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TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administrator-appellee, vs. BENGUET CONSOLIDATED. INC., oppositor-appellant.

Special proceedings; Principal administration and ancillary administration distinguished; When ancillary administration is proper; Reason.—It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any other administration is termed the ancillary administration.

The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs (Johannes v. Harvey, 43 Phil. 175). Ancillary administration is necessary or the reason for such administration is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority in the Philippines,

Settlement of estate of a decedent; Ancillary administrator; Scope of his power and authority.—No one could dispute the power of an ancillary administrator to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors (Rule 84, Sec. 3, Rules of Court. Cf. Pavia v. De la Rosa, 8 Phil. 70; Liwanag v. Reyes, L-19159, Sept. 29, 1964; Ignacio v. Elchico, L-18937, May 16, 1967; etc.). It is a general rule universally recognized that administration, whether principal or ancillary, certainly extends to the assets of a decedent found within the state or country where it was granted, the corollary being "that an administrator appointed in one state or country has no power over property la another state or country" (Leon and Ghezzi v. Manufacturers Life Ins. Co., 90 Phil. 459).

Same; Refusal of domiciliary administrator to deliver shares of stock despite judicial order; Case at bar.—Since, in the case at bar, there is a refusal, persistently adhered to by the domiciliary administrator in New York, to deIiver the shares of stocks of appellant corporation owned by the decedent to fee ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof.

Thereby, the task incumbent under the law on the ancillary administrator could be discharged and his responsibility fulfilled. Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of a party or entity.

In this connection, our Supreme Court held: "Our attention has not been called to any law or treaty that would make the findings of the Veterans' Administrator (of the United States), in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial descretion and render them subordinate instrumentalities of the Veterans' Administrator" (Viloria v. Administrator of Veterans Affairs, 101 Phil. 762).

It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the bench or the honor of the country.

Corporation law; Corporation; Concept and nature.—A corporation is an artificial being created by operation of law (Sec. 2, Act No. 1459). A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary. whenever called upon .to do so.

A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial icial person distinct and separate from its individual stockholders (1 Fletcher, Cyclopedia Corporations, pp. 19-20). [Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242(1968)]

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust Company of New York, United States of America, of the estate of the deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary administrator in the Philippines the stock certificates owned by her in a

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Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court, then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering the motion of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in connection with the administration and liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the same to be delivered by said corporation to either the incumbent ancillary administrator or to the Probate Division of this Court."1

From such an order, an appeal was taken to this Court not by the domiciliary administrator, the County Trust Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The challenged order represents a response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem, addressed to the attainment of specific ends by the use of specific remedies, with full and ample support from legal doctrines of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two stock certificates covering 33,002 shares of appellant, the certificates being in the possession of the County Trust Company of New York, which as noted, is the domiciliary administrator of the estate of the deceased.2 Then came this portion of the appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January 22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary administrator in New York and the ancillary administrator in the Philippines as to which of them was entitled to the possession of the stock certificates in question. On January 27, 1964, the Court of First Instance of Manila ordered the domiciliary administrator, County Trust Company, to "produce and deposit" them with the ancillary administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order, and on February 11, 1964, the ancillary administrator petitioned the court to "issue an order declaring the certificate or certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or] considered as lost."3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as far as it is concerned as to "who is entitled to the possession of the stock certificates in question; appellant opposed the petition of the ancillary administrator because the said stock certificates are in existence, they are today in the possession of the domiciliary administrator, the County Trust Company, in New York, U.S.A...."4

It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or considered as lost. Moreover, it would allege that there was a failure to observe certain requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful conduct of the domiciliary administrator in refusing to accord obedience to a court decree. How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for by the realities of the situation. What cannot be ignored is that conduct bordering on wilful defiance, if it had not actually reached it, cannot without undue loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a solution, the more so as deeper reflection would make clear its being buttressed by indisputable principles and supported by the strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no less than that of the country. Through this challenged order, there is thus dispelled the atmosphere of contingent frustration brought about by the persistence of the domiciliary administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court by entering its appearance through counsel on June 27, 1963, and filing a petition for relief from a previous order of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was decreed. For without it, what it had been decided would be set at naught and nullified. Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of what was previously ordained by a court order could be thus remedied, it would have entailed, insofar as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary administrator to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors.5 As Justice Tuason speaking for this Court made clear, it is a "general rule universally recognized" that administration, whether principal or


ancillary, certainly "extends to the assets of a decedent found within the state or country where it was granted," the corollary being "that an administrator appointed in one state or country has no power over property in another state or country."6

It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any other administration is termed the ancillary administration. The reason for the latter is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs."7

It would follow then that the authority of the probate court to require that ancillary administrator's right to "the stock certificates covering the 33,002 shares ... standing in her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is equally beyond question. For appellant is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds application. "In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here]." To the force of the above undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It would assign as the basic error allegedly committed by the lower court its "considering as lost the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9 More specifically, appellant would stress that the "lower court could not "consider as lost" the stock certificates in question when, as a matter of fact, his Honor the trial Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates are in existence and are today in the possession of the domiciliary administrator in New York."10

There may be an element of fiction in the above view of the lower court. That certainly does not suffice to call for the reversal of the appealed order. Since there is a refusal, persistently adhered to by the domiciliary administrator in New York, to deliver the shares of stocks of appellant corporation owned by the decedent to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator could be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would not be heard to contend in all seriousness that a judicial decree could be treated as a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in such a conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends have played an important part in its development."11

Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to advance the ends of justice, [even if] clumsy and at times offensive."12 Some of them have persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the empire of "as if" today."13 He likewise noted "a class of fictions of another order, the fiction which is a working tool of thought, but which at times hides itself from view till reflection and analysis have brought it to the light."14

What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in the law. There should be then on the part of the appellant a further refinement in the catholicity of its condemnation of such judicial technique. If ever an occasion did call for the employment of a legal fiction to put an end to the anomalous situation of a valid judicial order being disregarded with apparent impunity, this is it. What is thus most obvious is that this particular alleged error does not carry persuasion.


3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking one of the provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or destroyed stock certificate; it would stress that in the event of a contest or the pendency of an action regarding ownership of such certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would await the "final decision by [a] court regarding the ownership [thereof]."15

Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is admitted that the foreign domiciliary administrator did not appeal from the order now in question. Moreover, there is likewise the express admission of appellant that as far as it is concerned, "it is immaterial ... who is entitled to the possession of the stock certificates ..." Even if such were not the case, it would be a legal absurdity to impart to such a provision conclusiveness and finality. Assuming that a contrariety exists between the above by-law and the command of a court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which, however, the judiciary must yield deference, when appropriately invoked and deemed applicable. It would be most highly unorthodox, however, if a corporate by-law would be accorded such a high estate in the jural order that a court must not only take note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the appealed order be set aside for its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful court order certainly constitutes a valid defense, assuming that such apprehension of a possible court action against it could possibly materialize. Thus far, nothing in the circumstances as they have developed gives substance to such a fear. Gossamer possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is an artificial being created by operation of law...."16 It owes its life to the state, its birth being purely dependent on its will. As Berle so aptly stated: "Classically, a corporation was conceived as an artificial person, owing its existence through creation by a sovereign power."17As a matter of fact, the statutory language employed owes much to Chief Justice Marshall, who in the Dartmouth College decision defined a corporation precisely as "an artificial being, invisible, intangible, and existing only in contemplation of law."18

The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders.... It owes its existence to law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter."19 Dean Pound's terse summary, a juristic person, resulting from an association of human beings granted legal personality by the state, puts the matter neatly.20

There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from Friedmann, "is the reality of the group as a social and legal entity, independent of state recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still of persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may, when so minded, overrule the state, the source of its very existence; it is to contend that what any of its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that in a guardianship proceedings then pending in a lower court, the United States Veterans Administration filed a motion for the refund of a certain sum of money paid to the minor under guardianship, alleging that the lower court had previously granted its petition to consider the deceased father as not entitled to guerilla benefits according to a determination arrived at by its main office in the United States. The motion was denied. In seeking a reconsideration of such order, the Administrator relied on an American federal statute making his decisions "final and conclusive on all questions of law or fact"


precluding any other American official to examine the matter anew, "except a judge or judges of the United States court."23 Reconsideration was denied, and the Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the decisions of the U.S. Veterans' Administrator final and conclusive when made on claims property submitted to him for resolution; but they are not applicable to the present case, where the Administrator is not acting as a judge but as a litigant. There is a great difference between actions against the Administrator (which must be filed strictly in accordance with the conditions that are imposed by the Veterans' Act, including the exclusive review by United States courts), and those actions where the Veterans' Administrator seeks a remedy from our courts and submits to their jurisdiction by filing actions therein. Our attention has not been called to any law or treaty that would make the findings of the Veterans' Administrator, in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial discretion and render them mere subordinate instrumentalities of the Veterans' Administrator."

