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REYNOSO VS CA

FACTS: In early 1960, the Commercial Credit Corporation (CCC) a financing and investment firm decided to organized francise companies in different parts of the country, wherein it shall held 30% equity.

Petitioner Bibiano O. Reynoso, IV was designated as resident manager of the Francise Company in Q.C., known as CCC-QC.CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the management and full control of the business activities of the former.

On account of new restriction imposed by the CB policy by virtue of DOSRI RULE, CCC decided to form CCC Equity Corporation, wholly-owned subsidiary to which CCC transferred its 30% equity in CCC-QC together with two seats in the latter board of directors.

Under the new set-up, several officials of CCC, including petitioner Reynoso became employee of CCC Equity. While petitioner continued to be the President Manager of CCC-QC, he drew his salaries and allowances from CCC Equity.

A complaint for sum of money and preliminary attachment was instituted in the CFI of Rizal against petitioner. He was dismissed from his employment by CCC Equity. ISSUE: Whether or not the doctrine of piercing the veil of corporate entity is applicable in the case at bar.

HELD: Reversed.

RATIO: Faced with the financial obligation with CCC-QC had to satisfy, the mother firm closed CCC-QC in obvious fraud of its creditors.CCC-QC, instead of opposing its closure, cooperated in its own demise. CCC-QC stated in

its opposition to the motion for alias writ of execution that all its properties and assets had been transferred and taken over by CCC.

G.R. No. L-31061 August 17, 1976SULO NG BAYAN INC., plaintiff-appellant, 

vs. GREGORIO ARANETA, INC.,

NATURE: for the nullification of the transfer certificates of title issued in favor of defendants appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute owners of the property" and the issuance of the corresponding certificate of title; and for damages.

FACTS: Plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against defendants-appellees to recover the ownership and possession of a large tract of land in San Jose del Monte, Bulacan.

On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee National Waterworks & Sewerage Authority did not file any motion to dismiss. However, it pleaded in its answer as special and affirmative defenses lack of cause of action by the plaintiff-appellant and the barring of such action by prescription and laches.

On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds that the court had no jurisdiction to issue the Order of dismissal, because its request for the transfer of the case from the Valenzuela

Branch of the Court of First Instance to the Malolos Branch of the said court has been approved by the Department of Justice. This motion was denied by the trial court in its Order dated February 22, 1967. From the afore-mentioned Order of dismissal and the Order denying its motion for reconsideration, plaintiff-appellant appealed to the Court of Appeals.ISSUE: whether or not plaintiff corporation (non- stock may institute an action in behalf of its individual members for the recovery of certain parcels of land allegedly owned by said members

Held: It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. 4 The property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. 5 Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, "even in the case of a one-man corporation. 6 The mere fact that one is president of a corporation does not render the property which he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate similarities. 7 Similarly, stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock certificates were considered not to have such legal or equitable title or interest in the land, as would support a

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suit for title, especially against parties other than the corporation. 8

It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve the ends of justice. 9 This separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or where necessary to achieve equity. 10

Thus, when "the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, ... the law will regard the corporation as an association of persons, or in the case of two corporations, merge them into one, the one being merely regarded as part or instrumentality of the other. 11 The same is true where a corporation is a dummy and serves no business purpose and is intended only as a blind, or an alter ego or business conduit for the sole benefit of the stockholders. 12 This doctrine of disregarding the distinct personality of the corporation has been applied by the courts in those cases when the corporate entity is used for the evasion of taxes 13 or when the veil of corporate fiction is used to confuse legitimate issue of employer-employee relationship, 14 or when necessary for the protection of creditors, in which case the veil of corporate fiction may be pierced and the funds of the corporation may be garnished to satisfy the debts of a principal stockholder. 15 The aforecited principle is resorted to by the courts as a measure protection for third parties to prevent fraud, illegality or injustice. 16

It has not been claimed that the members have assigned or transferred whatever rights they may have on the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a corporation, like plaintiff-

appellant herein, has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities.ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant.

[G.R. No. 150763.  July 2, 2004]RURAL BANK OF MAKATI, INC., ESTEBAN

S. SILVA and MAGDALENA V. LANDICHO, petitioners, vs. MUNICIPALITY

OF MAKATI and ATTY. VICTOR A. L. VALERO, respondents.

The Court of Appeals affirmed the decision [2]   dated   October 22, 1996   of the   Regional   Trial   Court   of   Makati   City, Branch 134, in Civil Case No. 91-2866 dismissing petitioners’ complaint for recovery of a sum of money and damages. Petitioners now assail said CA decision as well as the Resolution[3] dated November 9, 2001, which denied their Motion for Reconsideration.

Facts:Atty. Victor A.L. Valero, then the municipal

attorney of the Municipality of Makati, upon request of the municipal treasurer, went to the Rural Bank of Makati to inquire about the bank’s payments of taxes and fees to the municipality.  He was informed, however, by petitioner Magdalena V. Landicho, corporate secretary of the bank, that the bank was exempt from paying taxes under Republic Act No. 720, as amended.[4]

On November 19, 1990, the municipality lodged a complaint with the Prosecutor’s Office, charging petitioners Esteban S. Silva, president and general manager of the bank and Magdalena V. Landicho for violation of Section 21(a), Chapter II, Article 3 in relation to Sections 105 and 169 of the Metropolitan Tax Code.

