Corporation Law Case Digests Compilation

8/12/2019 Corporation Law Case Digests Compilation

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Concepcion, Culminas, Gamo, Jaugan, Malcampo, Porcina, Uy, YbioCorporation Law, Case Digests

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Cases for Business Organizations II

GOD BLESS US ALL!

1. Philippine First Insurance Co., Inc. v. Maria Carmen Hartigan, et. al., 7 SCRA

252

FACTS:On June 1, 1953, plaintiff was originally named as 'The Yek Tong Lin Fire and

Marine Insurance Co., Ltd an insurance corp. duly presented with the Security andExchange Commissioner and before a Notary Public as provided in their articles ofincorporation. Later amended its articles of incorporation and changed its name on May26, 1961 as Philippine First Insurance Co., Inc. pursuant to a certificate of the Board ofDirectors.

The complaint alleges that: Philippine First Insurance Co., Inc., doing businessunder the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Lt.' signed as co-

maker together with defendant Maria Carmen Hartigan, CGH, to which a promissorynote was made in favour of China Banking. Said defendant failed to pay in full despiterenewal of such note. The complaint ends with a prayer for judgment against thedefendants, jointly and severally, for the sum of P4,559.50 with interest at the rate of12% per annum from November 23, 1961 plus P911.90 by way of attorney's fees andcosts.

Defendants admitted the execution of the indemnity agreement but they claim thatthey signed said agreement in favor of the Yek Tong Lin Fire and Marine Insurance Co.,Ltd.' and not in favor of the plaintiff Philippine Insurance. They likewise admit that theyfailed to pay the promissory note when it fell due but they allege that since theirobligation 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 valuethereof from the defendants otherwise they will be liable for double amount of theirobligation, there being no allegation that the surety has paid the obligation to the creditor.In their special defense, defendants claim that there is no privity of contract between theplaintiff and the defendants and consequently, the plaintiff has no cause of action againstthem, considering that the complaint does not allege that the plaintiff and the 'Yek TongLin Fire and Marine Insurance Co., Ltd.' are one and the same or that the plaintiff hasacquired the rights of the latter.

ISSUE:May a Philippine corporation change its name and still retain its original

personality and individuality as such?

RULING:YES. As can be gleaned under Sections 6 and 18 of the Corporation Law, the

name of a corporation is peculiarly important as necessary to the very existence of acorporation. The general rule as to corporations is that each corporation shall have aname by which it is to sue and be sued and do all legal acts. The name of a corporation inthis respect designates the corporation in the same manner as the name of an individual


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designates the person." Since an individual has the right to change his name under certainconditions, there is no compelling reason why a corporation may not enjoy the sameright. There is nothing sacrosanct in a name when it comes to artificial beings. Thesentimental considerations which individuals attach to their names are not present incorporations 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 procedureprescribed by law for the purpose; and this is what is important and indispensablyprescribedstrict adherence to such procedure.

A general power to alter or amend the charter of a corporation necessarilyincludes the power to alter the name of the corporation. Hence, a mere change in thename of a corporation, either by the legislature or by the corporators or stockholdersunder legislative authority, does not, generally speaking, affect the identity of thecorporation, nor in any way affect the rights, privileges, or obligations previouslyacquired or incurred by it. Indeed, it has been said that a change of name by a corporationhas no more effect upon the identity of the corporation than a change of name by anatural 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, butremains and continues to be the original corporation. It is the same corporation with adifferent name, and its character is in no respect changed. ... (6 Fletcher, Cyclopedia ofthe Law of Private Corporations, 224-225, citing cases.)

As correctly pointed out by appellant, the approval by the stockholders of theamendment 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 ofincorporation as amended, duly certified to be correct by the president and the secretaryof 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 stockholdersthereof shall thereafter be subject to the same liabilities as if such amendment had beenembraced in the original articles of incorporation." It goes without saying then thatappellant rightly acted in its old name when on May 15, 1961, it entered into theindemnity agreement, Annex A, with the defendant-appellees; for only after the filing ofthe amended articles of incorporation with the Securities & Exchange Commission onMay 26, 1961, did appellant legally acquire its new name; and it was perfectly right for itto file the present case In that new name on December 6, 1961. Such is, but the logicaleffect of the change of name of the corporation upon its actions.

Therefore, 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 thetime the change was made. The change in the name of the corporation does not affect itsright to bring an action on a note given to the corporation under its former name.

2. Municipality of Malabang, Lanao del Sur, et. al. v. Pangandapun Benito, et. al.,

27 SCRA 533


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FACTS:

Petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur,while the respondent Pangandapun Bonito is the mayor, and the rest of the respondentsare the councilors, of the municipality of Balabagan of the same province. Balabagan wasformerly 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 andsitios of the latter municipality.

The petitioners brought this action for prohibition to nullify Executive Order 386and to restrain the respondent municipal officials from performing the functions of theirrespective office relying on the ruling of this Court in Pelaez v. AuditorGeneral

andMunicipality of San Joaquin v. Siva. Respondents argued that the ruleannounced inPelaez can have no application in this case because unlike themunicipalities involved in Pelaez, the municipality of Balabagan is at least a defacto corporation, having been organized under color of a statute before this was declaredunconstitutional. It is contended that as a de facto corporation, its existence cannot becollaterally 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 petitionerBalindong.

ISSUE:Whether the municipality of Balabagan is a de factocorporation.

RULING:

NO. Executive Order 386 is declared void, and the respondents are herebypermanently restrained from performing the duties and functions of their respectiveoffices.

Result of the analysis of cases; the following principles may be deduced whichseem to reconcile the apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal corporationmay 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 itscreation can be found in some other valid law or in the recognition of its potentialexistence by the general laws or constitution of the state.II. There can be no de factomunicipal 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 invalidityof which is apparent on its face.

IV. There can be no de facto corporation created to take the place of an existing dejurecorporation, as such organization would clearly be a usurper.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 defacto corporation, as, independently of the Administrative Code provision in question,there is no other valid statute to give color of authority to its creation. Executive Order386 "created no office."


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3. Hall, et. all v. Piccio, et. al., 86 Phil. 603

FACTS:On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown,Hipolita D.Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, thearticle 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 andmanagers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428shares of stock had been subscribed and fully paid with certain properties transferredtothe corporation described in a list appended thereto. Immediately after the execution ofsaid articles of incorporation, the corporation proceeded to do business with the adoptionof by-laws and the election of its officers. On 2 December 1947, the said articles ofincorporation were filed in the office of the Securities and Exchange Commissioner, forthe issuance of the corresponding certificate of incorporation. On 22 March 1948,pendingaction on the articles of incorporation by the aforesaid governmental office, Fred Brown,Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court ofFirst Instance of Leyte the civil case, alleging among other things that the Far Eastern

Lumber and Commercial Co. was an unregistered partnership; that they wished to have itdissolved because of bitter dissension among the members, mismanagement and fraud bythe managers and heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed amotion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause ofaction. After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution ofthe company; and at the request of Brown, et. al., appointed Pedro A. Capuciong as thereceiver of the properties thereof, upon the filing of aP20,000 bond. Hall and Hall offeredto file a counter-bond for the discharge of the receiver, but Judge Piccio refused to acceptthe offer and to discharge the receiver. Whereupon, Hall and Hall instituted thepresent special civil action with the Supreme Court.

ISSUE:Whether respondents Brown, et. al. may file an action to cause the dissolution ofthe Far Eastern Lumber and Commercial Co., without State intervention.