It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet Consolidated seems to be firmly committed as shown by its failure to accept the validity of the order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not succeed. The deplorable consequences attendant on appellant prevailing attest to the necessity of negative response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to conjure extreme and even oppressive possibilities. That is not decisive. It does not settle the issue. What carries weight and conviction is the result arrived at, the just solution obtained, grounded in the soundest of legal doctrines and distinguished by its correspondence with what a sense of realism requires. For through the appealed order, the imperative requirement of justice according to law is satisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet Consolidated, Inc.

ANG PUE & COMPANY, ET AL., plaintiffs-appellants, vs. SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.

Partnership; To organize not absolute right.—To organize a corporation or partnership that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the state may deem necessary to impose.

Same; Only Filipinos may engage in retail business; Rep. Act 1180 applicable to existing partnership.—The State through Congress had the right to enact Republic Act No. 1180 providing that only Filipinos may engage in the retail business and such provision was intended to apply to partnership owned by foreigners already existing at the time of its enactment giving them the right to continue engaging in their retail business until the expiration of their term of life.

Same; Amendment of articles of partnership to extend term after enactment of the law.—The agreement in the articles of partnership to extend the term of its life is not a property right and it must be deemed subject to the law existing at the time when the partners came to agree regarding the extension. In the case at bar, when the partners amended the articles of partnership, the provisions of Republic Act 1180 were already in force, and there can be not the slightest doubt that the right claimed by appellants to extend the original term of their partnership to another five years would be in violation of the clear intent and purpose of said Act. [Ang Pue & Co. vs. Sec. of Commerce and Industry, 5 SCRA 645(1962)]

DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company, Ang Pue and Tan Siong against the Secretary of Commerce and Industry to secure judgment "declaring that plaintiffs could extend for five years the term of the partnership pursuant to the provisions of plaintiffs' Amendment to the Article of Co-partnership."


The answer filed by the defendant alleged, in substance, that the extension for another five years of the term of the plaintiffs' partnership would be in violation of the provisions of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the partnership Ang Pue & Company for a term of five years from May 1, 1953, extendible by their mutual consent. The purpose of the partnership was "to maintain the business of general merchandising, buying and selling at wholesale and retail, particularly of lumber, hardware and other construction materials for commerce, either native or foreign." The corresponding articles of partnership (Exhibit B) were registered in the Office of the Securities & Exchange Commission on June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided, among other things, that, after its enactment, a partnership not wholly formed by Filipinos could continue to engage in the retail business until the expiration of its term.

On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang Pue & Company, but after the enactment of the Republic Act 1180, the partners already mentioned amended the original articles of part ownership (Exhibit B) so as to extend the term of life of the partnership to another five years. When the amended articles were presented for registration in the Office of the Securities & Exchange Commission on April 16, 1958, registration was refused upon the ground that the extension was in violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed this appeal.

The question before us is too clear to require an extended discussion. To organize a corporation or a partnership that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. That the State, through Congress, and in the manner provided by law, had the right to enact Republic Act No. 1180 and to provide therein that only Filipinos and concerns wholly owned by Filipinos may engage in the retail business can not be seriously disputed. That this provision was clearly intended to apply to partnership already existing at the time of the enactment of the law is clearly showing by its provision giving them the right to continue engaging in their retail business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could extend the term of the partnership, the provisions of Republic Act 1180 cannot be adversely affect appellants herein, is to erroneously assume that the aforesaid provision constitute a property right of which the partners can not be deprived without due process or without their consent. The agreement contain therein must be deemed subject to the law existing at the time when the partners came to agree regarding the extension. In the present case, as already stated, when the partners amended the articles of partnership, the provisions of Republic Act 1180 were already in force, and there can be not the slightest doubt that the right claimed by appellants to extend the original term of their partnership to another five years would be in violation of the clear intent and purpose of the law aforesaid.

WHEREFORE, the judgment appealed from is affirmed, with costs.

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

Constitutional Law; Police Power; A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method.—A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.

Same; Same; Due Process; Private property cannot simply be taken by law from one person and given to another without any compensation and any known public purpose.—A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they accrue. Private property cannot simply be taken by law from one person and given to another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the Constitution.

Same; Same; Same; Same; Impairment Clause; While it is true that police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number.—The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification.


While it is true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number. Most present-day contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be affected with public interest. There was therefore no warrant to amend their provisions and deprive the private respondent of its vested property rights.

Same; Same; Presidential Decree No. 1717; Presidential Decree 1717 is an invalid exercise of police power, not being in conformity with the traditional requirements of a lawful subject and a lawful method.—Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the secured creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government, should have been created only by general and not special law. And insofar as the decree also interferes with purely private agreements without any demonstrated connection with the public interest, there is likewise an impairment of the obligation of the contract. [National Development Company vs. Philippine Veterans Bank, 192 SCRA 257(1990)]

D E C I S I O N

CRUZ, J.:

This case involves the constitutionality of a presidential decree which, like all other issuances of President Marcos during his regime, was at that time regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the touchstone of the fundamental law that even then was supposed to limit presidential action.: rd

The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be administered mainly by the National Development Company. The law outlined the procedure for filing claims against the Agrix companies and created a Claims Committee to process these claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished."

Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baños, Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other Agrix companies that the aforementioned decree was issued by President Marcos.

Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In the meantime, the New Agrix, Inc. and the National Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private respondent took steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same court to stop the foreclosure. The two cases were consolidated.

After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative power was a violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3) the decree violated the equal protection clause. The motion for reconsideration of this decision having been denied, the present petition was filed.: rd

The petition was originally assigned to the Third Division of this Court but because of the constitutional questions involved it was transferred to the Court en banc. On August 30, 1988, the Court granted the petitioner's prayer for a temporary restraining order and instructed the respondents to cease and desist from conducting a public auction sale of the lands in question. After the Solicitor General and the private respondent had filed their comments and the petitioners their reply, the Court gave due course to the petition and ordered the parties to file simultaneous memoranda. Upon compliance by the parties, the case was deemed submitted.

The petitioners contend that the private respondent is now estopped from contesting the validity of the decree. In support of this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also raised but not resolved. The Court, after noting that the petitioners had already filed their claims with the AGRIX Claims Committee created by the decree, had simply dismissed the petition on the ground of estoppel.


The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres. Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get results, it sought to foreclose the real estate mortgage executed by AGRIX in its favor, which had been extinguished by the decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that the private respondent attacked the validity of the provision. At that stage, however, consistent with Mendoza, the private respondent was already estopped from questioning the constitutionality of the decree.

The Court does not agree that the principle of estoppel is applicable.

It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It must be noted, however, that this was done in 1980, when President Marcos was the absolute ruler of this country and his decrees were the absolute law. Any judicial challenge to them would have been futile, not to say foolhardy. The private respondent, no less than the rest of the nation, was aware of that reality and knew it had no choice under the circumstances but to conform.: nad

It is true that there were a few venturesome souls who dared to question the dictator's decisions before the courts of justice then. The record will show, however, that not a single act or issuance of President Marcos was ever declared unconstitutional, not even by the highest court, as long as he was in power. To rule now that the private respondent is estopped for having abided with the decree instead of boldly assailing it is to close our eyes to a cynical fact of life during that repressive time.

This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX Claims Committee, received in settlement thereof shares of stock valued at P40,000.00 without protest or reservation. The herein private respondent has not been paid a single centavo on its claim, which was kept pending for more than seven years for alleged lack of supporting papers. Significantly, the validity of that claim was not questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by the private respondent. The petitioner limited itself to the argument that the private respondent was estopped from questioning the decree because of its earlier compliance with its provisions.

Independently of these observations, there is the consideration that an affront to the Constitution cannot be allowed to continue existing simply because of procedural inhibitions that exalt form over substance.

The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and other liens attaching to the assets of AGRIX. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in Subsection (iii) that "all accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not be recognized."

These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person shall be deprived of life, liberty or property without due course of law nor shall any person be denied the equal protection of the law" and in Section 10 that "no law impairing the obligation of contracts shall be passed."

In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation under the police power for the promotion of the common welfare. The contention is that this inherent power of the state may be exercised at any time for this purpose so long as the taking of the property right, even if based on contract, is done with due process of law.

This argument is an over-simplification of the problem before us. The police power is not a panacea for all constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty or property.