On April 5, 1991, an Information docketed as Criminal Case No. 140208, for violation of Municipal Ordinance Nos. 122 and 39 for non-payment of the mayor’s permit fee, was filed with the Metropolitan Trial Court (MeTC) of Makati against petitioners.  Another Information, docketed as Criminal Case No. 140209, for non-payment of annual business tax, in violation of Metro Manila Commission Ordinance No. 82-03, Section 21(a), Chapter II, Article 3, was likewise filed with the MeTC.

respondent municipality asserted that petitioners’ payment of P82,408.66 was for a legal obligation because the payment of the mayor’s permit fee as well as the municipal business license was required of all business concerns.  According to respondent, said requirement was in furtherance of the police power of the municipality to regulate businesses.

For his part, Atty. Valero filed an Answer claiming that there was no coercion committed by the municipality, that payment was a legal obligation of the bank, and that its claim of exemption had no legal basis.  He further alleged that petitioners’ action was clearly intended to harass and humiliate him and as counterclaim, he asked for moral and other damages.TC: On October 22, 1996, the RTC decided Civil Case No. 91-2866 as follows: WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing the complaint.On the counterclaim, the plaintiffs are hereby ordered jointly and severally to pay to defendant Victor Valero the sum of P200,000.00 as moral damages and the amount of P50,000.00 as attorney’s fees.CA: The appellate court sustained the lower court in this wise:WHEREFORE, premises considered, the appealed decision is hereby AFFIRMED in toto. SO ORDERED.[9]

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The Court of Appeals found the order of closure of the bank valid and justified since the bank was operating without any permit and without having paid the requisite permit fee. Thus, declared the Court of Appeals, “it is not merely a matter of enforcement and collection of fees, as the appellants would have it, but a violation of the municipality’s authority to regulate the businesses operating within its territory.”[10]

ISSUES:1.  Whether or not petitioner bank is liable

to pay the business taxes and mayor’s permit fees imposed by respondent;

2.  Whether or not the closure of petitioner bank is valid;

3.  Whether or not petitioners are entitled to an award of unrealized profit and damages;

4.     Whether or not respondent Atty. Victor Valero is entitled to damages.

Held:on the issue of damages, we agree with

both the trial and the appellate courts that the bank is not entitled to any damages.  The award of moral damages cannot be granted to a corporation, it being an artificial person that exists only in legal contemplation and cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.[30] There is also no sufficient basis for the award of exemplary damages.  There being no moral damages, exemplary damages could not be awarded also. As to attorney’s fees, aside from lack of adequate support and proof on the matter, these fees are not recoverable as a matter of right but depend on the sound discretion of the courts.[31]

Under the circumstances of this case, the award of damages to Atty. Valero is also baseless.  We cannot ascribe any illegal motive or malice to the bank for impleading Atty. Valero as an officer of respondent municipality.  The bank filed the case against respondent

municipality in the honest belief that it is exempt from paying taxes and fees.  Since Atty. Valero was the official charged with the implementation of the ordinances of respondent municipality, he was rightly impleaded as a necessary party in the case.

WHEREFORE, the assailed Decision dated July 17, 2001, of the Court of Appeals in CA-G.R. CV No. 58214 is AFFIRMED with MODIFICATIONS, so that (1) the order denying any claim for refunds and fees allegedly overpaid by the bank, as well as the denial of any award for damages and unrealized profits, is hereby SUSTAINED; (2) the order decreeing the closure of petitioner bank is SET ASIDE; and (3) the award of moral damages and attorney’s fees to Atty. Victor A.L. Valero is DELETED.  No pronouncement as to costs.

SO ORDERED.

G.R. No. L-22973           January 30, 1968MAMBULAO LUMBER COMPANY, plaintiff-

appellant, vs. PHILIPPINE NATIONAL BANK and

ANACLETO HERALDO Deputy Provincial Sheriff of Camarines Norte, defendants-

appellees.

NATURE: An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and Anacleto Heraldo, defendants", dismissing the complaint against both defendants and sentencing the plaintiff to pay to defendant Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 until fully paid, and the costs of suit.

Facts:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant PNB and the former offered real estate, machinery, logging and transportation equipments as collaterals. The application, however, was approved for a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings and improvements existing thereon.

The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated demands were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do so. Upon inspection and verification made by employees of the PNB, it was found that the plaintiff had already stopped operation about the end of 1957 or early part of 1958.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held.

TRIAL COURT rendered the decision appealed from which, as stated in the first paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 (day following the date of the questioned foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber Company interposed the instant appeal.

Issue:Is Mambulao Lumber Company entitled to moral damages?

Held: Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright,

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serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. 21 A corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that herein appellant had already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with the sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the mortgage contract, to which their attentions were timely called by herein appellant, and in disposing of the chattels in gross for the miserable amount of P4,200.00, herein appellant should be awarded exemplary damages in the sum of P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00

in exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees.

Bataan Shipyard Engineering Co., Inc. vs. PCGG

(G.R. No. 75885 May 27, 1987)Facts:When President Corazon Aquino took power, the Presidential Commission on Good Government (PCGG) was formed in order to recover ill gotten wealth allegedly acquired by former President Marcos and his cronies. Aquino then issued two executive orders in 1986 and pursuant thereto, a sequestration and a takeover order were issued against Bataan Shipyard & engineering Co., Inc. (BASECO). BASECO was alleged to be in actuality owned and controlled by the Marcoses through the Romualdez family, and in turn,  through dummy stockholders.The sequestration order issued in 1986 required, among others, that BASECO produce corporate records from 1973 to 1986 under pain of contempt of the PCGG if it fails to do so. BASECO assails this order as it avers, among others, that it is against BASECO’s right against self incrimination and unreasonable searches and seizures.Issues:

1. Whether or not a corporation can invoke the Right of Self Incrimination

2. Whether or not Baseco can be force to produce the corporate book under the pain of contempt of the PCGG, if fails to do so.