RULING:Section 11 of the Corporation Law provides that the personality of a corporation

begins to exist only from the moment such certificate is issued and not prior. Not havingobtained 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. Underthe statue it is to be noted that it is the issuance of a certificate of incorporation by theDirector of the Bureau of Commerce and Industry which calls a corporation into being. In

the case at bar, the Securities and Exchange Commissioner has not issued thecorresponding certificate of incorporation.Section 19 does not apply in this case for two reasons: 1) The immunity if collateralattack is granted to corporations "claiming in good faith to be a corporation under thisact." Such a claim is compatible with the existence of errors and irregularities; but notwith a total or substantial disregard of the law. Unless there has been an evidentattempt to comply with the law the claim to be a corporation "under this act" could not bemade "in good faith." 2) This is not a suit in which the corporation is a party. This is a


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litigation between stockholders of the alleged corporation, for the purpose of obtaining itsdissolution. Even the existence of a de jure corporation may be terminated in a privatesuit for its dissolution between stockholders, without the intervention of the state.

4.

Asia Banking Corporation v. Standard Products Co., 46 Phil. 145FACTS:

Standard Products, Co., Inc., was indebted to Asia Banking Corporation for theamount of P37,757.00. To secure its indebtedness, it executed a promissory note in favorof plaintiff. Upon demand for the balance due, the respondent failed to pay. Hence anaction was brought by plaintiff to recover the sum of P24,736.47. The court renderedjudgment in favor of the plaintiff for the sum demanded in the complaint, with interest on

Hence, this appeal by the respondent. At the trial of the case the plaintiff failed to proveaffirmatively the corporate existence of the parties and the appellant insists that underthese circumstances the court erred in finding that the parties were corporations with

juridical personality and assigns same as reversible error.

ISSUE:

Whether or not respondent is estopped from denying the corporate existence ofthe plaintiff.

RULING:The general rule is that in the absence of fraud, a person who has contracted or

otherwise dealt with an association in such a way as to recognize and in effect admit itslegal existence as a corporate body is thereby estopped to den# its corporate existence inany action leading out of or insisting such contract or dealing, unless its existence is

attacked for cause which has arisen since making the contract or other dealing relied onas an estoppel and this applies to foreign as well as to domestic corporations. Thedefendant having recognized the corporate existence of the plaintiff by making apromissory note in its favor and making partial payments on the same is thereforeestopped to deny said plaintiffs corporate existence. It is, of course, also estopped fromdenying its own corporate existence. Under these circumstances it was unnecessary forthe plaintiff to present other evidence of the corporate existence of either of the parties. Itma# be noted that there is no evidence showing circumstances taking the case out of therules stated.

5. Salvatierra v. Garlitos, et. al., 103 Phil. 757

FACTS:In 1954, Manuela Vda. De Salvatierra entered into a lease contract with

Philippine Fibers Producers Co., Inc. (PFPC). PFPC was represented by its presidentSegundino Refuerzo. It was agreed that Manuela shall lease her land to PFPC inexchange of rental payments plus shares from the sales of crops. However, PFPC failedto comply with its obligations and so in 1955, Manuela sued PFPC and she won. Anorder was issued by Judge Lorenzo Garlitos of CFI Leyte ordering the execution of thejudgment against Refuerzos property (there being no property under PFPC). Refuerzo


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moved for reconsideration on the ground that he should not be held personally liablebecause he merely signed the lease contract in his official capacity as president of PFPC.Garlitos granted Refuerzos motion. Manuela assailed the decision of the judge on theground that she sued PFPC without impleading Refuerzo because she initially believedthat PFPC was a legitimate corporation. However, during trial, she found out that PFPC

was not actually registered with the Securities and Exchange Commission (SEC) henceRefuerzo should be personally liable.

ISSUE:Whether or not Manuela is correct.

HELD:Yes. It is true that as a general rule, the corporation has a personality separate and

distinct from its incorporators and as such the incorporators cannot be held personallyliable for the obligations of the corporation. However, this doctrine is not applicable tounincorporated associations. The reason behind this doctrine is obvious-since anorganization 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 asprovided 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 withoutauthority and at their own risk. In this case, Refuerzo was the moving spirit behind PFPC.As such, his liability cannot be limited or restricted that imposed upon would-becorporate shareholders. In acting on behalf of a corporation which he knew to beunregistered, he assumed the risk of reaping the consequential damages or resultantrights, if any, arising out of such transaction.

6. Albert v. University Publishing Co., Inc., G.R. No. L-19118, Jan. 30, 1965

FACTS:

Mariano Albert entered into a contract with University Publishing Co., Inc.through Jose M. Aruego, its President, whereby University would pay plaintiff for theexclusive right to publish his revised Commentaries on the Revised Penal Code. Thecontract stipulated that failure to pay one installment would render the rest of thepayments due. When University failed to pay the second installment, Albert sued forcollection and won. However, upon execution, it was found that University was notregistered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruegoas the real defendant. University opposed, on the ground that Aruego was not a party tothe case.

ISSUE:Whether or not Aruego can be held personally liable to the plaintiff.

RULING:

YES. The Supreme Court found that Aruego represented a non-existent entity andinduced not only Albert but the court to believe in such representation. Aruego, acting asrepresentative of such non-existent principal, was the real party to the contract sued upon,and thus assumed such privileges and obligations and became personally liable for thecontract entered into or for other acts performed as such agent. One who has inducedanother to act upon his wilful misrepresentation that a corporation was duly organized


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and existing under the law, cannot thereafter set up against his victim the principle ofcorporation by estoppel The Supreme Court likewise held that the doctrine of corporationby estoppel cannot be set up against Albert since it was Aruego who had induced him toact upon his (Aruego's) willful representation that University had been duly organizedand was existing under the law.

7. Fleischer v. Botica Nolasco Co., 47 Phil. 583

FACTS:

Botica Nolasco, Inc. is a corporation duly organized and existing under the lawsof the Philippine Islands. The plaintiff, Henry Fleischer, filed a complaint against theBotica Nolasco, Inc., alleging that hebecame the owner of five shares of stock of said corporation, by purchase from theiroriginal owner, one Manuel Gonzalez; that the said shares were fully paid; and that thedefendant refused to register said shares in his name in the books of the corporation inspite of repeated demands to that effect made by him upon said corporation, whichrefusal 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 fiveshares of stock recorded in said books in the name of Manuel Gonzalez, and to indemnifyhim in the sum of P500 as damages, and to pay the costs.

The cause was brought on for trial, and the judge, held that, in his opinion, article 12 ofthe bylawsof the corporation which gives it preferential right to buy its shares from retiringstockholders, is in conflict withAct No. 1459 (Corporation Law), especially with section 35 thereof; and rendered ajudgment ordering thedefendant corporation, through its board of directors, to register in the books of said

corporation the said fiveshares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder or ownerthereof, instead of theoriginal owner, Manuel Gonzalez, with costs against the defendant.The defendant appealed from said judgment.

ISSUE:Whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict

with the provisions of the Corporation Law (Act No. 1459).

RULING:

Yes. As a general rule, the by-laws of a corporation are valid if they arereasonable and calculated to carry into effect the objects of the corporation, and are notcontradictory to the general policy of the laws of the land.