A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2

Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently involved to warrant the interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small investors," who would be prejudiced if the corporation were not to be assisted. However, the record does not state how many there are of such investors, and who they are, and why they are being preferred to the private respondent and other creditors of AGRIX with vested property rights.:-cralaw

The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the New Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole, as distinguished from those of a particular class, would be promoted or protected. The indispensable link to the welfare of the greater number has not been established. On the contrary, it would appear that the decree was issued only to favor a special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX.

Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far short of the requirement that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree. The right to property in all mortgages, liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the extinction of the mortgage rights. The accrued interests and other charges are simply rejected by the decree. The right to property is dissolved by legislative fiat without regard to the private interest violated and, worse, in favor of another private interest.8 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they accrue. Private property cannot simply be taken by law from one person and given to another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the Constitution.

And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other liens, the decree lumps the secured creditors with the unsecured creditors and places them on the same level in the prosecution of their respective claims. In this respect, all of them are considered unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to earn interest from the date of the decree, but that still does not justify the cancellation of the interests earned before that date. Such interests, whether due to the secured or the unsecured creditors, are all extinguished by the decree. Even assuming such cancellation to be valid, we still cannot see why all kinds of creditors, regardless of security, are treated alike.

Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges conferred and the obligations imposed. Conversely, all persons or things differently situated should be treated differently. In the case at bar, persons differently situated are similarly treated, in disregard of the principle that there should be equality only among equals.- nad

One may also well wonder why AGRIX was singled out for government help, among other corporations where the stockholders or investors were also swindled. It is not clear why other companies entitled to similar concern were not similarly treated. And surely, the stockholders of the private respondent, whose mortgage lien had been cancelled and legitimate claims to accrued interests rejected, were no less deserving of protection, which they did not get. The decree operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven hand."

On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of the 1973 Constitution, then in force, that:

SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. 4

The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the management of the corporation, but with the obligation of making periodic reports to the Agrix board of directors. After payment of the loan, the said board can then appoint its own management. The stocks of the new corporation are to be issued to the old investors and stockholders of AGRIX upon proof of their claims against the abolished corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely private and so should have been organized under the Corporation Law in accordance with the above-cited constitutional provision.

The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification. While it is true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most present-day contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be affected with public interest. There was therefore no warrant to amend their provisions and deprive the private respondent of its vested property rights.

It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we sustained the preference in payment of a mortgage creditor as against the argument that the claims of laborers should take precedence over all other claims, including those of the government. In arriving at this ruling, the Court recognized the mortgage lien as a property right protected by the due process and contract clauses notwithstanding the argument that the amendment in Section 110 of the Labor Code was a proper exercise of the police power.: nad

The Court reaffirms and applies that ruling in the case at bar.

Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the secured creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government, should have been created only by general and not special law. And insofar as the decree also interferes with purely private agreements without any demonstrated connection with the public interest, there is likewise an impairment of the obligation of the contract.

With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to promulgate Pres. Decree No. 1717 under Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree must fall just the same because of its violation of the Bill of Rights.

WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The temporary restraining order dated August 30, 1988, is LIFTED. Costs against the petitioners.- nad

SO ORDERED.


ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region VIII, respondents.

Commission on Audit; Jurisdiction; The COA’s audit jurisdiction extends not only to government “agencies or instrumentalities,” but also to “government-owned and controlled corporations with original charters as well as “other government-owned or controlled corporations” without original charters.—The Constitution and existing laws mandate COA to audit all government agencies, including government-owned and controlled corporations (“GOCCs”) with original charters. An LWD is a GOCC with an original charter. x x x The COA’s audit jurisdiction extends not only to government “agencies or instrumentalities,” but also to “government-owned and controlled corporations with original charters” as well as “other government-owned or controlled corporations” without original charters.

Same; Same; The determining factor of COA’s audit jurisdiction is government ownership or control of the corporation.—The determining factor of COA’s audit jurisdiction is governmentownership or control of the corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank, the Court even ruled that the criterion of ownership and control is more important than the issue of original charter.

Corporation Law; Congress cannot enact a law creating a private corporation with a special charter; Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.—In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code, except that the Cooperative Code governs the incorporation of cooperatives. The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.

Same; Local Water Districts; Local Water Districts (LWDs) are not private corporations because they are not created under the Corporation Code.—Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that “[A]ll corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x x x.” LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office.

Same; Same; LWDs can validly exist only if they are government-owned or controlled.—LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is constitutionally infirm.

Same; Same; LWDs derive their legal existence and power from PD 198.—Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and power from PD 198.

Same; Same; The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198.—The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a water district, Besides, even assuming for the sake of argument that the Sangguniang Bayan has the power to create corporations, the LWDs would remain government-owned or controlled corporations subject to COA’s audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWD’s special charter, making the LWD a goyernment-owned and controlled corporation with an original charter.

Same; Same; The board directors and other personnel of LWDs are government employees subject to civil service laws and anti-graft laws.—The government owns and controls LWDs. The government organizes LWDs in accordance


with a specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or local government owns and controls all their assets. The government controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD for a fixed term of six years. The board directors of LWDs are not co-owners of the LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are government employees subject to civil service laws and anti-graft laws. [Feliciano vs. Commission on Audit, 419 SCRA 363(2004)]

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for certiorari1 to annul the Commission on Audit’s ("COA") Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Feliciano’s request for COA to cease all audit services, and to stop charging auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA also denied petitioner’s request for COA to refund all auditing fees previously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999 informing COA’s Regional Director that the water district could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 ("PD 198")2, as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director referred petitioner’s reply to the COA Chairman on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to COA.

On 16 March 2000, petitioner received COA Chairman Celso D. Gangan’s Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COA’s audit jurisdiction over local water districts in Davao City Water District v. Civil Service Commission and Commission on Audit,3 as follows:

The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioner’s contention that they are private corporations. It is clear therefrom that the power to appoint the members who will comprise the members of the Board of Directors belong to the local executives of the local subdivision unit where such districts are located. In contrast, the members of the Board of Directors or the trustees of a private corporation are elected from among members or stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily, said members or stockholders should be given a free hand to choose who will compose the governing body of their corporation. But this is not the case here and this clearly indicates that petitioners are not private corporations.

The COA also denied petitioner’s request for COA to stop charging auditing fees as well as petitioner’s request for COA to refund all auditing fees already paid.

The Issues


Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:

1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a government-owned or controlled corporation subject to the audit jurisdiction of COA;

2. Whether Section 20 of PD 198, as amended, prohibits COA’s certified public accountants from auditing local water districts; and

3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws4 mandate COA to audit all government agencies, including government-owned and controlled corporations ("GOCCs") with original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for COA’s audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied)

The COA’s audit jurisdiction extends not only to government "agencies or instrumentalities," but also to "government-owned and controlled corporations with original charters" as well as "other government-owned or controlled corporations" without original charters.

Whether LWDs are Private or Government-Ownedand Controlled Corporations with Original Charters

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long line of cases culminating in Davao City Water District v. Civil Service Commission5 and just recently reiterated in De Jesus v. Commission on Audit.6 Petitioner maintains that LWDs are not government-owned and controlled corporations with original charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a "new perspective to the issue of the true character of water districts."7

Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and not the LWDs. Petitioner claims that LWDs are created "pursuant to" and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an "original charter" that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only provides for their formation on an optional or voluntary basis.8 Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as specified in PD 198.

Petitioner’s contention deserves scant consideration.

We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to government-owned or controlled corporations created by special charters. Section 16, Article XII of the Constitution provides:


Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens.9 The purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other citizens.10

In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code,11 except that the Cooperative Code governs the incorporation of cooperatives.12

The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.

Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that "[A]ll corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus:

From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations created pursuant to the Corporation Code. Significantly, petitioners are not created under the said code, but on the contrary, they were created pursuant to a special law and are governed primarily by its provision.13 (Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is constitutionally infirm.

Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD 19814 provide:

Section 6. Formation of District. — This Act is the source of authorization and power to form and maintain a district. For purposes of this Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As such, a district shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the powers granted in, and subject to such restrictions imposed, under this Act.

(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by said system, followed by the words "Water District".

(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof.

(c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the control of such city, municipality or province to such district upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above.

(e) The names of the initial directors of the district with the date of expiration of term of office for each.


(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title.

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be adopted in each city, municipality and province.

x x x

Sec. 25. Authorization. — The district may exercise all the powers which are expressly granted by this Title or which are necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to review by the Administration. (Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs "shall exercise the powers, rights and privileges given to private corporations under existing laws." Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled corporations with a special charter.

The phrase "government-owned and controlled corporations with original charters" means GOCCs created under special laws and not under the general incorporation law. There is no difference between the term "original charters" and "special charters." The Court clarified this in National Service Corporation v. NLRC15 by citing the deliberations in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.

MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows: "including government-owned or controlled corporations WITH ORIGINAL CHARTERS." The purpose of this amendment is to indicate that government corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However, corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what exactly do we mean?

MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.

MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.

MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the meaning of the phrase "government-owned and controlled corporations with original charters" in this wise:


By "government-owned or controlled corporation with original charter," We mean government owned or controlled corporation created by a special law and not under the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We held:

"The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively from the deliberations of the 1986 Constitutional Commission in respect of the intent and meaning of the new phrase ‘with original charter,’ in effect held that government-owned and controlled corporations with original charter refer to corporations chartered by special law as distinguished from corporations organized under our general incorporation statute — the Corporation Code. In NASECO, the company involved had been organized under the general incorporation statute and was a subsidiary of the National Investment Development Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered by a special statute. Thus, government-owned or controlled corporations like NASECO are effectively, excluded from the scope of the Civil Service." (Emphasis supplied)

Petitioner’s contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption. The Local Government Code17 does not vest in the Sangguniang Bayan the power to create corporations.18 What the Local Government Code empowers the Sangguniang Bayan to do is to provide for the establishment of a waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local Government Code provides:

SECTION 447. Powers, Duties, Functions and Compensation. — (a) The sangguniang bayan, as the legislative body of the municipality, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the municipality and its inhabitants pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as provided for under Section 22 of this Code, and shall:

x x x

(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient waterworks system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and, for this purpose, extend the coverage of appropriate ordinances over all territory within the drainage area of said water supply and within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in connection with the water service; and regulate the consumption, use or wastage of water;

x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan has the power to create corporations, the LWDs would remain government-owned or controlled corporations subject to COA’s audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWD’s special charter, making the LWD a government-owned and controlled corporation with an original charter. In any event, the Court has already ruled in Baguio Water District v. Trajano19 that the Sangguniang Bayan resolution is not the special charter of LWDs, thus:

While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of the opinion that said resolution cannot be considered as its charter, the same being intended only to implement the provisions of said decree.

Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an original charter. In short, petitioner argues that one special law cannot serve as enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the Constitution mandates that "Congress shall not, except by general law,"20 provide for the creation of private corporations. Thus, the Constitution prohibits one special law to create one private corporation, requiring instead a "general law" to create private corporations. In contrast, the same Section 16 states that "Government-owned or controlled corporations may be created or established by special charters." Thus, the Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress to create several GOCCs of the same class under one special enabling charter.

The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs. There is no danger of creating special privileges to certain individuals, families or groups if there is one special law creating each GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or one special 15 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to LWDs.

Petitioner also contends that LWDs are private corporations because Section 6 of PD 19821 declares that LWDs "shall be considered quasi-public" in nature. Petitioner’s rationale is that only private corporations may be deemed "quasi-public" and not public corporations. Put differently, petitioner rationalizes that a public corporation cannot be deemed "quasi-public" because such corporation is already public. Petitioner concludes that the term "quasi-public" can only apply to private corporations. Petitioner’s argument is inconsequential.

Petitioner forgets that the constitutional criterion on the exercise of COA’s audit jurisdiction depends on the government’s ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is immaterial.

The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with original charters," as well as "government-owned or controlled corporations" without original charters. GOCCs with original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs without original charters refer to corporations created under the Corporation Code but are owned or controlled by the government. The nature or purpose of the corporation is not material in determining COA’s audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law.

The determining factor of COA’s audit jurisdiction is government ownership or control of the corporation. InPhilippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even ruled that the criterion of ownership and control is more important than the issue of original charter, thus:

This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters." As the Bank is not owned or controlled by the Government although it does have an original charter in the form of R.A. No. 3518,23 it clearly does not fall under the Civil Service and should be regarded as an ordinary commercial corporation. Section 28 of the said law so provides. The consequence is that the relations of the Bank with its employees should be governed by the labor laws, under which in fact they have already been paid some of their claims. (Emphasis supplied)

Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or local government owns and controls all their assets. The government controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD for a fixed term of six years.24 The board directors of LWDs are not co-owners of the LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are government employees subject to civil service laws25 and anti-graft laws.26

While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means that the appointees to the board of directors of LWDs shall come from the private sector. Once such private sector representatives assume office as directors, they become public officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service includes "government-owned or controlled corporations with original charters."

If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under the term "agencies or instrumentalities" of the government and thus still subject to COA’s audit jurisdiction. However, the stark and undeniable fact is that the government owns LWDs. Section 4527 of PD 198 recognizes government ownership of LWDs when Section 45 states that the board of directors may dissolve an LWD only on the condition that "another public entity has acquired the assets of the district and has assumed all obligations and liabilities attached thereto." The implication is clear that an LWD is a public and not a private entity.

Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner advances the theory that the "Water District’s owner is the District itself."28 Assuming for the sake of argument that an LWD is "self-owned,"29 as petitioner describes an LWD, the government in any event controls all LWDs. First, government officials appoint all LWD directors to a fixed term of office. Second, any per diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration, and directors can receive no other compensation for their services to the LWD.30 Third, the Local Water Utilities Administration can require LWDs to merge or consolidate their facilities or operations.31 This element of government control subjects LWDs to COA’s audit jurisdiction.

Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of ownership of water facilities from local government units to their respective water districts as mandated by PD 198. 16 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

Petitioner is grasping at straws. Privatization involves the transfer of government assets to a private entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD 198 is no other than the LWD itself.32 The transfer of assets mandated by PD 198 is a transfer of the water systems facilities "managed, operated by or under the control of such city, municipality or province to such (water) district."33 In short, the transfer is from one government entity to another government entity. PD 198 is bereft of any indication that the transfer is to privatize the operation and control of water systems.

Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. 34 Section 20 of PD 198 provides:

Sec. 20. System of Business Administration. — The Board shall, as soon as practicable, prescribe and define by resolution a system of business administration and accounting for the district, which shall be patterned upon and conform to the standards established by the Administration. Auditing shall be performed by a certified public accountant not in the government service. The Administration may, however, conduct annual audits of the fiscal operations of the district to be performed by an auditor retained by the Administration. Expenses incurred in connection therewith shall be borne equally by the water district concerned and the Administration.35 (Emphasis supplied)

Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198 when it states that "[A]uditing shall be performed by a certified public accountant not in the government service."36

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from COA’s audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or devise to escape COA’s audit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the Commission on Audit. (Emphasis supplied)

The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange in the deliberations of the Constitutional Commission elucidates this intent of the framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.

May I explain my reasons on record.

We know that a number of entities of the government took advantage of the absence of a legislature in the past to obtain presidential decrees exempting themselves from the jurisdiction of the Commission on Audit, one notable example of which is the Philippine National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly on its own account. Its funds were not very impressive in quantity but underneath that shell there were billions of pesos in a multiplicity of companies. The PNOC — the empty shell — under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of pesos invested in different corporations underneath it were exempted from the coverage of the Commission on Audit.

Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted it from the jurisdiction of the Commission on Audit, it being a private organization.

So these are the fetuses of future abuse that we are slaying right here with this additional section.

May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.


THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople?

MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the amendment.

MR. OPLE: Gladly, Madam President. Thank you.

MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.

Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled corporations and their subsidiaries"? So that if these government-owned and controlled corporations and their subsidiaries are subjected to the audit of the COA, any law exempting certain government corporations or subsidiaries will be already unconstitutional.

So I believe, Madam President, that the proposed amendment is unnecessary.

MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by Commissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same provision was in the 1973 Constitution and yet somehow a law or a decree was passed where certain institutions were exempted from audit. We are just reaffirming, emphasizing, the role of the Commission on Audit so that this problem will never arise in the future.37

There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the Constitution.

On the Legality of COA’sPractice of Charging Auditing Fees

Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section 18 of RA 6758,38 which states:

Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. – In order to preserve the independence and integrity of the Commission on Audit (COA), its officials and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government unit, government-owned or controlled corporations, and government financial institutions, except those compensation paid directly by COA out of its appropriations andcontributions.

Government entities, including government-owned or controlled corporations including financial institutions and local government units are hereby prohibited from assessing or billing other government entities, including government-owned or controlled corporations including financial institutions or local government units for services rendered by its officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and employees. (Emphasis supplied)

Claiming that Section 18 is "absolute and leaves no doubt,"39 petitioner asks COA to discontinue its practice of charging auditing fees to LWDs since such practice allegedly violates the law.

Petitioner’s claim has no basis.