Held: 1. No. PCGG has the right to require the production of such documents pursuant to the power granted to it. Neither is the right against unreasonable searches and seizures applicable here. There were no searches made and no seizure pursuant to any search was ever made. BASECO was merely ordered to produce the corporate records.

It is elementary that the right against self-incrimination has no application to juridical persons. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privileges. Corporations are not entitled to all of the constitutional protections, which private individuals have. They are not at all within the privilege against self-incrimination; although this court more than once has said that the privilege runs very closely with the4th Amendment's Search and Seizure provisions.

2. It is also settled that an officer of the company cannot refuse to produce its records in its possession upon the plea that they will either incriminate him or may incriminate it.

The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts and find out whether it has exceeded its powers.

SARONA VS NLRC GR 185280NAURE: This is a petition for review under Rule 45 of the Rules of Court from the May 29, 2008 Decision1 of the Twentieth Division of the Court of Appeals (CA) in CA-G.R. SP No. 02127 entitled “Timoteo H. Sarona v. National Labor Relations Commission, Royale Security Agency (formerly Sceptre Security Agency) and Cesar S. Tan” (Assailed Decision), which affirmed the

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National Labor Relations Commission’s (NLRC): November 30, 2005 Decision and January 31, 2006 Resolution, finding the petitioner illegally dismissed but limiting the amount of his backwages to three (3) monthly salaries. The CA: held that absent any showing that Royale is a mere alter ego of Sceptre Security Agency (Sceptre), Royale cannot be compelled to recognize the petitioner’s tenure with Sceptre. The dispositive portion of the CA’s Assailed Decision states:WHEREFORE , in view of the foregoing, the instant petition is   PARTLY GRANTED , though piercing of the corporate veil is hereby denied for lack of merit. Accordingly, the assailed Decision and Resolution of the NLRC respectively dated November 30, 2005 and January 31, 2006 are hereby   AFFIRMED   as to the monetary awards.

Facts:On June 20, 2003, the petitioner, who was hired by Sceptre as a security guard sometime in April 1976, was asked by Karen Therese Tan (Karen), Sceptre’s Operation Manager, to submit a resignation letter as the same was supposedly required for applying for a position at Royale. 

Petitioner was  informed him that he would no longer be given any assignment per the instructions of Aida Sabalones-Tan (Aida), general manager of Sceptre. This prompted him to file a complaint for illegal dismissal on October 4, 2003.

The respondents were ordered to pay the petitioner backwages. In lieu of reinstatement, the respondents were ordered to pay the petitioner separation pay. In this regard, LA Gutierrez refused to pierce Royale’s corporate veil for purposes of factoring the petitioner’s length of service with Sceptre in the computation of his separation pay. LA Gutierrez ruled that Royale’s corporate personality, which

is separate and distinct from that of Sceptre, a sole proprietorship owned by the late Roso Sabalones (Roso) and later, Aida, cannot be pierced absent clear and convincing evidence that Sceptre and Royale share the same stockholders and incorporators and that Sceptre has complete control and dominion over the finances and business affairs of Royale. 

The NLRC partially affirmed LA Gutierrez’s May 11, 2005 Decision. It concurred with the latter’s finding that the petitioner was illegally dismissed and the manner by which his separation pay was computed, but modified the monetary award in the petitioner’s favor by reducing the amount of his backwages from P95,600.00 to P15,600.00. The NLRC determined the petitioner’s backwages as limited to three (3) months of his last monthly salary, considering that his employment with Royale was only for a period for one (1) month and three (3) days.

The petitioner, on the other hand, did not appeal LA Gutierrez’s May 11, 2005 Decision but opted to raise the validity of LA Gutierrez’s adverse findings with respect to piercing Royale’s corporate personality and computation of his separation pay in his Reply to the respondents’ Memorandum of Appeal. 

The CA, in consideration of substantial justice and the jurisprudential dictum that an appealed case is thrown open for the appellate court’s review, disagreed with the NLRC and proceeded to review the evidence on record to determine if Royale is Sceptre’s alter ego that would warrant the piercing of its corporate veil.14 According to the CA, errors not assigned on appeal may be reviewed as technicalities should not serve as bar to the full adjudication of cases. CA: ruled against the petitioner and found the evidence he submitted to support his allegation that Royale and Sceptre are one and the same juridical entity to be wanting. The CA refused to pierce Royale’s corporate mask as one of the

“probative factors that would justify the application of the doctrine of piercing the corporate veil is stock ownership by one or common ownership of both corporations” and the petitioner failed to present clear and convincing proof that Royale and Sceptre are commonly owned or controlled. 

ISSUESa. Whether Royale’s corporate fiction should be pierced for the purpose of compelling it to recognize the petitioner’s length of service with Sceptre and for holding it liable for the benefits that have accrued to him arising from his employment with Sceptre; andb. Whether the petitioner’s backwages should be limited to his salary for three (3) months.

HELD:Royale is a continuation or successor of Sceptre.

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. This is basic.45

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.46

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu

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where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.47

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.48

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience 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.49

In this regard, this Court finds cogent reason to reverse the CA’s findings. Evidence abound showing that Royale is a mere continuation or successor of Sceptre and fraudulent objectives are behind Royale’s incorporation and the petitioner’s subsequent employment therein. These are plainly suggested by events that the respondents do not dispute and which the CA, the NLRC and LA Gutierrez accept as fully substantiated but misappreciated as insufficient to warrant the use of the equitable weapon of piercing.