Section 13, paragraph 7, of the Corporation Law, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. It followsfrom said provision, that a by-law adopted by a corporation relating to transfer of stockshould be in harmony with the law on the subject of transfer of stock. The law on this


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subject is found in section 35 of Act No. 1459. Said section specifically provides that theshares of stock "are personal property and may be transferred by delivery of thecertificate indorsed by the owner, etc." Said section 35 defines the nature, character andtransferability of shares of stock. Said section contemplates no restriction as to whomthey may be transferred or sold. 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, withoutany other limitation in this respect, than the general provisions of law. Therefore, a stockcorporation in adopting a by-law governing transfer of shares of stock should take intoconsideration the specific provisions of section 35 of Act No. 1459, and said by-lawshould be made to harmonize with said provisions. It should not be inconsistenttherewith.

And moreover, the by-laws now in question cannot have any effect on the appellee. Hehad no knowledge of such by-law when the shares were assigned to him. He obtainedthem in good faith and for a valuable consideration. He was not a privy to the contractcreated 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. Anunauthorized by-law forbidding a shareholder to sell his shares without first offeringthem to the corporation for a period of thirty days is not binding upon an assignee of thestock as a personal contract, although his assignor knew of the by-law and took part in itsadoption.

8. Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399

FACTS:The Philippine Commission enacted Act No. 1459, also known as the

Corporation Law on 1906. El Hogar Filipino, organized under the laws of the Phiippines

Islands, was the first corporation organized under Sec. 171-190 of Act No. 1459, devotedto the subject of building and loan associations. In the said law, the capial of the saidcorporation shall not exceed P3M, but Act No. 2092 amended that and, permittingcapitalization in the amount of P10M.Soon thereafter the association took advantage of this enactment by amending its articlesso as to provide that the capital should be in an amount not exceeding the then lawfullimit. From the time of its first organization the number of shareholders has constantlyincreased, with the result that on 1925, the association had 5,826 shareholders holding125,750 shares, with a total paid-up value of P8,703,602.25.

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 theproperty had been bought in by the respondent at one of its own foreclosure sales. Theprovision of law relevant to the matter is found in section 75 of Act of Congress of July1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law.)

it appears that in the year 1920 El Hogar Filipino was the holder of a recorded mortgageupon a tract of land in the municipality of San Clemente, Province of Tarlac, as securityfor a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners of


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said property. The borrowers having defaulted in their payments, El Hogar Filipinoforeclosed the mortgage and purchased the land at the foreclosure sale for the net amountof the indebtedness, namely, the sum of P23,744.18. the deed conveying the property toEl Hogar Filipino was sent to the register of deeds of the Province of Tarlac, with therequest 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.

For months no reply was received by El Hogar Filipino, so it filed a complaint to theChief of the General Land Registration Office; and on May 7, 1921, the certificate of titleto the San Clemente land was received by El Hogar Filipino from the register of deeds ofTarlac.

Thereafter, the San Clemente land was to be sold to a certain Alcantara. Alcantara wasgiven successive extensions of the time, the last of which expired April 30, 1926, withinwhich to make the payment agreed upon; and upon his failure to do so El Hogar Filipinotreated the contract with him as rescinded, and efforts were made at once to find another

buyer. Finally the land was sold to Doa Felipa Alberto for P6,000 by a public instrumentexecuted before a notary public.

ISSUE:Whether or not ther was illegal holding on the part of the respondent of the title

to the real property.

Ruling 1: The Attorney-General points out that the respondent acquired title onDecember 22, 1920, when the deed was executed and delivered, by which the propertywas conveyed to it as purchaser at its foreclosure sale, and this title remained in it untilJuly 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 the five yearperiod did not begin to run against the respondent until May 7, 1921, when the register ofdeeds of Tarlac delivered the new certificate of title to the respondent pursuant to thedeed by which the property was acquired. It has been held by this court that a purchaserof land registered under the Torrens system cannot acquire the status of an innocentpurchaser for value unless his vendor is able to place in his hands an owner's duplicateshowing the title of such land to be in the vendor.

It results that prior to May 7, 1921, El Hogar Filipino was not really in a position to passan indefeasible title to any purchaser. The failure of the respondent to receive thecertificate 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.

Second cause of action. The second cause of action is based upon a charge that therespondent is owning and holding a business lot, with the structure thereon, in thefinancial district of the City of Manila is excess of its reasonable requirements and incontravention of subsection 5 of section 13 of the corporation Law.

ISSUE:


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Whether or not the respondent is owning and holding a business lot in excess of itsreasonable requirements.

Ruling 2: Under subsection 5 of section 13 of the Corporation Law, every corporation hasthe 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 propertywas 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 thefinancial district of the City of Manila and in constructing thereon a suitable building asthe site of its offices; and it cannot be fairly said that the area of the lot 1,413 squaremeters was in excess of its reasonable requirements. Inasmuch as the lot referred towas lawfully acquired by the respondent, it is entitled to the full beneficial use thereof.No legitimate principle can discovered which would deny to one owner the right to enjoyhis (or its) property to the same extent that is conceded to any other owner; and anintention to discriminate between owners in this respect is not lightly to be imputed to theLegislature.

Third cause of action. Under the third cause of action the respondent is charged withengaging in activitiesforeign to the purposes for which the corporation was created and not reasonablenecessary to its legitimate ends. The specifications under this cause of action relate tothree different sorts of activities. The first consist of the administration of the offices inthe El Hogar building not used by the respondent itself and the renting of such offices tothe public.

Ruling 3a: The activities here criticized clearly fall within the legitimate powers of therespondent. 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 mustnecessarily be lawful.

The second specification has reference to the administration and management ofproperties belonging to delinquent shareholders of the association. The association hasbeen accustomed (pursuant to clause 8 of its standard mortgage) to take over and managethe mortgaged property for the purpose of applying the income to the obligations of thedebtor party.

Ruling 3b: 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 andto manage it with a view to the satisfaction of the obligations due to the debtor than theimmediate enforcement of the entire obligation, and the validity of the clause allowingthis course to be taken appears to us to be not open to doubt. The second specificationunder 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 aredescribed in the following paragraphs contained in the agreed statements of facts:


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El Hogar Filipino has undertaken the management of some parcels of improved realestate situated inManila not under mortgage to it, but owned by shareholders, and has held itself out byadvertisement as

prepared to do so. The number of properties so managed during the years 1921 to 1925,inclusive, was as follows:1921 eight properties1922 six properties1923 ten properties1924 fourteen properties1925 fourteen properties.This service is limited to shareholders; but some of the persons whose properties are somanaged for them became shareholders only to enable them to take advantage thereof.

Ruling 3c: 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 andloan association. The circumstance that the owner of the property may have been requiredto subscribe to one or more shares of the association with a view to qualifying him toreceive this service is of no significance. It is a general rule of law that corporationspossess only such express powers. The management and administration of the property ofthe shareholders of the corporation is not expressly authorized by law, and we are unableto see that, upon any fair construction of the law, these activities are necessary to theexercise of any of the granted powers. The corporation, upon the point now under thecriticism, has clearly extended itself beyond the legitimate range of its powers.

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 itsmembers, is empoweredto cancel shares and to return to the owner thereof the balance resulting from theliquidation thereof whenever, by reason of their conduct, or for any other motive, thecontinuation as members of the owners of such shares is not desirable.

Ruling 4: This by-law is of course a patent nullity, since it is in direct conflict with thelatter part of section 187 of the Corporation Law, which expressly declares that the boardof directors shall not have the power to force the surrender and withdrawal of unmaturedstock except in case of liquidation of the corporation or of forfeiture of the stock for

delinquency. It is supposed, in the fourth cause of action, that the existence of this articleamong the by-laws of the association is a misdemeanor on the part of the respondentwhich justifies its dissolution.