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government entity except "compensation paid directly by COA out of its appropriations and contributions." Thus, RA 6758 itself


recognizes an exception to the statutory ban on COA personnel receiving compensation from GOCCs. InTejada v. Domingo,40 the Court declared:

There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to preserve the independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government unit, GOCCs and government financial institutions, except such compensation paid directly by the COA out of its appropriations and contributions, and (2) government entities, including GOCCs, government financial institutions and local government units from assessing or billing other government entities, GOCCs, government financial institutions or local government units for services rendered by the latter’s officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and employees.

x x x

The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the GOCCs and government financial institutions. Under the first, COA personnel assigned to auditing units of GOCCs or government financial institutions can receive only such salaries, allowances or fringe benefits paid directly by the COA out of its appropriations and contributions. The contributions referred to are the cost of audit services earlier mentioned which cannot include the extra emoluments or benefits now claimed by petitioners. The COA is further barred from assessing or billing GOCCs and government financial institutions for services rendered by its personnel as part of their regular audit functions for purposes of paying additional compensation to such personnel. x x x. (Emphasis supplied)

In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which allows COA to charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of the audit function in the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit cost shall include personnel services, maintenance and other operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the former’s auditing units, the same shall be directly defrayed by COA from its own appropriations x x x. 41

COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COA’s "actual audit cost." Neither has petitioner alleged that the auditing fees are paid by LWDs directly to individual COA auditors. Thus, petitioner’s contention must fail.

WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30 January 2001 denying petitioner’s Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.

SO ORDERED.

J.R.S, BUSINESS CORPORATION, J.R. DA SlLVA and A.J. BELTRAN, petitioners, vs. IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and HON. AGUSTIN MONTESA, Judge of the Court of First Instance of Manila, respondents.

Corporation law; Secondary franchise; Messenger service.—The right to operate a messenger and delivery service by virtue of a legislative enactment is a secondary franchise.

Same; Same; Subject to execution sale.—A secondary franchise is subject to levy and sale on execution together with all the property necessary for the enjoyment thereof.

Same; Same; Same; Procedure.—A secondary franchise and the property necessary for its enjoyment can be sold under execution only when such sale is especially decreed and ordered in the judgment and it becomes effective only when such sale is confirmed by the Court after due notice.

Same; Same; Same; Effect of absence of special decree.—Where the judgment does not contain any special decree making the franchise of a private corporation answerable for its judgment debt, the inclusion of said corporation's


franchise, trade name and capital stocks in the execution sale of its properties has no justification and such sale should be set aside in so far as it authorizes such levy and sale. [J.R.S. Business Corp. vs. Imperial Insurance, Inc., 11 SCRA 634(1964)]

PAREDES, J.:

Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation, an establishment duly franchised by the Congress of the Philippines, to conduct a messenger and delivery express service. On July 12, 1961, the respondent Imperial Insurance, Inc., presented with the CFI of Manila a complaint (Civ. Case No. 47520), for sum of money against the petitioner corporation. After the defendants therein have submitted their Answer, the parties entered into a Compromise Agreement, assisted by their respective counsels, the pertinent portions of which recite:

1) WHEREAS, the DEFENDANTS admit and confess their joint and solidary indebtedness to the PLAINTIFF in the full sum of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY-TWO & 32/100 (P61,172.32), Philippine Currency, itemized as follows:

a) Principal P50,000.00

b) Interest at 12% per annum 5,706.14

c) Liquidated damages at 7% per annum 3,330.58

d) Costs of suit 135.60

e) Attorney's fees 2,000.00

2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and hereby promise to pay their aforementioned obligation to the PLAINTIFF at its business address at 301-305 Banquero St., (Ground Floor), Regina Building, Escolta, Manila, within sixty (60) days from March 16, 1962 or on or before May 14, 1962;

3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total amount of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY TWO & 32/100 (P61,172.32), Philippine Currency, for any reason whatsoever, on May 14, 1962, the PLAINTIFF shall be entitled, as a matter of right, to move for the execution of the decision to be rendered in the above-entitled case by this Honorable Court based on this COMPROMISE AGREEMENT.

On March 17, 1962, the lower court rendered judgment embodying the contents of the said compromise agreement, the dispositive portion of which reads —

WHEREFORE, the Court hereby approves the above-quoted compromise agreement and renders judgment in accordance therewith, enjoining the parties to comply faithfully and strictly with the terms and conditions thereof, without special pronouncement as to costs.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët

On May 15, 1962, one day after the date fixed in the compromise agreement, within which the judgment debt would be paid, but was not, respondent Imperial Insurance Inc., filed a "Motion for the Insurance of a Writ of Execution". On May 23, 1962, a Writ of Execution was issued by respondent Sheriff of Manila and on May 26, 1962, Notices of Sale were sent out for the auction of the personal properties of the petitioner J.R.S. Business Corporation. On June 2, 1962, a Notice of Sale of the "whole capital stocks of the defendants JRS Business Corporation, the business name, right of operation, the whole assets, furnitures and equipments, the total liabilities, and Net Worth, books of accounts, etc., etc." of the petitioner corporation was, handed down. On June 9, the petitioner, thru counsel, presented an "Urgent Petition for Postponement of Auction Sale and for Release of Levy on the Business Name and Right to Operate of Defendant JRS Business Corporation", stating that petitioners were busy negotiating for a loan with which to pay the judgment debt; that the judgment was for money only and, therefore, plaintiff (respondent Insurance Company) was not authorized to take over and appropriate for its own use, the business name of the defendants; that the right to operate under the franchise, was not transferable and could not be considered a personal or immovable, property, subject to levy and sale. On June 10, 1962, a Supplemental Motion for Release of Execution, was filed by counsel of petitioner JRS Business Corporation, claiming that the capital stocks thereof, could not be levied upon and sold under execution. Under date of June 20, 1962, petitioner's counsel presented a pleading captioned "Very Urgent Motion for Postponement of Public Auction Sale and for Ruling on Motion for Release of Levy 20 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

on the Business Name, Right to Operate and Capital Stocks of JRS Business Corporation". The auction sale was set for June 21, 1962. In said motion, petitioners alleged that the loan they had applied for, was to be secured within the next ten (10) days, and they would be able to discharge the judgment debt. Respondents opposed the said motion and on June 21, 1962, the lower court denied the motion for postponement of the auction sale.

In the sale which was conducted in the premises of the JRS Business Corporation at 1341 Perez St., Paco, Manila, all the properties of said corporation contained in the Notices of Sale dated May 26, 1962, and June 2, 1962 (the latter notice being for the whole capital stocks of the defendant, JRS Business Corporation, the business name, right of operation, the whole assets, furnitures and equipments, the total liabilities and Net Worth, books of accounts, etc., etc.), were bought by respondent Imperial Insurance, Inc., for P10,000.00, which was the highest bid offered. Immediately after the sale, respondent Insurance Company took possession of the proper ties and started running the affairs and operating the business of the JRS Business Corporation. Hence, the present appeal.

It would seem that the matters which need determination are (1) whether the respondent Judge acted without or in excess of his jurisdiction or with grave abuse of discretion in promulgating the Order of June 21, 1962, denying the motion for postponement of the scheduled sale at public auction, of the properties of petitioner; and (2) whether the business name or trade name, franchise (right to operate) and capital stocks of the petitioner are properties or property rights which could be the subject of levy, execution and sale.

The respondent Court's act of postponing the scheduled sale was within the discretion of respondent Judge, the exercise of which, one way or the other, did not constitute grave abuse of discretion and/or excess of jurisdiction. There was a decision rendered and the corresponding writ of execution was issued. Respondent Judge had jurisdiction over the matter and erroneous conclusions of law or fact, if any, committed in the exercise of such jurisdiction are merely errors of judgment, not correctible by certiorari (Villa Rey Transit v. Bello, et al., L-18957, April 23, 1963, and cases cited therein.)

The corporation law, on forced sale of franchises, provides —

Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use public property or any portion of the public domain or any right of way over public property or the public domain, and any rights and privileges acquired under such franchise may be levied upon and sold under execution, together with the property necessary for the enjoyment, the exercise of the powers, and the receipt of the proceeds of such franchise or right of way, in the same manner and with like effect as any other property to satisfy any judgment against the corporation: Provided, That the sale of the franchise or right of way and the property necessary for the enjoyment, the exercise of the powers, and the receipt of the proceeds of said franchise or right of way is especially decreed and ordered in the judgment: And provided, further, That the sale shall not become effective until confirmed by the court after due notice. (Sec. 56, Corporation Law.)

In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was held —

The first question then for decision is the meaning of the word "franchise" in the statute.

"A franchise is a special privilege conferred by governmental authority, and which does not belong to citizens of the country generally as a matter of common right. ... Its meaning depends more or less upon the connection in which the word is employed and the property and corporation to which it is applied. It may have different significations.