As correctly pointed out by the petitioner, it was Aida who exercised control and supervision over the affairs of both Sceptre and Royale. Contrary to the submissions of the respondents that Roso had been the only one in sole control of Sceptre’s finances and business affairs, Aida took over as early as 1999 when Roso assigned his license to operate Sceptre on May 3, 1999.50 As further proof of Aida’s acquisition of the rights as Sceptre’s sole proprietor, she caused the registration of the business name “Sceptre Security & Detective Agency” under her name with the DTI a few months after Roso abdicated his rights to Sceptre in her favor.51 As far as Royale is concerned, the respondents do not deny that she has a hand in its management and operation and possesses control and supervision of its employees, including the petitioner. As the petitioner correctly pointed out, that Aida was the one who decided to stop giving any assignments to the petitioner and summarily dismiss him is an eloquent testament of the power she wields insofar as Royale’s affairs are concerned. The presence of actual common control coupled with the misuse of the corporate form to perpetrate oppressive or manipulative conduct or evade performance of legal obligations is patent; Royale cannot hide behind its corporate fiction.

Aida’s control over Sceptre and Royale does not, by itself, call for a disregard of the corporate fiction. There must be a showing that a fraudulent intent or illegal purpose is behind the exercise of such control to warrant the piercing of the corporate veil.52 However, the manner by which the petitioner was made to resign from Sceptre and how he became an employee of Royale suggest the perverted use of the legal fiction of the separate corporate personality. It is undisputed that the petitioner tendered his resignation and that he applied at Royale at the instance of Karen and Cesar and on the impression they created that these were

necessary for his continued employment. They orchestrated the petitioner’s resignation from Sceptre and subsequent employment at Royale, taking advantage of their ascendancy over the petitioner and the latter’s lack of knowledge of his rights and the consequences of his actions.

Furthermore, that the petitioner was made to resign from Sceptre and apply with Royale only to be unceremoniously terminated shortly thereafter leads to the ineluctable conclusion that there was intent to violate the petitioner’s rights as an employee, particularly his right to security of tenure. The respondents’ scheme reeks of bad faith and fraud and compassionate justice dictates that Royale and Sceptre be merged as a single entity, compelling Royale to credit and recognize the petitioner’s length of service with Sceptre. The respondents cannot use the legal fiction of a separate corporate personality for ends subversive of the policy and purpose behind its creation53 or which could not have been intended by law to which it owed its being.54

For the piercing doctrine to apply, it is of no consequence if Sceptre is a sole proprietorship. As ruled in Prince Transport, Inc., et al. v. Garcia, et al.,55 it is the act of hiding behind the separate and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts, evade one’s obligations that the equitable piercing doctrine was formulated to address and prevent:

A settled formulation of the doctrine of piercing the corporate veil is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that these two entities are distinct and treat them as identical or as one and the same. In the

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present case, it may be true that Lubas is a single proprietorship and not a corporation. However, petitioners’ attempt to isolate themselves from and hide behind the supposed separate and distinct personality of Lubas so as to evade their liabilities is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy.56

Also, Sceptre and Royale have the same principal place of business. As early as October 14, 1994, Aida and Wilfredo became the owners of the property used by Sceptre as its principal place of business by virtue of a Deed of Absolute Sale they executed with Roso.57 Royale, shortly after its incorporation, started to hold office in the same property. These, the respondents failed to dispute.

The respondents do not likewise deny that Royale and Sceptre share the same officers and employees. Karen assumed the dual role of Sceptre’s Operation Manager and incorporator of Royale. With respect to the petitioner, even if he has already resigned from Sceptre and has been employed by Royale, he was still using the patches and agency cloths of Sceptre during his assignment at Highlight Metal.

Royale also claimed a right to the cash bond which the petitioner posted when he was still with Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released the petitioner’s cash bond when he resigned and Royale would have required the petitioner to post a new cash bond in its favor.

Taking the foregoing in conjunction with Aida’s control over Sceptre’s and Royale’s business affairs, it is patent that Royale was a mere subterfuge for Aida. Since a sole proprietorship does not have a separate and distinct personality from that of the owner of the

enterprise, the latter is personally liable. This is what she sought to avoid but cannot prosper.

WHEREFORE, premises considered, the Petition is hereby GRANTED. We REVERSE and SET ASIDE the CA’s May 29, 2008 Decision in C.A.-G.R. SP No. 02127.

[G.R. No. 117416.  December 8, 2000]Avelina G. Ramoso vs CA

NATURE: This petition for review on certiorari assails the decision[1] of the Court of Appeals dated October 8, 1993, and its resolution[2] dated September 22, 1994

CA :G.R. SP No. 29225, which affirmed the Securities and Exchange Commission’s decision stating thus:“WHEREFORE, the appealed decision of the hearing officer in SEC Case No. 2581 is hereby   MODIFIED   as follows: 1.     Piercing the veil of corporate fiction among GCC, CCC Equity and the franchise companies - Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City, and Commercial Credit Corporation of Quezon City - is not proper for being without merit; and2.     The declaration that petitioning franchise corporations and individual petitioners are not liable for the payment of bad accounts assigned to, and discounted by GCC is SET ASIDE for being in excess of jurisdiction.” [3]

Facts:On March 11, 1957, Commercial Credit

Corporation was registered with SEC as a general financing and investment corporation.  CCC made proposals to several investors for the organization of franchise companies in different localities.  The proposed trade names and indicated areas were:  (a)

Commercial Credit Corporation - Cagayan Valley; (b) Commercial Credit Corporation - Olongapo City; and (c) Commercial Credit Corporation - Quezon City.