Fifth cause of action. The failure of the corporation to hold annual meetings and thefilling of vacancies in the directorate in the manner described constitute misdemeanourson the part of the respondent which justify the resumption of the franchise by theGovernment and dissolution of the corporation; and in this connection it is charge that the


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board of directors of the respondent has become a permanent and self perpetuating bodycomposed of wealthy men instead of wage earners and persons of moderate means.

Ruling 5: We are unable to see the slightest merit in the charge. No fault can be imputedto 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 partas expressing their satisfaction of the way in which things have been conducted.The doctrine above stated finds expressions in article 66 of the by-laws of the respondentwhich declares inso many words that directors shall hold office "for the term of one year on until theirsuccessors shall have been elected and taken possession of their offices."It result that the practice of the directorate of filling vacancies by the action of thedirectors themselves is valid. Nor can any exception be taken to then personality of theindividuals chosen by the directors to fill vacancies in the body. Certainly it is no faircriticism to say that they have chosen competent businessmen of financial responsibilityinstead 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 ofEl Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixedsalary, as the complaint supposes would be proper, have been receiving largecompensation, varying in amount from time to time, out of the profits of the respondent.

Ruling 6: The power to fixed the compensation they shall receive, if any, is left to thecorporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to thisauthority the compensation for the directors of El Hogar Filipino has been fixed insection 92 of its by-laws, as already stated.

If a mistake has been made, or the rule adopted in the by-laws meeting to change the rule,the remedy, if any, seems to lie rather in publicity and competition, rather than in a courtproceeding. The sixth cause of action is in our opinion without merit.

Seventh cause of action. It appears that the promoter and organizer of El HogarFilipino was Mr. Antonio Melian, and in the early stages of the organization of theassociation the board of directors authorized the association to make a contract with himwith regard to the services him therefor. As a seventh cause of action it is alleged in thecomplaint that this royalty of the founder is "unconscionable, excessive and out of allproportion to the services rendered, besides being contrary to and incompatible with thespirit and purpose of building and loan associations."

Ruling 7: It is our opinion that this contention is entirely without merit. The mere factthat the compensation paid under this contract is in excess of what, in the full light ofhistory, may be considered appropriate is not a proper consideration for this court, andsupplies no ground for interfering with its performance. In the case of El Hogar Filipinovs. Rafferty (37 Phil., 995), which was before this court nearly ten years ago, this courtheld that the El Hogar Filipino is contract with Mr. Melian did not affect theassociation's legal character. The inference is that the contract under consideration was


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then considered binding, and it occurred to no one that it was invalid. It would be aradical step indeed for a court to attempt to substitute its judgment for the judgment of thecontracting parties and to hold, as we are invited to hold under this cause of action, thatthe making of such a contract as this removes the respondent association from the pale ofthe 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 innovatingtendencies which find acceptance with some and which, if given full rein, would go far tosink legitimate enterprise in the Islands into the pit of populism and bolshevism. Theseventh count is not sustainable.

Eight cause of action.Under the fourth cause of action we had case where the allegedground for the revocation of the respondent's charter was based upon the presence in theby-laws of article 10 that was found to be inconsistent with the express provisions of law.Article 70 of the by-laws in effect requires that persons elected to the board of directorsmust be holders of shares of the paid up value of P5,000 which shall be held as securitymay 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 asshareholders to receive loans from the association.

Ruling 8: Article 70 is objectionable in that, under the requirement for security, a poormember, or wage-earner, cannot serve as director. Article 76 is criticized on the groundthat the provision requiring directors to renounce their right to loans unreasonably limitstheir rights and privileges as members. There is nothing of value in either of thesesuggestions. Section 21 of the Corporation Law expressly gives the power to thecorporation to provide in its by-laws for the qualifications of directors; and therequirement of security from them for the proper discharge of the duties of their office,Article 76, prohibiting directors from making loans to themselves, is

of course designed to prevent the possibility of the looting of the corporation byunscrupulous directors. A more discreet provision to insert in the by-laws of a buildingand loan association would be hard to imagine. Clearly, the eighth cause of action cannotbe sustained.

Ninth cause of action.The specification under this head is in effect that the respondenthas abused its franchise in issuing "special" shares. The issuance of these shares isalleged to be illegal and inconsistent with the plan and purposes of building and loanassociations.

Ruling 9: Tt 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 theseshares are invalid is seen to be baseless. In addition to this it is satisfactorilydemonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statutehas not expressly authorized such shares, yet the association has implied authority toissue them. The complaint consequently fails also as regards the stated in the ninth causeof action.


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Tenth cause of action.Under this head of the complaint it is alleged that the defendantis pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value ofthe real properties acquired by it at its sales; and it is alleged that this rate is excessive.

Ruling 10: 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 itsreal profits; and article 74 of its by-laws expressly authorizes the board of directors todetermine each year the amount to be written down upon the expenses of installation andthe property of the corporation. There can be no question that the power to adopt such aby-law is embraced within the power to make by-laws for the administration of thecorporate affairs of the association and for the management of its business, as well as thecare, control and disposition of its property (Act No. 1459, sec. 13 [7]). Certainly thiscourt cannot undertake to control the discretion of the board of directors of theassociation about an administrative matter as to which they have legitimate power ofaction. The tenth cause of action is therefore not well founded.

Eleventh and twelfth causes of action. The same comment is appropriate with respectto the eleventh and twelfth causes of action, which are treated together in the briefs, andwill be here combined. The specification in the eleventh cause of action is that therespondent maintains excessive reserve funds, and in the twelfth cause of action that theboard of directors has settled upon the unlawful policy of paying a straight annualdividend of 10 per centum, regardless of losses suffered and profits made by thecorporation and in contravention of the requirements of section 188 of the CorporationLaw.

Ruling 11 and 12: We find no reason to doubt the right of the respondent to maintainthese 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 commercialenterprises encounter periods when earnings fall below the average, and the prudentmanager makes provision for such contingencies. To regard all surplus as profit is toneglect one of the primary canons of good business practice. Building and loanassociations, though among the most solid of financial institutions, are neverthelesssubject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to anyfiscal institutions, while uniformity in the payments of dividends, continued over longperiods, supplies the surest foundations of public confidence.Our conclusion is that the respondent has the power to maintain the reserves criticized inthe eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that thereserves referred to have become excessive, the remedy is in the hands of the Legislature.

Thirteenth and fourteenth causes of action. The specification under this head is, ineffect, that the respondent association has made loans which, to the knowledge of theassociations officers were intended to be used by the borrowers for other purposes thanthe building of homes. The specification under this head is that the loans made by thedefendant for purposes other than building or acquiring homes have been extended inextremely large amounts and to wealthy persons and large companies.


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Seventeenth cause of action. Under the seventeenth cause of action, it is charged thatin disposing of realestates purchased by it in the collection of its loans, the defendant has no variousoccasions sold some of the said real estate on credit, transferring the title thereto to thepurchaser; 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 assuch in the books of the defendant, and that several such obligations are still outstanding.

Ruling 17: It seems to be supposed that, when the respondent sells property acquired atits own foreclosure sales and takes a mortgage to secure the deferred payments, theobligation of the purchaser is a true loan, and hence prohibited. But in requiring therespondent to sell real estate which it acquires in connection with the collection of itsloans within five years after receiving title to the same, the law does not prescribe that theproperty must be sold for cash or that the purchaser shall be a shareholder in thecorporation.