"For practical purposes, franchises, so far as relating to corporations, are divisible into (1) corporate or general franchises; and (2) special or secondary franchises. The former is the franchise to exist as a corporation, while the latter are certain rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes or tracks, erect poles or string wires." 2 Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p. 160; Adams v. Yazon & M. V. R. Co., 24 So. 200, 317, 28 So. 956, 77 Miss. 253, 60 L.R.A. 33 et seq.

The primary franchise of a corporation that is, the right to exist as such, is vested "in the individuals who compose the corporation and not in the corporation itself" (14 C.J. pp. 160, 161; Adams v. Railroad, supra; 2 Fletcher's Cyclopedia Corp. Secs. 1153, 1158; 3 Thompson on Corporations 2d Ed.] Secs. 2863, 2864),and cannot be conveyed in the absence of a legislative authority so to do (14A CJ. 543, 577; 1 Fletcher's Cyc. Corp. Sec. 1224; Memphis & L.R.R. Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28 L.E.d. 837; Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453, 50 L.E.d. 1102, 6 Ann. Cas. 253; Arthur v. Commercial & Railroad Bank, 9 Smedes & M. 394, 48 Am. Dec. 719), but the specify or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property (Adams v. Railroad, supra; 14A C.J. 542, 557; 3 Thompson on Corp. [2nd Ed.] Sec. 2909), except such special or secondary franchises as are charged with a


public use (2 Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544; 3 Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R. Bank, supra; McAllister v. Plant, 54 Miss. 106).

The right to operate a messenger and express delivery service, by virtue of a legislative enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled "An Act granting the JRS Business Corporation a franchise to conduct a messenger and express service)" and, as such, under our corporation law, is subject to levy and sale on execution together and including all the property necessary for the enjoyment thereof. The law, however, indicates the procedure under which the same (secondary franchise and the properties necessary for its enjoyment) may be sold under execution. Said franchise can be sold under execution, when such sale is especially decreed and ordered in the judgment and it becomes effective only when the sale is confirmed by the Court after due notice (Sec. 56, Corp. Law). The compromise agreement and the judgment based thereon, do not contain any special decree or order making the franchise answerable for the judgment debt. The same thing may be stated with respect to petitioner's trade name or business name and its capital stock. Incidentally, the trade name or business name corresponds to the initials of the President of the petitioner corporation and there can be no serious dispute regarding the fact that a trade name or business name and capital stock are necessarily included in the enjoyment of the franchise. Like that of a franchise, the law mandates, that property necessary for the enjoyment of said franchise, can only be sold to satisfy a judgment debt if the decision especially so provides. As We have stated heretofore, no such directive appears in the decision. Moreover, a trade name or business name cannot be sold separately from the franchise, and the capital stock of the petitioner corporation or any other corporation, for the matter, represents the interest and is the property of stockholders in the corporation, who can only be deprived thereof in the manner provided by law (Therbee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and Phrases, 109).

It, therefore, results that the inclusion of the franchise, the trade name and/or business name and the capital stock of the petitioner corporation, in the sale of the properties of the JRS Business Corporation, has no justification. The sale of the properties of petitioner corporation is set aside, in so far as it authorizes the levy and sale of its franchise, trade name and capital stocks. Without pronouncement as to costs.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Regala and Makalintal, JJ., concur.

ANITA MANGILA, petitioner, vs. COURT OF APPEALS and LORETA GUINA, respondents.

Actions; Attachments; Pleadings and Practice; A party to a suit may, at any time after filing the complaint, avail of the provisional remedies under the Rules of Court, and, specifically, Rule 57 on preliminary attachment speaks of the grant of the remedy “at the commencement of the action or at any time thereafter.”—As a preliminary note, a distinction should be made between issuance and implementation of the writ of attachment. It is necessary to distinguish between the two to determine when jurisdiction over the person of the defendant should be acquired to validly implement the writ. This distinction is crucial in resolving whether there is merit in petitioner’s argument. This Court has long settled the issue of when jurisdiction over the person of the defendant should be acquired in cases where a party resorts to provisional remedies. A party to a suit may, at any time after filing the complaint, avail of the provisional remedies under the Rules of Court. Specifically, Rule 57 on preliminary attachment speaks of the grant of the remedy “at the commencement of the action or at any time thereafter.” This phrase refers to the date of filing of the complaint which is the moment that marks “the commencement of the action.” The reference plainly is to a time before summons is served on the defendant, or even before summons issues.

Same; Same; The grant of the provisional remedy of attachment involves three stages—the issuance by the court of the order granting the application, the issuance of the writ of attachment pursuant to the order, and the implementation of the writ; For the initial two stages, it is not necessary that jurisdiction over the person of the defendant be first obtained, but once the implementation of the writ commences, the court must have acquired jurisdiction over the defendant.—Furthermore, we have held that the grant of the provisional remedy of attachment involves three stages: first, the court issues the order granting the application; second, the writ of attachment issues pursuant to the order granting the writ; and third, the writ is implemented. For the initial two stages, it is not necessary that jurisdiction over the person of the defendant be first obtained. However, once the implementation of the writ commences, the court must have acquired jurisdiction over the defendant for without such jurisdiction, the court has no power and authority to act in any manner against the defendant. Any order issuing from the Court will not bind the defendant.

Same; Same; Summons by Publication; If the defendant’s whereabouts could not be ascertained after the sheriff had served the summons at her given address, then plaintiff should immediately ask the court for service of summons by publication on the defendant; The condition of a resident temporarily out of the country is the exact situation contemplated in Section 16, Rule 14 of the Rules of Civil Procedure, providing for service of summons by publication.—The rules provide for certain remedies in cases where personal service could not be effected on a party. Section 14, Rule 14 of the Rules of Court provides that whenever the defendant’s “whereabouts are unknown and cannot be


ascertained by diligent inquiry, service may, by leave of court, be effected upon him by publication in a newspaper of general circulation x x x.” Thus, if petitioner’s whereabouts could not be ascertained after the sheriff had served the summons at her given address, then respondent could have immediately asked the court for service of summons by publication on petitioner. Moreover, as private respondent also claims that petitioner was abroad at the time of the service of summons, this made petitioner a resident who is temporarily out of the country. This is the exact situation contemplated in Section 16, Rule 14 of the Rules of Civil Procedure, providing for service of summons by publication.

Same; Same; An alias summons belatedly served on a defendant cannot be deemed to cure the fatal defect in the enforcement of the writ of preliminary attachment.—In conclusion, we hold that the alias summons belatedly served on petitioner cannot be deemed to have cured the fatal defect in the enforcement of the writ. The trial court cannot enforce such a coercive process on petitioner without first obtaining jurisdiction over her person. The preliminary writ of attachment must be served after or simultaneous with the service of summons on the defendant whether by personal service, substituted service or by publication as warranted by the circumstances of the case. The subsequent service of summons does not confer a retroactive acquisition of jurisdiction over her person because the law does not allow for retroactivity of a belated service.

Same; Venue; A mere stipulation on the venue of an action is not enough to preclude parties from bringing a case in other venues—the parties must be able to show that such stipulation is exclusive; Venue stipulations in a contract, while considered valid and enforceable, do not as a rule, supersede the general rule set forth in Rule 4 of the Revised Rules of Court.—The Rules of Court provide that parties to an action may agree in writing on the venue on which an action should be brought. However, a mere stipulation on the venue of an action is not enough to preclude parties from bringing a case in other venues. The parties must be able to show that such stipulation is exclusive. Thus, absent words that show the parties’ intention to restrict the filing of a suit in a particular place, courts will allow the filing of a case in any venue, as long as jurisdictional requirements are followed. Venue stipulations in a contract, while considered valid and enforceable, do not as a rule supersede the general rule set forth in Rule 4 of the Revised Rules of Court. In the absence of qualifying or restrictive words, they should be considered merely as an agreement on additional forum, not as limiting venue to the specified place.

Same; Same; Parties; Sole Proprietorships; A sole proprietorship does not have a separate juridical personality that could enable it to file a suit in court—there is no law authorizing sole proprietorships to file a suit in court.—In the instant case, it was established in the lower court that petitioner resides in San Fernando, Pampanga while private respondent resides in Parañaque City. However, this case was brought in Pasay City, where the business of private respondent is found. This would have been permissible had private respondent’s business been a corporation, just like the case in Sy v. Tyson Enterprises, Inc. However, as admitted by private respondent in her Complaint in the lower court, her business is a sole proprietorship, and as such, does not have a separate juridical personality that could enable it to file a suit in court. In fact, there is no law authorizing sole proprietorships to file a suit in court. A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court.