Petitioners herein invested and bought majority shares of stocks, while CCC retained minority holdings.  Management contracts were executed between each franchise company and CCC, under the following terms and conditions:  (1) The franchise company shall be managed by CCC’s resident manager.  (2) Management fee equivalent to 10% of net profit before taxes shall be paid to CCC.  (3) All expenses shall be borne by the franchise company, except the salary of the resident manager and the cost of credit investigation. (4) CCC shall set prime rates for discounting or rediscounting of receivables.  Apart from these, each investor was required to sign a continuing guarantee for bad accounts that might be incurred by CCC due to discounting activities.

In 1974, CCC attempted to obtain a quasi-banking license from Central Bank of the Philippines.  But there was a hindrance because Section 1326 of CB’s “Manual of Regulations for Banks and Other Financial Intermediaries,”

The companies’ operations were on course until 1981, when adverse media reports unraveled anomalies in the business of GCC.  Upon investigation, petitioners allegedly discovered the dissipation of the assets of their respective franchise companies.  Among the alleged fraudulent schemes by GCC involved transfer or assignment of its uncollectible notes and accounts; utilization of spurious commercial papers to generate paper revenues; and release of collateral in connivance with unauthorized loans.  Furthermore, GCC allegedly divested itself of its assets through a questionable offset of receivables arrangement with one of its creditors, Resource and Finance Corporation.Hearing officer: ordered “piercing the corporate veil” of GCC, CCC Equity, and the franchise companies.  He later declared that GCC was not

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liable to individual petitioners for the losses, since as investors they assumed the risk of their respective investments.  The franchise companies and the individual petitioners were held not liable to GCC for the bad accounts incurred by the latter through the discounting process. In an en banc decision, dated October 6, 1992, the SEC reversed the ruling of its hearing officer.  Petitioners appealed to the Court of Appeals.  On October 8, 1993, the appellate court affirmed respondent SEC’s decision.  Petitioners moved for a reconsideration, but it was denied on September 22, 1994.

Issues:I.         WHETHER THE COURT OF

APPEALS ERRED GRAVELY IN FAILING TO RULE THAT GCC’S FRAUD UPON PETITIONERS AND MISMANAGEMENT OF THE FRANCHISE COMPANIES WARRANT THE PIERCING OF ITS VEIL OF CORPORATE FICTION.

II.       WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE THAT ONLY THE SEC HAS JURISDICTION OVER THE ISSUE OF WHETHER INDIVIDUAL PETITIONERS MAY BE HELD LIABLE ON THE SURETY AGREEMENTS FOR BAD ACCOUNTS INCURRED BY GCC THROUGH THE DISCOUNTING PROCESS.

III.WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO REVERSE AND SET ASIDE THE 06, OCTOBER 1992 SEC DECISION.

Held:

SEC en banc decided against the petitioners, saying:“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... [T]he control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.The test may be stated as follows:In any given case, except express agency, estoppel, or direct tort, three elements must be proved:

1.  Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2.  Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of the statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and

3.  the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents ‘piercing the corporate veil.”[5]

The SEC stated further that:“The second element required for the application of the instrumentality rule is not present in this case.  Upon close scrutiny of the various testamentary and documentary evidence presented during trial, it may be observed that petitioner’s claim of dissipation of assets and resources belonging to the franchise companies

has not been reasonably supported by said evidence at hand with the Commission.  In fact, the disputed decision of the hearing officer dealt mainly with the aspect of control exercised by GCC over the franchise companies without a concrete finding of fraud on the part of the former to the prejudice of individual petitioners’ interests.  As previously discussed, mere control on the part of GCC through CCC Equity over the operations and business policies of the franchise companies does not necessarily warrant piercing the veil of corporate fiction without proof of fraud.  In order to determine whether or not the control exercised by GCC through CCC Equity over the franchise companies was used to commit fraud or wrong, to violate a statutory or other positive legal duty, or dishonest and unjust act in contravention of petitioners’ legal rights, the circumstances that caused the bankruptcy of the franchise companies must be taken into consideration.”[6]

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears.  When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.[7] Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation  internally,  involving  no  rights of the public or third persons.  In both instances, there must have been fraud, and proof of it.  For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established.[8] It cannot be presumed.[9]

We agree with the findings of the SEC concurred in by the appellate court that there was no fraud nor mismanagement in the control exercised by GCC and by CCC Equity, over the franchise companies.  Whether the existence of the corporation should be pierced depends on

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questions of facts, appropriately pleaded.  Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient.  The presumption is that the stockholders or officers and the corporation are distinct entities.  The burden of proving otherwise is on the party seeking to have the court pierce the veil of the corporate entity.[10] In this, petitioner failed.

Petitioners contend that the issue of whether the investors may be held liable on the surety agreements for bad accounts incurred by GCC through the discounting process cannot be isolated from the fundamental issue of validly piercing GCC’s corporate veil.  They argue that since these surety agreements are intra-corporate matters, only the SEC has the specialized knowledge to evaluate whether fraud was perpetrated.

We note, however, that petitioners signed the continuing guaranty of the franchise companies’ bad debts in their own personal capacities.  Consequently, they are responsible for their individual acts.  The liabilities of petitioners as investors arose out of the regular financing venture of the franchise companies.  There is no evidence that these bad debts were fraudulently incurred.  Any taint of bad faith on the part of GCC in enticing investors may be resolved in ordinary courts, inasmuch as this is in the nature of a contractual relationship.  Changing petitioners’ subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity.

Finally, we note that petitioners were given ample opportunity to present evidence in support of their claims.  But mere allegations do not constitute convincing evidence.  We find no sufficient reason to overturn the decisions of both the SEC and the appellate court.

WHEREFORE, the instant petition is DENIED for lack of merit.  The assailed decision and resolution of the Court of Appeals dated October 8, 1993 and September 22, 1994,

respectively, are AFFIRMED.  Costs against petitioners.