9.

Stockholders of F. Guanzon & Sons, Inc. v. Register of Deeds of Manila, 6SCRA 373

FACTS:

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 otherthings, 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 theirshareholdings, as liquidating dividends, the assets of said corporation, including realproperties 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 thestockholders: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 ofthe assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of LandRegistration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6. Thestockholders interposed the present appeal.

ISSUE:Whether or noDt the certificate of registration merely involves a distribution of

the corporation's assets or should be considered a transfer or conveyance.

RULING: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


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and distinct from its members. While shares of stock constitute personal property they donot represent property of the corporation. The corporation has property of its own whichconsists chiefly of real estate. A share of stock only typifies an aliquot part of thecorporation's property, or the right to share in its proceeds to that extent when distributedaccording to law and equity, but its holder is not the owner of any part of the capital of

the corporation. Nor is he entitled to the possession of any definite portion of its propertyor assets. The stockholder is not a co-owner or tenant in common of the corporateproperty.

On the basis of the foregoing authorities, it is clear that the act of liquidation made by thestockholders of the F.Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition ofcommunity property, but rather a transfer or conveyance of the title of its assets to theindividual stockholders. Indeed, since the purpose of the liquidation, as well as thedistribution of the assets of the corporation, is to transfer their title from the corporationto 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 transfercannot be effected without the corresponding deed of conveyance from the corporation tothe stockholders. It is, therefore, fair and logical to consider the certificate of liquidationas one in the nature of a transfer or conveyance.

10.Caram, et. al, v. Court of Appeals, et. al., 151 SCRA 373

FACTS:Herein petitioners question the ruling of the lower court in declaring them

solidarily liable with their co-defendants in the lower court in the dispositive portion ofthe decision:

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 servicesthat led to the organization of the defendant corporation, plus P10,000.00 attorneysfees.

Petitioners claim that the order of the lower court had no support in fact and inlaw because they had no contract with the private respondent regarding the above-mentioned services. Petitioners claim that as mere subsequent investors in the corporationthat was later created, they should not be held solidarily liable with the Filipinas OrientAirways, a separate juridical entity, and with Barreto and Garcia, their co-defendants inthe lower court, who were the ones who requested the said services from the privaterespondent.

ISSUE:Whether or not petitioners are also and personally liable for the expenses?

RULING:

No. Petitioners are not liable at all, jointly or jointly and severally.


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Petitioners, stockholders, were not really involved in the initial steps that finallyled to the incorporation of the Filipinas Orient Airways. Barreto was the moving spiritand the main promoter during the initial stages of the organization of the airline. Thepetitioners were merely among the financiers whose interest was to be invited and whowere 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 makingthe petitioners, as principal stockholders thereof, responsible for its obligations. As abona fide corporation, the Filipinas Orient Airways should alone be responsible for itscorporate acts as duly authorized by its officers and directors.

The petitioners cannot be held personally liable for the compensation claimed bythe private respondent for the services performed by him in the organization of thecorporation. The petitioners did not contract such services. It was only the results of suchservices that Barreto and Garcia presented to them and which persuaded them to invest inthe proposed airline. The most that can be said is that they benefitted from such services,

but that surely is no justification to hold them personally liable therefor. Otherwise, allthe other stockholders of the corporation, including those who came in later, andregardless of the amount of their share holdings, would be equally and personally liablealso with the petitioners for the claims of the private respondent.

11.Palay, Inc. v. Clave, 124 SCRA 640

FACTS:

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott,executed in favor of private respondent, Nazario Dumpit, a contract to sell a parcel of

land of the Crestview Heights Subdivision in Antipolo, Rizal, owned by said corporation.The sale price was P23,000 with 9% interest per annum, payable with a downpayment ofP4,660 and monthly installments of P246.42 until fully paid. Par. 6 of the contractprovided for automatic extrajudicial rescission upon default in payment of any monthlyinstallment after the lapse of 90 days from the expiration of the grace period of onemonth, without need of notice and with forfeiture of all installments paid.

Respondent Dumpit paid the downpayment and several installments amounting toP13,722.50. The last payment was made on Dec. 5, 1967 for installments up to Sep.1967.

On May 10, 1973, almost 6 years later, private respondent wrote petitioneroffering to update all his overdue accounts with interest, and seeking its written consent

to the assignment of his rights to a certain Lourdes Dizon. He followed this up withanother letter dated June 20, 1973 reiterating the same request. Replying petitionersinformed respondent that his Contract to Sell had long been rescinded pursuant toparagraph 6 of the contract, and that the lot had already been resold.

Respondent questioned the validity of the rescission and filed a letter complaintwith the National Housing Authority (NHA) for reconveyance with the alternative prayerfor refund. NHA found the rescission void in the absence of either judicial or notarialdemand and ordered Palay, Inc. and Alberto Onstott, in his capacity as President of the


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corporation, jointly and severally, to refund immediately to Nazario Dumpit P13,722.50with 12% interest from the filing of the complaint.

ISSUE:Whether the doctrine of piercing the veil of corporate fiction has application to

the case at bar. And whether petitioner Onstott was properly made jointly and severallyliable with petitioner corporation for refund to private respondent of the total amount thelatter had paid to petitioner company.

RULING:No, the piercing of the veil of corporate fiction has no application to the case at

bar. And Petitioner Onstott, the president of the corporation, cannot be made personallyliable.

It is basic that a corporation is invested by law with a personality separate anddistinct from those of the persons composing it as well as from that of any other legalentity to which it may be related. As a general rule, a corporation may not be made to

answer for acts or liabilities of its stockholders or those of the legal entities to which itmay be connected and vice versa. However, the veil of corporate fiction may be piercedwhen it is used as a shield to further an end subversive of justice; or for purposes thatcould not have been intended by the law that created it; or to defeat public convenience,justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimateissues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct orbusiness conduit for the sole benefit of the stockholders.

We find no badges of fraud on petitioner`s part. They had literally relied, albeitmistakenly, on par. 6 of its contract with private respondent when it rescinded thecontract to sell extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President

of the corporation and he a to (sic) be the controlling stockholder. No sufficient proofexists on record that said petitioner used the corporation to defraud private respondent.He cannot, therefore, be made personally liable just because he "appears to be thecontrolling stockholder". Mere ownership by a single stockholder or by anothercorporation is not of itself sufficient ground for disregarding the separate corporatepersonality.

(The Court ruled that the extrajudicial rescission was ineffective and inoperativeagainst private respondent for lack of notice of resolution. Notice of cancellation to thebuyer is indispensable. Extrajudicial rescission has legal effect where the other party does

not oppose it. Where it is objected to, a judicial determination of the issue is stillnecessary. In other words, resolution of reciprocal contracts may be made extrajudiciallyunless successfully impugned in Court. If the debtor impugns the declaration, it shall besubject to judicial determination. Thus, the corporation should refund.)

12.Laguna Transportation Company, Inc. v. Social Security System, 107 Phil. 833

FACTS:


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Sometime in 1949, the Bian Transportation Co., a corporation duly registeredwith the SEC, sold part of the lines and equipment it operates to Gonzalo Mercado,Artemio Mercado, Florentino Mata and Dominador Vera Cruz. The said vendees formedan unregistered partnership under the name of Laguna Transportation Company, whichcontinued to operate the lines and equipment bought from the Bian Transportation Co.,

in addition to new lines which it was able to secure from the Public Service Commission.The original partners and two new members organized a corporation known as theLaguna Transportation Company, Inc., registered under the SEC on June 20, 1956. Thecorporation continued the same transportation business of the unregistered partnership.

