid obligations to plaintiff.
Then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of NMIC should be pierced.
For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial contracts, and then using such separate entity to evade the payment of a just debt, would be the height of injustice and iniquity. Surely that could not have been the intendment of the law with respect to corporations. The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public con venience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
2. SPECIFIC POWERS: THEORY OF SPECIFIC CAPACITY ix. Ultra Vires Acts
UNIVERSITY OF MINDANAO VS. BSP, 778 SCRA 458 GR No. 194964, January 11, 2016
Nature of Action: An action for the nullification and cancellation of mortgage on the ground that the person who entered into contract has no authority to execute such contract.
FACTS: Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift banks: (1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift banks. He acted as FISLAI's President, while his wife, Dolores P. Torres, acted as DSLAI's President and FISLAI's Treasurer. Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas issued a P1.9 million standby emergency credit to FISLAI. On May 25, 1982, University of Mindanao's Vice President for Finance, Saturnino Petalcorin, executed a deed of real estate mortgage over University of Mindanao's property in Cagayan de Oro City in favor of Bangko Sentral ng Pilipinas. "The mortgage served as security for FISLAI's PI.9 Million loan" It was allegedly executed on University of Mindanao's behalf. As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino Petalcorin showed a Secretary's Certificate signed by University of Mindanao's Corporate Secretary, Aurora de Leon. The Secretary’s certificate states among others the authorizing of the chairman to appoint Satunino Pactolerin to represent the University of Mindanao to transact, transfer, convey, lease, mortgage, or otherwise hypothecate the subject properties. Saturnino Petalcorin executed another deed of real estate mortgage, allegedly on behalf of University of Mindanao, over its two properties in Iligan City. This mortgage served as additional security for FISLAI's loans. FISLAI and DSLAI eventually merged with DSLAI as the surviving corporation in an effort to rehabilitate the thrift banks due to the heavy withdrawals of depositors. DSLAI later became known as Mindanao Savings and Loan Association, Inc. (MSLAI). MSLAI failed to recover from its losses. Bangko Sentral ng Pilipinas later on foreclosed the mortgaged properties. University of Mindanao filed two Complaints for nullification and cancellation of mortgage. One Complaint was filed before the Regional Trial Court of Cagayan de Oro City, and the other Complaint was filed before the Regional Trial Court of Iligan City. University of Mindanao alleged that it did not obtain any loan from Bangko Sentral ng Pilipinas and that Aurora De Leon’s certification was anomalous. That it never authorized Saturnino Petalcorin to execute real estate mortgage contracts involving its properties to secure FISLAI's debts and it never ratified the execution of the mortgage contracts. The Regional
Trial Courts ruled in favor of University of Mindanao. The Court of Appeals however ruled that "although BSP failed to prove that the UM Board of Trustees actually passed a Board Resolution authorizing Petalcorin to mortgage the subject real properties, Aurora de Leon's Secretary's Certificate" clothed Petalcorin with apparent and ostensible authority to execute the mortgage deed on its behalf. Bangko Sentral ng Pilipinas merely relied in good faith on the Secretary's Certificate. University of Mindanao is estopped from denying Saturnino Petalcorin's authority.
ISSUE: Whether petitioner University of Mindanao is bound by the real estate mortgage contracts executed by Saturnino Petalcorin.
RULING: No. Acts of an officer that are not authorized by the board of directors/trustees do not bind the corporation unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on its behalf.
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its behalf. There was no board resolution to that effect. Thus, the mortgages executed by Saturnino Petalcorin were unenforceable. The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed without authority from petitioner. Being a juridical person, petitioner cannot conduct its business, make
decisions, or act in any manner without action from its Board of Trustees. The Board of Trustees must act as a body in order to exercise corporate powers. Individual trustees are not clothed with corporate powers just by being a trustee. Hence, the individual trustee cannot bind the corporation by himself or herself. The corporation may, however, delegate through a board resolution its corporate powers or functions to a representative, subject to limitations under the law and the corporation's articles of incorporation. The relationship between a corporation and its representatives is governed by the general principles of agency. Article 1317 of the Civil Code provides that there must be authority from the principal before anyone can act in his or her name:
ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.