BERNADETH LONDONIO AND JOAN CORCORO vs.

BIO RESEARCH, INC. AND WILSON Y. ANG

Facts: Petitioners Bernadeth E. Londonio (Bernadeth) and Joan T. Corcoro (Joan) were hired by respondent Bio Research Inc. (Bio Research) as graphic/visual artists on February 12 and October 19, 2004, respectively.

In a Memorandum dated April 30, 2005 which petitioners received on May 7, 2005, Bio Research informed its employees including petitioners that pursuant to its plan to reduce the workforce in order to prevent losses, it would be severing their employment with the company. On May 9, 2005, Bio Research filed an Establishment Termination Report with the Department of Labor and Employment (DOLE) stating that it was retrenching 18 of its employees including petitioners due to redundancy and to prevent losses. Bernadeth and Joan were in fact retrenched on May 26 and May 18, 2005, respectively.

Petitioners later filed a complaint for illegal dismissal, moral and exemplary damages and attorney’s fees against respondent Bio Research and its co-respondent President/CEO Wilson Y. Ang (Ang). Petitioners claimed that their dismissal was done in bad faith and tainted with malice.Issue: Whether or not respondent Ang is personally liable for his official acts.Labor Arbiter’s Decision:The Labor Arbiter ruled in favor of petitioners.NLRC’s Decision:

On appeal by respondents, the National Labor Relations Commission affirmed the LA’s decision and it denied respondents’ reconsideration.CA’s Decision:

The Court of Appeals to which respondents assailed the NLRC resolutions by certiorari, sustained the ratio decidendi behind the NLRC decision in favor of petitioners.  However, the appellate court departed from the NLRC ruling holding respondent Ang solidarily liable with Bio Research for the money claims of petitioners, the latter having failed to show that Ang was impelled by malice and bad faith in dismissing them.SC’s Decision:

Respecting the appellate court’s freeing Ang from liability, the same is in order. Corporate officers, absent any evidence that they have exceeded their authority, are not personally liable for their official acts. For a corporation has, by legal fiction a personality separate and distinct from its officers, stockholders and members. In cases of illegal dismissal, this fictional veil may be pierced and its directors and officers held solidarily liable with it, where the dismissals of its employees are done with malice or in bad faith, which was not proven to be the case here.

PHIVIDEC VS. CA 181 SCRA 669FACTS: This case arose when Violeta M. Borres, private respondent herein, was injured in an accident that was later held by the trial and respondent courts to be due to the negligence of Phividec Railways, Inc. (PRI). The accident occurred on March 29, 1979. On May 25, 1979, petitioner Philippine Veterans Investment Development Corporation (PHIVIDEC) sold all its rights and interests in the PRI to the Philippine Sugar Commission (PHILSUCOM). On January 21, 1980, Borres filed a complaint for damages against PRI & Panay Railways Inc. (Panay). PRI disclaimed liability on the ground that in the agreement concluded between PHIVIDEC and PHILSUCOM it was provided that:

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D. With the exception of the Liabilities and Contracts specified in Annexes 4 and 5 of the preceding paragraph, PHIVIDEC hereby holds PHILSUCOM harmless from and against any action, claim or liability that may arise out of or result from acts or omissions, contracts or transactions prior to the turn-over. Regional Trial Court of Iloilo held Phividec Railways, Inc. negligent and so liable to the plaintiff for damages. It also held that as PRI was a wholly-owned subsidiary of PHIVIDEC, the latter should answer for PRI's liability. The decision was affirmed on appeal by the respondent court, which is now faulted for grave abuse of discretion in this petition.Issue: Thus, the piercing of the veil of corporate fiction is called for in the case at barRuling: When PRI was sold by PHIVIDEC to PHILSUCOM on May 25, 1979, the legal fiction of PRI as a separate corporate entity from PHIVIDEC disappeared pursuant to and in view of the representations and warranties contained in the agreement of sale between PHIVIDEC and PHILSUCOM, particularly the stipulation already quoted above, by virtue of which PHIVIDEC held PHILSUCOM harmless from any claim or liability arising out of any act or transaction "prior to the turn-over." By virtue of this provision, PHIVIDEC had expressly assumed liability for any claim arising before the turn-over of PRI to PHILSUCOM. And since the accident in question took place before said turn-over and since after said turn-over PRI ceased to exist (in the sense that its railways operations were taken over by PHILSUCOM thru the Panay RW) the only logical conclusion is that PHIVIDEC should be solely liable for the damages to the plaintiff in the case at bar. Indeed, applying the Koppelprecedent just cited, PHIVIDEC cannot hide behind the veil of corporate fiction in order to evade this liability, nor could the veil of corporate fiction be made a shield to confuse claimants such as plaintiff-appellee.

In Koppel v. Yatco, 6 the Court, citing Fletcher, declared that the veil of corporate fiction may be pierced when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime. 7 It added that when the corporation is the mere alter ego or business conduit of a person it may be disregarded, "to prevent injustice, or the distortion or hiding of the truth, or to let in a just defense." The rule is that: Where it appears that two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat them as identical. 9

Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. Moreover, as correctly pointed out by the respondent court: Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that PHVIDEC had complete control of PRI's business. This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v. Manila Electric, 24 F 2nd 383) that if a parent- holding company (PHIVIDEC in the present case) assumes complete control of the operations of its subsidiary's business, the separate corporate existence of the subsidiary must be disregarded, such that the holding company will be responsible for the negligence of the employees

of the subsidiary as if it were the holding company's own employees.

WHEREFORE, the challenged decision is AFFIRMED and the petition is DENIED, with costs against the petitioner.