Prior to November 11, 1957, plaintiff requested for exemption from coverage bythe System on the ground that it started operation only on June 20, 1956, when it wasregistered with the SEC but on November 11, 1957, the Social Security System notifiedplaintiff that it was covered.

The lower court ruled that petitioner was an employer engaged in business ascommon carrier which had been in operation for at least two years prior to the enactmentof RA 1161, as amended by RA 1792 and by virtue thereof, it was subject to compulsory

coverage under said law.

ISSUE:Whether or not petitioner, an employer which had been engaged in business as a

common carrier for at least 2 years prior to the enactment of the Social Security Act, issubject to compulsory coverage thereunder?

RULING:Yes. The Petitioner corporation is subject to compulsory coverage under the SSS.Sec. 9 of the Social Security Act provides,

Sec. 9. Compulsory Coverage Coverage in the System shall be

compulsory upon all employees between the ages of sixteen and sixty years, inclusive, ifthey have been for at least six months in the service of an employer who is a member ofthe System. Provided, That the Commission may not compel any employer to become amember of the System unless he shall have been in operation for at least two years....

It is not disputed that the Laguna Transportation Company, an unregisteredpartnership composed of Gonzalo Mercado, Artemio Mercado, Florentina Mata, andDominador Vera Cruz, commenced the operation of its business as a common carrier onApril 1, 1949. These 4 original partners, with 2 others (Maura Mendoza and SabinaBorja) later converted the partnership into a corporate entity, by registering its articles ofincorporation with the Securities and Exchange Commission on June 20, 1956. The firmname "Laguna Transportation Company" was not altered, except with the addition of the

word "Inc." to indicate that petitioner was duly incorporated under existing laws. Thecorporation continued the same transportation business of the unregistered partnership,using the same lines and equipment. There was, in effect, only a change in the form of theorganization of the entity engaged in the business of transportation of passengers. Hence,said entity as an employer engaged in business, was already in operation for at least 3years prior to the enactment of the Social Security Act on June 18, 1954 and for at leasttwo years prior to the passage of the amendatory act on June 21, 1957.


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Petitioner argues that, since it was registered as a corporation with the Securitiesand Exchange Commission only on June 20, 1956, it must be considered to have been inoperation only on said date. While it is true that a corporation once formed is conferred ajuridical personality separate and district from the persons composing it, it is but a legalfiction introduced for purposes of convenience and to subserve the ends of justice. The

concept cannot be extended to a point beyond its reasons and policy, and when invokedin support of an end subversive of this policy, will be disregarded by the courts.

If any general rule can be laid down, in the present state of authority, it is that acorporation will be looked upon as a legal entity as a general rule, and until sufficientreason to the contrary appears; but, when the motion of legal entity is used to defeatpublic convenience, justify wrong, protect fraud, or defend crime, the law will regard thecorporation as an association of persons.

To adopt petitioner's argument would defeat, rather than promote, the ends forwhich the Social Security Act was enacted. An employer could easily circumvent thestatute by simply changing his form of organization every other year, and then claimexemption from contribution to the System as required, on the theory that, as a new

entity, it has not been in operation for a period of at least 2 years. The door to fraudulentcircumvention of the statute would, thereby, be opened. Moreover, petitioner admittedthat as an employer engaged in the business of a common carrier, its operationcommenced on April 1, 1949 while it was a partnership and continued by the corporationupon its formation on June 20, 1956. Unlike in the conveyance made by the BianTransportation Company to the partners Gonzalo Mercado, Artemio Mercado, FlorentinoMata, and Dominador Vera Cruz, no mention whatsoever is made either in the pleadingsor in the stipulation of facts that the lines and equipment of the unregistered partnershiphad been sold and transferred to the corporation, petitioner herein. This omission, to ourmind, clearly indicates that there was, in fact, no transfer of interest, but a mere change inthe form of the organization of the employer engaged in the transportation business, i.e.,

from an unregistered partnership to that of a corporation. As a rule, courts will look to thesubstance and not to the form.Finally, the weight of authority supports the view that where a corporation was

formed by, and consisted of members of a partnership whose business and property wasconveyed and transferred to the corporation for the purpose of continuing its business, inpayment for which corporate capital stock was issued, such corporation is presumed tohave assumed partnership debts, and isprima facie liable therefor.

The reason for the rule is that the members of the partnership may be said to havesimply put on a new coat, or taken on a corporate cloak, and the corporation is a merecontinuation of the partnership.

13.

Marvel Building Corporation, et. al. v. David, 94 Phil. 376FACTS:

Marvel Building Corporation was incorporated in February 12, 1947 wherein itsarticles of incorporation contained a capital stock of P 2,000,000.00 of which majority ofits stockholders are Maria B. Castro(President), Amado A. Yatco, Segundo Esguerra andMaximo Cristobal(Secretary-Treasurer) from the total of eleven(11) stockholders.During the existence of the corporation, it acquired assets including buildings, namely,Aguinaldo Building, Wise Building and Dewey Boulevard-Padre Faura Mansion.


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Towards the end of year 1948, internal revenue examiners discovered that from the 11stock certificates, all of it were endorsed in the bank by the subscribers, except the onesubscribed by Maria B. Castro. They also discovered that there were no business meetingheld by the board of directors, no by-laws and that the corporation never had any reportsof their transactions or affairs. As a result, Secretary of Finance recommended the

collection of war profit taxes assessed against Maria B. Castro in the amount ofP3,593,950.78 and seize the three(3) buildings named above.

Plaintiff(Marvel Building Corporation) filed a complaint for the release of theseized property contending that said property are owned by the corporation and not solelyby Maria Castro. The trial court ruled in favor of plantiff and enjoin Collector of InternalRevenue from selling the same. Collector of Internal Revenue appealed, and CA ruledthat trial court failed to show that Maria B. Castro is not the true owner of all the stockcertificates of the corporation, therefore confiscation of the property against thecorporation is justified. Hence this petition arise.

ISSUE:

Whether or not Maria B. Castro is the sole owner of all the stocks of MarvelCorporation and the other stockholders are mere dummies?

RULING:Yes. 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. Section 89,Rule 123 of the Rules of Court and section 42 of the Provisional law for the applicationof the Penal Code, applies in this case pursuant to circumstantial evidence as the basis ofjudgment.

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. Thecircumstantial evidence is not only convincing; it is conclusive. The existence ofendorsed certificates, discovered by the internal revenue agents between 1948 and 1949in the possession of the Secretary-Treasurer, the fact that twenty-five certificates weresigned by the president of the corporation, for no justifiable reason, the fact that two setsof certificates were issued, the undisputed fact that Maria B. Castro had made enormousprofits and, therefore, had a motive to hide them to evade the payment of taxes, the factthat the other subscribers had no incomes of sufficient magnitude to justify their bigsubscriptions, the fact that the subscriptions were not receipted for and deposited by thetreasurer in the name of the corporation but were kept by Maria B. Castro herself, the factthat 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 tothe corporation without any previous arrangement or accounting, and the fact that thebooks of accounts were kept as if they belonged to Maria B. Castro alone these factsare of patent and potent significance. This implied that Maria B. Castro would not haveasked them to endorse their stock certificates, or be keeping these in her possession, ifthey were really the owners. They never would have consented that Maria B. Castro keepthe funds without receipts or accounting, nor that she manages the business without theirknowledge or concurrence, were they owners of the stocks in their own rights. Each and


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every one of the facts all set forth above, in the same manner, is inconsistent with theclaim that the stockholders, other than Maria B. Castro, own their shares in their ownright.