Same; Same; Same; Same; It is the residence of the proprietor which should be considered as one of the proper venues, not the business address of the sole proprietorship.—Thus, not being vested with legal personality to file this case, the sole proprietorship is not the plaintiff in this case but rather Loreta Guina in her personal capacity. In fact, the complaint in the lower court acknowledges in its caption that the plaintiff and defendant are Loreta Guina and Anita Mangila, respectively. The title of the petition before us does not state, and rightly so, Anita Mangila v. Air Swift International, but rather Anita Mangila v. Loreta Guina. Logically then, it is the residence of private respondent Guina, the proprietor with the juridical personality, which should be considered as one of the proper venues for this case. All these considered, private respondent should have filed this case either in San Fernando, Pampanga (petitioner’s residence) or Parañaque (private respondent’s residence). Since private respondent (complainant below) filed this case in Pasay, we hold that the case should be dismissed on the ground of improper venue.

Same; Same; The objective of the rules on venue to insure a just and orderly administration of justice or the impartial and evenhanded determination of every action and proceeding will not be attained if the plaintiff is given unrestricted freedom to choose where to file the complaint or petition.—The rules on venue, like other procedural rules, are designed to insure a just and orderly administration of justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom to choose where to file the complaint or petition. [Mangila vs. Court of Appeals, 387 SCRA 162(2002)]


CARPIO, J.:

The Case

This is a petition fore review on certiorari under Rule 45 of the Rules of Court, seeking to set aside the Decision1 of the Court of Appeals affirming the Decision2 of the Regional Trial Court, Branch 108, Pasay City. The trial court upheld the writ of attachment and the declaration of default on petitioner while ordering her to pay private respondent P109,376.95 plus 18 percent interest per annum, 25 percent attorney’s fees and costs of suit.

The Facts

Petitioner Anita Mangila ("petitioner" for brevity) is an exporter of sea foods and doing business under the name and style of Seafoods Products. Private respondent Loreta Guina ("private respondent" for brevity) is the President and General Manager of Air Swift International, a single registered proprietorship engaged in the freight forwarding business.

Sometime in January 1988, petitioner contracted the freight forwarding services of private respondent for shipment of petitioner’s products, such as crabs, prawns and assorted fishes, to Guam (USA) where petitioner maintains an outlet. Petitioner agreed to pay private respondent cash on delivery. Private respondent’s invoice stipulates a charge of 18 percent interest per annum on all overdue accounts. In case of suit, the same invoice stipulates attorney’s fees equivalent to 25 percent of the amount due plus costs of suit.3

On the first shipment, petitioner requested for seven days within which to pay private respondent. However, for the next three shipments, March 17, 24 and 31, 1988, petitioner failed to pay private respondent shipping charges amounting to P109, 376.95.4

Despite several demands, petitioner never paid private respondent. Thus, on June 10, 1988, private respondent filed Civil Case No. 5875 before the Regional Trial Court of Pasay City for collection of sum of money.

On August 1, 1988, the sheriff filed his Sheriff’s Return showing that summons was not served on petitioner. A woman found at petitioner’s house informed the sheriff that petitioner transferred her residence to Sto. Niño, Guagua, Pampanga. The sheriff found out further that petitioner had left the Philippines for Guam.5

Thus, on September 13, 1988, construing petitioner’s departure from the Philippines as done with intent to defraud her creditors, private respondent filed a Motion for Preliminary Attachment. On September 26, 1988, the trial court issued an Order of Preliminary Attachment6 against petitioner. The following day, the trial court issued a Writ of Preliminary Attachment.

The trial court granted the request of its sheriff for assistance from their counterparts in RTC, Pampanga. Thus, on October 28, 1988, Sheriff Alfredo San Miguel of RTC Pampanga served on petitioner’s household help in San Fernando, Pampanga, the Notice of Levy with the Order, Affidavit and Bond.7

On November 7, 1988, petitioner filed an Urgent Motion to Discharge Attachment8 without submitting herself to the jurisdiction of the trial court. She pointed out that up to then, she had not been served a copy of the Complaint and the summons. Hence, petitioner claimed the court had not acquired jurisdiction over her person.9

In the hearing of the Urgent Motion to Discharge Attachment on November 11, 1988, private respondent sought and was granted a re-setting to December 9, 1988. On that date, private respondent’s counsel did not appear, so the Urgent Motion to Discharge Attachment was deemed submitted for resolution.10

The trial court granted the Motion to Discharge Attachment on January 13, 1989 upon filing of petitioner’s counter-bond. The trial court, however, did not rule on the question of jurisdiction and on the validity of the writ of preliminary attachment.

On December 26, 1988, private respondent applied for an alias summons, which the trial court issued on January 19, 1989.11 It was only on January 26, 1989 that summons was finally served on petitioner.12

On February 9, 1989, petitioner filed a Motion to Dismiss the Complaint on the ground of improper venue. Private respondent’s invoice for the freight forwarding service stipulates that "if court litigation becomes necessary to enforce collection xxx the agreed venue for such action is Makati, Metro Manila."13 Private respondent filed an Opposition asserting that although "Makati" appears as the stipulated venue, the same was merely an inadvertence by the printing press whose general manager executed an affidavit14 admitting such inadvertence. Moreover, private respondent claimed that petitioner knew that private respondent was holding office in Pasay City and not in


Makati.15 The lower court, finding credence in private respondent’s assertion, denied the Motion to Dismiss and gave petitioner five days to file her Answer. Petitioner filed a Motion for Reconsideration but this too was denied.

Petitioner filed her Answer16 on June 16, 1989, maintaining her contention that the venue was improperly laid.

On June 26, 1989, the trial court issued an Order setting the pre-trial for July 18, 1989 at 8:30 a.m. and requiring the parties to submit their pre-trial briefs. Meanwhile, private respondent filed a Motion to Sell Attached Properties but the trial court denied the motion.

On motion of petitioner, the trial court issued an Order resetting the pre-trial from July 18, 1989 to August 24, 1989 at 8:30 a.m..

On August 24, 1989, the day of the pre-trial, the trial court issued an Order17 terminating the pre-trial and allowing the private respondent to present evidence ex-parte on September 12, 1989 at 8:30 a.m.. The Order stated that when the case was called for pre-trial at 8:31 a.m., only the counsel for private respondent appeared. Upon the trial court’s second call 20 minutes later, petitioner’s counsel was still nowhere to be found. Thus, upon motion of private respondent, the pre-trial was considered terminated.

On September 12, 1989, petitioner filed her Motion for Reconsideration of the Order terminating the pre-trial. Petitioner explained that her counsel arrived 5 minutes after the second call, as shown by the transcript of stenographic notes, and was late because of heavy traffic. Petitioner claims that the lower court erred in allowing private respondent to present evidence ex-parte since there was no Order considering the petitioner as in default. Petitioner contends that the Order of August 24, 1989 did not state that petitioner was declared as in default but still the court allowed private respondent to present evidence ex-parte.18

On October 6, 1989, the trial court denied the Motion for Reconsideration and scheduled the presentation of private respondent’s evidence ex-parte on October 10, 1989.1âwphi1.nêt

On October 10, 1989, petitioner filed an Omnibus Motion stating that the presentation of evidence ex-parte should be suspended because there was no declaration of petitioner as in default and petitioner’s counsel was not absent, but merely late.

On October 18, 1989, the trial court denied the Omnibus Motion.19

On November 20, 1989, the petitioner received a copy of the Decision of November 10, 1989, ordering petitioner to pay respondent P109,376.95 plus 18 percent interest per annum, 25 percent attorney’s fees and costs of suit. Private respondent filed a Motion for Execution Pending Appeal but the trial court denied the same.

The Ruling of the Court of Appeals

On December 15, 1995, the Court of Appeals rendered a decision affirming the decision of the trial court. The Court of Appeals upheld the validity of the issuance of the writ of attachment and sustained the filing of the action in the RTC of Pasay. The Court of Appeals also affirmed the declaration of default on petitioner and concluded that the trial court did not commit any reversible error.

Petitioner filed a Motion for Reconsideration on January 5, 1996 but the Court of Appeals denied the same in a Resolution dated May 20, 1996.

Hence, this petition.

The Issues

The issues raised by petitioner may be re-stated as follows:

I.

WHETHER RESPONDENT COURT ERRED IN NOT HOLDING THAT THE WRIT OF ATTACHMENT WAS IMPROPERLY ISSUED AND SERVED;

II.

WHETHER THERE WAS A VALID DECLARATION OF DEFAULT;25 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

III.

WHETHER THERE WAS IMPROPER VENUE.

IV.