G.R. No. 167603DEVELOPMENT BANK OF THE

PHILIPPINES, Petitioner, vs. HYDRO RESOURCES CONTRACTORS

CORPORATION, Respondent.

SUMMARY:RTC – favoured respondent. Awarding them judgement award.CA – AffirmedSC – reversed. Finding DBP and PNB not solidarily liable.

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. 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 NMICwere either from DBP or PNB.9

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. NMIC’s receivables fromHercon, 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,

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DBP, and PNB solidarily liable for the amount owing Hercon, Inc.11 The case was docketed as Civil Case No. 15375.

APT was created by virtue of Proclamation No. 50 creating it “ for the expeditious disposition and privatization of certain government corporations and/or the assets thereof.”DBP and PNB executed their respective deeds of transfer in favour of the national government assigning, transferring and conveying certain assets and liabilities, including their respective shares in NMIC.

Defenses of each respondent:NMIC - no cause of action. Its contract with HRCC was entered into by its then President without any authority. The contract allegedly failed to comply with laws, rules and regulations concerning government contracts. The contract amount was manifestly excessive and grossly disadvantageous to the government.DBP -  defense that HRCC had no cause of action against it because DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate from that of DBPPNB’s-invoked lack of cause of action against it. It also raised estoppel on HRCC’s part and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for payment was made on it by HRCC.Invoked the separate juridical personality of NMIC and made counterclaims for moral damages and attorney’s fees.20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon, Inc. and APT, and the National Government’s preferred lien over the assets of NMIC.22

RTC – decided in favor of Plaintiff, by piercing the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC. Ratio:

The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and treat them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

CA- affirmed.

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of NMIC should be pierced, ratiocinating: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. x x x.27

SC –IN piercing the corporate veil:cutting through the corporate cover requires an approach characterized by due care and caution:“xxxIt must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed.The TEST as pronounced in Sarona v. National Labor Relations Commission. The doctrine of piercing the corporate veil applies only in three

(3) basic areas, namely: 1) defeat of public convenience 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. In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent.It examines the parent corporation’s relationship with the subsidiary.It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its

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separate existence as a distinct corporate entity will be ignored.It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation.It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor.As such, it requires a showing of "an element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

AS TO THE CASE AT BAR

1.CONTROL - as to RTC/CA decision stating “NMIC having no mind, will or existence of its own”

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s predecessor-in-interest, regarding the contract for NMIC’s mine stripping and road construction program was addressed to and accepted by NMIC. The various billing reports, progress reports, statements of accounts and communications of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction program in 1985 concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised by DBP and/or PNB over NMIC’s affairs, policies and practices.

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services rendered by HRCC in connection with NMIC’s mine stripping and road construction program in 1985. On the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person acting through its own corporate officers.73

2. Such control to commit fraudIn relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and convincingly established; it cannot

be presumed. Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does not apply.80

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals82:As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

3. Control and breach of Duty must have proximately caused the injury or unjust loss.As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable with NMIC.1âwphi1

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BENITO ARATEA and PONCIANA CANONIGO,

- Versus - ESMERALDO P. SUICO and COURT OF APPEALS,

G.R. No. 170284

Petition for review on certiorari under Rule 45 of the Rules of Court seeks the reversal and setting aside of the decision[1] dated 5 May 2005 of the Court of Appeals (CA)-Cebu City, as reiterated in its resolution[2] of 23 September 2005, in   CA-G.R. CV No. 60174   which affirmed an earlier decision of the Regional Trial Court (RTC) of Cebu City, Branch 24, in an action for a sum of money and damages thereat instituted by the herein private respondent Esmeraldo P. Suico (Suico) against, among others, the herein petitioners Benito Aratea (Aratea) and Ponciana Canonigo (Canonigo).

Facts:Petitioners Aratea and Canonigo are the

controlling stockholders of Samar Mining Development Corporation (SAMDECO), a domestic corporation engaged in mining operations in San Isidro, Wright, Western Samar.  On the other hand, private respondent Suico is a businessman engaged in export and general merchandise.

Sometime  in  1989,  Suico  entered  into a Memorandum of Agreement (MOA) with SAMDECO.  Armed with the proper board resolution, Aratea and Canonigo signed the MOA as the duly authorized representatives of the corporation.  Under the MOA, Suico would extend loans  and  cash  advances  to  SAMDECO  in  exchange  for  the grant of the  exclusive  right  to  market  fifty percent (50%) of the total coal extracted by SAMDECO from its mining sites in San Isidro, Wright, Western Samar.

Suico was enticed into the aforementioned financing scheme because

Aratea and Canonigo assured him that the money he would lend to SAMDECO would easily be paid with five percent (5%) monthly interest as the coals in said sites is easier to gather because it is excavated from open-pit mines.  Aratea and Canonigo also promised to Suico that the loan the latter would extend to SAMDECO could easily be paid from the profits of his fifty percent (50%) share of the coal produced.  Also reserved in favor of Suico was the right of first priority to operate the mining facilities in the event SAMDECO becomes incapable of coping with the work demands.  By way of further incentive, Suico was actually appointed SAMDECO’s Vice-President for Administration.

Pursuant to the same MOA, Suico started releasing loans and cash advances to SAMDECO, still through Aratea and Suico.  SAMDECO started operations in its mining sites to gather the coal.  As agreed in the MOA, fifty percent (50%) of the coals produced were offered by Suico to different buyers.  However, SAMDECO, again through Aratea and Canonigo, prevented the full implementation of the marketing arrangement by not accepting the prices offered by Suico’s coal buyers even though such prices were competitive and fair enough, giving no other explanation for such refusal other than saying that the price was too low.  Aratea and Canonigo did not also set any criterion or standard with which any price offer would be measured against.  Because he failed to close any sale of his 50% share of the coal-produce and gain profits therefrom, Suico could not realize payment of the loans and advances he extended to SAMDECO. 