On the other hand, each and every one of them, and all of them, can point to noother conclusion than that Maria B. Castro was the sole and exclusive owner of the shares

and that they were only her dummies.

14. Palacio, et. al, v. Fely Transportation Company, 5 SCRA 1011

FACTS:On December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo)

Carillo was driving AC-687 jeepney at Halcon Street, Quezon City, he accidentally runover a child Mario Palacio of the herein plaintiff Gregorio Palacio. Mario Palaciosuffered injury and fracture thereby hospitalizing him at the Philippine OrthopedicHospital from December 24, 1952, up to January 8, 1953, and continued to be treated fora period of five months thereafter. While Plaintiff's (Gregorio Palacio's) child was in thehospital and was under treatment for five months, he was forced to abandon his shop

where he derives income of P10.00 a day for the support of his family and was forced tosell one air compressor (heavy duty) and one heavy duty electric drill, for a sacrifice saleof P150.00 which could easily sell at P350.00 in order to sustain the daily expenses of hisfamily. Because of the failure to recover indemnity from the criminal case filed by theplaintiff against the driver, this prompted plaintiff to file a civil suit in the Court of FirstInstance against the defendant Fely Transportation company, for he incurred P300 forattorneys fees, P500 for actual damages, and P1200 for moral damages.The Court of First Instance found accused Alfredo Carillo y Damaso(driver) guiltybeyond reasonable doubt of the crime charged, however, on the basis of these facts, thelower court held that the civil action filed is barred by the judgment in the criminal caseand, 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.

ISSUE:Whether or not Fely Transportation Company is subsidiarily liable of the crime

committed by its employee(driver).

RULING:Yes.

The Court ruled that Isabelo Calingasan(the President and General Manager) anddefendant 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 hissubsidiary civil liability resulting from the conviction of his driver, Alfredo Carillo. Thisconclusion is borne out by the fact that the incorporators of the Fely Transportation areIsabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. It is believedthat in a case where the defendant corporation should not be heard to say that it has apersonality separate and distinct from its members when to allow it to do so would be tosanction the use of the fiction of corporate entity as a shield to further an end subversiveof justice. Furthermore, the failure of the defendant corporation to prove that it has other


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lot it had leased but also an adjacent lot belonging to the respondents-appellees Padilla,without the owners' knowledge and consent. When the latter discovered the truth aroundOctober of 1947, they demanded payment for the use and occupation of the lot. Thecorporation (then controlled by petitioners Cirilo Parades and Ursula Tolentino, who hadpurchased and held 1,496 of its 1,500 shares) disclaimed liability, blaming the original

incorporators, McConnel, Rodriguez and Cochrane. The lot owners filed a complaint forforcible entry in the Municipal Court of Manila which rendered judgment ordering thePark Rite Co., Inc. to pay P7,410.00 plus legal interest as damages from April 15, 1947until return of the lot. Restitution not having been made until 31 January 1948, the entirejudgment amounted to P11,732.50. Upon execution, the corporation was found withoutany assets other than P550.00 deposited in Court. After their application to the judgmentcredit, there remained a balance of P11,182.50 outstanding and unsatisfied. The judgmentcreditors then filed suit in the CFI of Manila against the corporation and its past andpresent stockholders, to recover from them, jointly and severally, the unsatisfied balanceof the judgment, plus legal interest and costs. The CFI denied recovery; but on appeal, theCA reversed, finding that the corporation was a mere alter ego or business conduit of the

principal stockholders that controlled it for their own benefit, and adjudged themresponsible for the amounts demanded by the lot owners. Hence, this resort via certiorari.

ISSUE:Whether or not the individual stockholders can held liable for obligations

contracted by the Corporation

RULING:The Court has answered the question in the affirmative wherever circumstances have

shown that the corporate entity is being used as an alter ego or business conduit for thesole benefit of the stockholders, or else to defeat public convenience, justify wrong,

protect fraud, or defend crime. The facts thus found cannot be varied by the Court, andconclusively show that the corporation is a mere instrumentality of the individualstockholder's, hence the latter must individually answer for the corporate obligations.While the mere ownership of all or nearly all of the capital stock of a corporation is amere business conduit of the stockholder, that conclusion is amply justified where it isshown, as in the case before us, that the operations of the corporation were so mergedwith those of the stockholders as to be practically indistinguishable from them. To holdthe latter liable for the corporation's obligations is not to ignore the corporation's separateentity, but merely to apply the established principle that such entity cannot be invoked orused for purposes that could not have been intended by the law that created that separatepersonality.

17.National Marketing Corporation v. Associated Financing Company, et. al., 19

SCRA 962

FACTS:On March 25, 1958, ASSOCIATED, a domestic corporation, through its

President, appellee Francisco Sycip, entered into an agreement to exchange sugar withNAMARCO, represented by its then General Manager, Benjamin Estrella, whereby theformer would deliver to the latter 22,516 bags of "Victorias" and/or "National" refined


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sugar in exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" rawsugar belonging to NAMARCO, both agreeing to pay liquidated damages equivalent to20% of the contractual value of the sugar should either party fail to comply with theterms and conditions stipulated. Pursuant thereto, on May 19,1958, NAMARCOdelivered the exact quantity of the products as agreed . As ASSOCIATED failed to

comply with its obligation to NAMARCO, the latter demanded in writing either the (a)immediate delivery thereof before January 20, or (b) payment of its equivalent cash valueamounting to P372,639.80. On January 19, 1959, ASSOCIATED, through Sycip, offeredto pay NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 perbag, but the latter rejected the offer. Instead, NAMARCO demanded payment of the7,732.71 bags of "Busilak" raw sugar amounting to P118,310.40. and of the 17,285.08piculs of "Pasumil" raw sugar amounting to P285.203.82. As ASSOCIATED refused todeliver the raw sugar or pay for the refined sugar delivered to it, inspite of repeateddemands, NAMARCO instituted the present action in the lower court to recover thepayment of the raw sugar plus damages, attorney's fees, expenses of litigation and withlegal interest thereon from the filing of the complaint until fully paid. The trial court

rendered a judgment ordering ASSOCIATED to pay the NAMARCO the sum ofP403,514.28, with legal interest thereon from the date of filing of the action until fullypaid plus damages and attorneys fees but dismissing the complaint insofar as defendantFrancisco Sycip was concerned, as well as the latter's counterclaim.

ISSUE:

Whether or not Francisco Sycip may be held liable, jointly and severally with hisco-defendant, forthe sums of money adjudged in favor of NAMARCO

RULING:

Yes. The Court made a conclusion that Sycip was guilty of fraud becausethrough false representations he succeeded in inducing NAMARCO to enter into theaforesaid exchange agreement, with full knowledge, on his part, on the fact thatASSOCIATED whom he represented and over whose business and affairs he hadabsolute control, was in no position to comply with the obligation it had assumed.Consequently, he cannot now seek refuge behind the general principle that a corporationhas a personality distinct and separate from that of its stockholders and that the latter arenot personally liable for the corporate obligations. To the contrary, upon the proven facts,the Court is justified in "piercing the veil of corporate fiction" and in holding Sycippersonally liable, jointly and severally with his co-defendant, for the sums of moneyadjudged in favor of appellant. It is settled in law in this and other jurisdictions that when

the corporation is the mere alter ego of a person, the corporate fiction may bedisregarded; the same being true when the corporation is controlled, and its affairs are soconducted as to make it merely an instrumentality, agency or conduit of another.