Hence, without delegation by the board of directors or trustees, acts of a person - including those of the corporation's directors, trustees, shareholders, or officers—executed on behalf of the corporation are generally not binding on the corporation. The unenforceable status of contracts entered into by an unauthorized person on behalf of another is based on the basic principle that contracts must be consented to by both parties. There is no contract without meeting of the minds as to the subject matter and cause of the obligations created under the contract. Consent of a person cannot be presumed from representations of another, especially if obligations will be incurred as a result. Thus, authority is required to make actions made on his or her behalf binding on a person. Contracts entered into by persons without authority from the corporation shall
generally be considered ultra vires and unenforceable against the corporation.
F. CORPORATE POWERS
1. GENERAL POWERS: THEORY OF GENERAL CAPACITY
G.R. No. 211485, May 30, 2016
MAGALLANES WATERCRAFT ASSOCIATION, INC., AS REPRESENTED BY ITS BOARD OF TRUSTEES, NAMELY: EDILBERTO M. BAJAO, GERARDO O. PLAZA, ISABELITA MULIG, EDNA ABEJAY, MARCELO DONAN, NENITA O. VARQUEZ, MERLYN ALVAREZ, EDNA EXCLAMADOR, AND CESAR MONSON
,
Petitioner,
v. MARGARITO C. AUGUIS AND DIOSCORO C. BASNIG,
Respondents.
Facts:
Petitioner Magallanes Watercraft Association, Inc. (
MWAI)
is a local association of motorized
bancaowners and
operators ferrying cargoes and passengers from
Magallanes, Agusan del Norte, to Butuan City and back.
Respondents Margarito C. Auguis (
Auguis) and Dioscoro C.
Basnig (
Basnig) were members and officers of MWAI
-vice-president and secretary, respectively.
3The Board of Trustees (
Board) of MWAI passed Resolution
No. 1, Series of 2003, and thereafter issued Memorandum
No. 001 suspending the rights and privileges of Auguis and
Basnig as members of the association for thirty (30) days
for their refusal to pay their membership dues and
berthing fees because of their pending oral complaint and
demand for financial audit of the association funds.
4In spite of the suspension of their privileges as members,
Auguis and Basnig still failed to settle their obligations
with MWAI. For said reason, the latter issued
Memorandum No. 002, Series of 2004, suspending their
rights and privileges for
anotherthirty (30) days.
5Respondents filed an action for damages and attorney's
fees with a prayer for the issuance of a writ of preliminary
injunction before the RTC. The trial court ordered Auguis
and Basnig to pay their unpaid accounts. It, nonetheless,
required MWAI to pay them actual damages and
attorney's fees.
6Aggrieved, MWAI appealed before the CA. The CA
affirmed the decision of the RTC.According to the
appellate court, the RTC correctly held that MWAI was
guilty of an
ultra viresact.
�
The CA noted that neither
MWAI's Articles of Incorporation nor its By-Laws
7contained any provision that expressly and/or impliedly
vested power or authority upon its Board to recommend
the imposition of disciplinary sanctions on its delinquent
officers and/or members. It further noted that MWAI
lacked the authority to suspend the right of the
respondents to operate their
bancas, which was granted
through a Certificate of Public Convenience. Hence, the
CA concluded that MWAI acted beyond the scope of its
powers when it suspended the rights of Auguis and Basnig
as members of MWAI to berth on the seaport of
Magallanes and operate their bancas.
Issue:
Whether or not petitioner was guilty of an
ultra viresact when it suspended respondents' berthing rights
because its by-laws obliged Auguis and Basnig as
members to: (1) obey and comply with the by
�
laws,
rules and regulations that may be promulgated by the
association from time to time; and (2) to pay its
membership dues and other assessments.
Ruling:
The petition is meritorious.
Corporate powers include implied and incidental powers