SAMDECO, on the other hand, successfully disposed of its 50% share of the coal-produce.  Even with said coal sales, however, SAMDECO absolutely made no payment of its loan obligations to Suico, despite demands.

Aratea and Canonigo eventually sold the mining rights and passed on the operations of SAMDECO to Southeast Pacific Marketing, Inc. (SPMI).  They also sold their shares in SAMDECO to SPMI’s President, Arturo E. Dy without notice to, or consent of Suico, in violation of the MOA.

Hence, in the RTC of Cebu City, Suico filed a complaint for a Sum of Money and Damages against SAMDECO, Aratea, Canonigo, and Seiko Philippines, Inc. (SEIKO, which was later substituted by SPMI and Arturo E. Dy).

TC: WHEREFORE, finding that the plaintiff has meritorious cause of action against the defendants, this Court hereby orders all the defendants SAMDECO, SPMI, Dy, SEIKO, Benito Aratea, Ponciana Canonigo to solidarily pay the plaintiff the principal obligation of P3.5 million plus 5% interest per month reckoned from March 1989 until fully paid; while defendants Aratea & Canonigo should solidarily pay plaintiff the balance on the principal amounting to P978,440.00 plus 5% interest per month reckoned from March 1989 until fully paid.  In addition all defendants are hereby ordered solidarily to pay plaintiff P2,000,000.00 million (sic) as moral damages, P500,000.00 as exemplary damages, P250,000.00 as attorney’s fees, and P100,000.00 as litigation expenses.  All counterclaims and cross-claims are hereby dismissed.

CA: WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DISMISSING the appeal filed in this case and AFFIRMING the decision dated January 5, 1998 of the RTC of Cebu City, Branch 24 in Civil Case No. CEB-10618.

Issue: whether SAMDECO’s stockholders and/or representatives (petitioners Aratea and

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Canonigo) may be held solidarily liable with SAMDECO’s obligations, the Court must determine whether, upon the same facts found by the two courts below, there is basis to pierce the veil of corporate fiction and hold SAMDECO’sstockholders and/or officers personally and solidarily liable with the corporation.

Held:

Prudential Bank v. Alviar[4] stated:

Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders.  Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority.  However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.  

SAMDECO must generally be treated as separate and distinct entity from petitioners Aratea and Canonigo unless there are facts and circumstances that would justify the Court to pierce the veil of corporate fiction and treat them as one and the same.  From the facts, as found by the trial court and reechoed by the appellate court, the Court has no reason to doubt that Suico was very well aware that he was dealing with SAMDECO and that Aratea and Canonigo were mere authorized representatives acting for and in behalf of the corporation.  In fact, Suico took note that Aratea and Canonigo were duly authorized by the corresponding board resolution.  There were no indications

whatsoever that Suico was misled to believe that the loans and cash advances were initially intended for the personal benefit of Aratea and/or Canonigo, and that the corporation was only used thereafter for the purpose of hiding behind the veil of corporate fiction to evade personal liability. The evidence sufficiently established that all loans and cash advances were used for the mining operations of SAMDECO, and there were neither allegations nor proofs to the contrary.  Absent any proof of fraud or double dealing, therefore, the doctrine on piercing the veil of corporate entity would not apply.

Considering that the veil of corporate fiction cannot be pierced in this case but the evidence indisputably established that Suico released loans and cash advances in favor of SAMDECO, which loans and cash advances remain unpaid to the present, to Suico’s damage and prejudice, may Aratea and Canonigo, as SAMDECO’s controlling stockholders and/or representatives,  be nonetheless held personally and solidarily liable with SAMDECO and its successors-in-interest for obligations the corporation incurred under the facts herein obtaining?

We rule in the affirmative.In MAM Realty Development

Corporation v. NLRC,[5] the Court stated:A corporation is a

juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it.  The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. There are times, however, when solidary liabilities may be incurred but only when exceptional

circumstances warrant such as in the following cases:

1.         When directors and trustees or, in appropriate cases, the officers of a corporation:

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate affairs;(c) are guilty of conflict of interest  to the prejudice of the corporation, its stockholders or members, and other persons;[6]

2.         When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;[7]

3.         When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation;[8] or4.         When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.[9]

In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. (Emphasis supplied.)Petitioners Aratea and

Canonigo, despite having separate and distinct personalities from SAMDECO may be held personally liable for the loans and advances made by Suico to SAMDECO which they represent on account of their bad faith in carrying out the business of the corporation. 

Petitioners Aratea and Canonigo acted in bad faith when they, as officers of SAMDECO, unreasonably prevented Suico from selling his

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part of the coal-produce of the mining site, in gross violation of their MOA.  This resulted in Suico not being unable to realize profits from his 50% share of the coal-produce, from which Suico could obtain part of the payment for the loans and advances he made in favor of SAMDECO.  Moreover, petitioners also acted in bad faith when they sold, transferred and assigned their proprietary rights over the mining area in favor of SPMI and Dy, thereby causing SAMDECO to grossly violate its MOA with Suico.  Suico suffered grave injustice because he was prevented from acquiring the opportunity to obtain payment of his loans and cash advances, while petitioners Aratea and Canonigo profited from the sale of their shareholdings in SAMDECO in favor of SPMI and Dy. These facts duly established Aratea and Canonigo’s personal liability as officers/stockholders of SAMDECO and their solidary liability with SAMDECO for its obligations in favor of Suico for the loans and cash advances received by the corporation.

WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are AFFIRMED in toto.