18.Claparols, et. al. v. Court of Industrial Relations, et. al., 65 SCRA 613

FACTS:


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A complaint for unfair labor practice was filed by herein private respondentAllied Workers' Association, respondent Demetrio Garlitos and ten (10) respondentworkers against herein petitioners on account of the dismissal of respondent workersfrom petitioner Claparols Steel and Nail Plant. On September 16, 1963, respondent Courtrendered its decision finding "Mr. Claparols guilty of union busting and" of having

"dismissed said complainants because of their union activities," and ordering respondents"(1) To cease and desist from committing unfair labor practices against their employeesand laborers; (2) To reinstate said complainants to their former or equivalent jobs, assoon as possible, with back wages from the date of their dismissal up to their actualreinstatement". Counsel for herein respondent workers filed a motion for execution whichwas granted. On January 23, 1965, petitioners filed an opposition alleging that under thecircumstances presently engulfing the company, petitioner Claparols could not personallyreinstate respondent workers; that assuming the workers are entitled to back wages, thesame should only be limited to three months pursuant to the court ruling in the case ofSta. Cecilia Sawmills vs. CIR; and that since Claparols Steel Corporation ceased tooperate on December 7, 1962, re-employment of respondent workers cannot go beyond

December 7, 1962. On the other had respondent workers, contended that Claparols Steeland Nail Plant and Claparols Steel and Nail Corporation are one and the same corporationcontrolled by petitioner Claparols, with the latter corporation succeeding the former.

ISSUE:Whether or not the amount of back wages recoverable by respondent workers

from petitioners should be the amount accruing up to December 7, 1962 when theClaparols Steel Corporation ceased operations.

RULING:Yes. It is not disputed that Claparols Steel and Nail Plant, which ceased operation of

June 30, 1957, was succeeded by the Claparols Steel Corporation effective the next day,July 1, 1957 up to December 7, 1962. It is very clear that the latter corporation was acontinuation and successor of the first entity, and its emergence was skillfully timed toavoid the financial liability that already attached to its predecessor, the Claparols Steeland Nail Plant. Both predecessors and successor were owned and controlled by thepetitioner Eduardo Claparols and there was no break in the succession and continuity ofthe same business. This "avoiding-the-liability" scheme is very patent, considering that90% of the subscribed shares of stocks of the Claparols Steel Corporation (the secondcorporation) was owned by respondent (herein petitioner) Claparols himself, and all theassets of the dissolved Claparols Steel and Nail Plant were turned over to the emergingClaparols Steel Corporation. It is very obvious that the second corporation seeks the

protective shield of a corporate fiction whose veil in the present case could, and should,be pierced as it was deliberately and maliciously designed to evade its financialobligation to its employees. Furthermore, the Court cited Yutivo & Sons HardwareCompany vs. Court of Tax Appeals where it held that when the notion of legal entity isused to defeat public convenience, justify wrong, protect fraud, or defend crime, the lawwill regard the corporation as an association or persons, or, in the case of twocorporations, will merge them into one.


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19.Villa Rey Transit, inc. v. Eusebio E. Ferrer, et. al., 25 SCRA 849

FACTS:

Jose M. Villarama was an operator of Villa Rey Transit, pursuant to certificates of public

convenience granted him by the Public Service Commission. He sold the 2 certificates tothe Pangasinan Transportation Company, Inc. with the condition, among others, that theVillarama "shall not for a period of 10 years from the date of this sale, apply for any TPUservice identical or competing with the buyer."

Three months after, a corporation called Villa Rey Transit, Inc. was organized whichbought5 certificates of public convenience, 49 buses, tools and equipment from ValentinFernando. Before the PSC could take final action on said application for approval of sale,the Sheriff of Manila levied on 2 of the 5 certificates of public convenience,pursuant to awrit of execution in favor of Eusebio Ferrer, judgment creditor, against ValentinFernando, judgment debtor, and were sold to Ferrer in a public sale. Ferrer sold

the 2certificates Pantranco.

Villa Rey Transit, Inc. filed a complaint for the annulment of the sheriff's sale of theaforesaid 2certificates and the subsequent sale thereof to Pantranco, praying that all theorders of the PSC relative to the parties' dispute over the said certificates be annulled.

ISSUES:

1) Whether or not Villa Rey Transit, Inc. is an alter ego of Villarama, warranting theapplication of the doctrine of piercing the veil of corporate fiction.

2) Does the stipulation between Villarama and Pantranco, as contained in the deed ofsale, that the former "shall not for a period of 10 years from the date of this sale,apply for any tpu service identical or competing with the buyer," bind theCorporation?

RULING:

1) Villarama supplied the organization expenses and the assets of Villa Rey Transit,Inc.; there was no actual payment by the original subscribers as appearing in thebooks; he made use of the money of the Corporation and deposited them to his

private accounts; and the Corporation paid his personal accounts. He mingled thecorporate funds with his own money. Gasoline purchases of the Corporation weremade in his name. Such circumstances are strong persuasive evidence showingthat Villarama has been too much involved in the affairs of the Corporation toaltogether negative the claim that he was only a part-time general manager. Theyshow beyond doubt that the Corporation is his alter ego.


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The interference of Villarama in the complex affairs of the corporation, andparticularly its finances, are much too inconsistent with the ends and purposes ofthe Corporation law, which, precisely, seeks to separate personal responsibilitiesfrom corporate undertakings. It is the very essence of incorporation that the actsand conduct of the corporation be carried out in its own corporate name because it

has its own personality.

The doctrine that a corporation is a legal entity distinct and separate from themembers and stockholders who compose it is recognized and respected in allcases which are within reason and the law. When the fiction is urged as a meansof perpetrating a fraud or an illegal act or as a vehicle for the evasion of anexisting obligation, the circumvention of statutes, the achievement or perfectionof a monopoly or generally the perpetration of knavery or crime, the veil withwhich the law covers and isolates the corporation from the members orstockholders who compose it will be lifted to allow for its consideration merely asan aggregation of individuals.

2) The preponderance of evidence have shown that the Villa Rey Transit, Inc. isan alter egoof Jose M. Villarama, and that the restrictive clause in the contractentered into with Pantranco is also enforceable and binding against the saidCorporation. For the rule is that a seller or promisor may not make use of acorporate entity as a means of evading the obligation of his covenant. Where theCorporation is substantially the alter egoof the covenantor to the restrictiveagreement, it can be enjoined from competing with the covenantee.

20.National Federation of Labor Unions v. Ople, 143 SCRA 125

FACTS:

The National Federation of Labor Union (NAFLU) filed a request for conciliationbefore the Bureau of Labor Relations requesting for the intervention in its dispute withLawmans management involving certain money claims, refusal to conclude a collectiveagreement after such has been negotiated and run-away shop undertaken by managementin order to bust the union. Several conferences were conducted by the Bureau to settle thedispute amicably but to no avail.

Management unilaterally declared a temporary shutdown alleging that it had suffered

losses and that it had no more plant and building because they were allegedly repossessedby another corporation for failure to pay rentals. However, it appears that at night,machines were dism

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