WHETHER RESPONDENT COURT ERRED IN DECLARING THAT PETITIONER IS OBLIGED TO PAY P109, 376.95, PLUS ATTORNEY’S FEES.20

The Ruling of the Court

Improper Issuance and Service of Writ of Attachment

Petitioner ascribes several errors to the issuance and implementation of the writ of attachment. Among petitioner’s arguments are: first, there was no ground for the issuance of the writ since the intent to defraud her creditors had not been established; second, the value of the properties levied exceeded the value of private respondent’s claim. However, the crux of petitioner’s arguments rests on the question of the validity of the writ of attachment. Because of failure to serve summons on her before or simultaneously with the writ’s implementation, petitioner claims that the trial court had not acquired jurisdiction over her person and thus the service of the writ is void.

As a preliminary note, a distinction should be made between issuance and implementation of the writ of attachment. It is necessary to distinguish between the two to determine when jurisdiction over the person of the defendant should be acquired to validly implement the writ. This distinction is crucial in resolving whether there is merit in petitioner’s argument.

This Court has long settled the issue of when jurisdiction over the person of the defendant should be acquired in cases where a party resorts to provisional remedies. A party to a suit may, at any time after filing the complaint, avail of the provisional remedies under the Rules of Court. Specifically, Rule 57 on preliminary attachment speaks of the grant of the remedy "at the commencement of the action or at any time thereafter."21 This phrase refers to the date of filing of the complaint which is the moment that marks "the commencement of the action." The reference plainly is to a time before summons is served on the defendant, or even before summons issues.

In Davao Light & Power Co., Inc. v. Court of Appeals,22 this Court clarified the actual time when jurisdiction should be had:

"It goes without saying that whatever be the acts done by the Court prior to the acquisition of jurisdiction over the person of defendant - issuance of summons, order of attachment and writ of attachment - these do not and cannot bind and affect the defendant until and unless jurisdiction over his person is eventually obtained by the court, either by service on him of summons or other coercive process or his voluntary submission to the court’s authority. Hence, when the sheriff or other proper officer commencesimplementation of the writ of attachment, it is essential that he serve on the defendant not only a copy of the applicant’s affidavit and attachment bond, and of the order of attachment, as explicitly required by Section 5 of Rule 57, but also the summons addressed to said defendant as well as a copy of the complaint xxx." (Emphasis supplied.)

Furthermore, we have held that the grant of the provisional remedy of attachment involves three stages: first, the court issues the order granting the application; second, the writ of attachment issues pursuant to the order granting the writ; and third, the writ is implemented. For the initial two stages, it is not necessary that jurisdiction over the person of the defendant be first obtained. However, once the implementation of the writ commences, the court must have acquired jurisdiction over the defendant for without such jurisdiction, the court has no power and authority to act in any manner against the defendant. Any order issuing from the Court will not bind the defendant.23

In the instant case, the Writ of Preliminary Attachment was issued on September 27, 1988 and implemented on October 28, 1988. However, the alias summons was served only on January 26, 1989 or almost three months after the implementation of the writ of attachment.

The trial court had the authority to issue the Writ of Attachment on September 27 since a motion for its issuance can be filed "at the commencement of the action." However, on the day the writ was implemented, the trial court should have, previously or simultaneously with the implementation of the writ, acquired jurisdiction over the petitioner. Yet, as was shown in the records of the case, the summons was actually served on petitioner several months after the writ had been implemented.


Private respondent, nevertheless, claims that the prior or contemporaneous service of summons contemplated in Section 5 of Rule 57 provides for exceptions. Among such exceptions are "where the summons could not be served personally or by substituted service despite diligent efforts or where the defendant is a resident temporarily absent therefrom x x x." Private respondent asserts that when she commenced this action, she tried to serve summons on petitioner but the latter could not be located at her customary address in Kamuning, Quezon City or at her new address in Guagua, Pampanga.24 Furthermore, respondent claims that petitioner was not even in Pampanga; rather, she was in Guam purportedly on a business trip.

Private respondent never showed that she effected substituted service on petitioner after her personal service failed. Likewise, if it were true that private respondent could not ascertain the whereabouts of petitioner after a diligent inquiry, still she had some other recourse under the Rules of Civil Procedure.

The rules provide for certain remedies in cases where personal service could not be effected on a party. Section 14, Rule 14 of the Rules of Court provides that whenever the defendant’s "whereabouts are unknown and cannot be ascertained by diligent inquiry, service may, by leave of court, be effected upon him by publication in a newspaper of general circulation x x x." Thus, if petitioner’s whereabouts could not be ascertained after the sheriff had served the summons at her given address, then respondent could have immediately asked the court for service of summons by publication on petitioner.25

Moreover, as private respondent also claims that petitioner was abroad at the time of the service of summons, this made petitioner a resident who is temporarily out of the country. This is the exact situation contemplated in Section 16,26 Rule 14 of the Rules of Civil Procedure, providing for service of summons by publication.

In conclusion, we hold that the alias summons belatedly served on petitioner cannot be deemed to have cured the fatal defect in the enforcement of the writ. The trial court cannot enforce such a coercive process on petitioner without first obtaining jurisdiction over her person. The preliminary writ of attachment must be served after or simultaneous with the service of summons on the defendant whether by personal service, substituted service or by publication as warranted by the circumstances of the case.27 The subsequent service of summons does not confer a retroactive acquisition of jurisdiction over her person because the law does not allow for retroactivity of a belated service.

Improper Venue

Petitioner assails the filing of this case in the RTC of Pasay and points to a provision in private respondent’s invoice which contains the following:

"3. If court litigation becomes necessary to enforce collection, an additional equivalent (sic) to 25% of the principal amount will be charged. The agreed venue for such action is Makati, Metro Manila, Philippines."28

Based on this provision, petitioner contends that the action should have been instituted in the RTC of Makati and to do otherwise would be a ground for the dismissal of the case.

We resolve to dismiss the case on the ground of improper venue but not for the reason stated by petitioner.

The Rules of Court provide that parties to an action may agree in writing on the venue on which an action should be brought.29 However, a mere stipulation on the venue of an action is not enough to preclude parties from bringing a case in other venues.30 The parties must be able to show that such stipulation is exclusive. Thus, absent words that show the parties’ intention to restrict the filing of a suit in a particular place, courts will allow the filing of a case in any venue, as long as jurisdictional requirements are followed. Venue stipulations in a contract, while considered valid and enforceable, do not as a rule supersede the general rule set forth in Rule 4 of the Revised Rules of Court.31 In the absence of qualifying or restrictive words, they should be considered merely as an agreement on additional forum, not as limiting venue to the specified place.32

In the instant case, the stipulation does not limit the venue exclusively to Makati. There are no qualifying or restrictive words in the invoice that would evince the intention of the parties that Makati is the "only or exclusive" venue where the action could be instituted. We therefore agree with private respondent that Makati is not the only venue where this case could be filed.

Nevertheless, we hold that Pasay is not the proper venue for this case.

Under the 1997 Rules of Civil Procedure, the general rule is venue in personal actions is "where the defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff."33 The exception to this rule is when the parties agree on an exclusive venue other than the places mentioned in the rules. But, as we have discussed, this exception is not applicable in this case. Hence, following the 27 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

general rule, the instant case may be brought in the place of residence of the plaintiff or defendant, at the election of the plaintiff (private respondent herein).

In the instant case, the residence of private respondent (plaintiff in the lower court) was not alleged in the complaint. Rather, what was alleged was the postal address of her sole proprietorship, Air Swift International. It was only when private respondent testified in court, after petitioner was declared in default, that she mentioned her residence to be in Better Living Subdivision, Parañaque City.

In the earlier case of Sy v. Tyson Enterprises, Inc.,34 the reverse happened. The plaintiff in that case was Tyson Enterprises, Inc., a corporation owned and managed by Dominador Ti. The complaint, however, did not allege the office or place of business of the corporation, which was in Binondo, Manila. What was alleged was the residence of Dominador Ti, who lived in San Juan, Rizal. The case was filed in the Court of First Instance of Rizal, Pasig. The Court there held that the evident purpose of alleging the address of the corporation’s president and manager was to justify the filing of the suit in Rizal, Pasig instead of in Manila. Thus, the Court ruled that there was no question that venue was improperly laid in that case and held that the place of business of Tyson Enterpises, Inc. is considered as its residence for purposes of venue. Furthermore, the Court held that the residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders.

In the instant case, it was established in the lower court that petitioner resides in San Fernando, Pampanga35 while private respondent resides in Parañaque City.36 However, this case was brought in Pasay City, where the business of private respondent is found. This would have been permissible had private respondent’s business been a corporation, just like the case in Sy v. Tyson Enterprises, Inc. However, as admitted by private respondent in her Complaint37 in the lower court, her business is a sole proprietorship, and as such, does not have a separate juridical personality that could enable it to file a suit in court.38 In fact, there is no law authorizing sole proprietorships to file a suit in court.39

A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise.40 The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government.41 The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court.42

Thus, not being vested with legal personality to file this case, the sole proprietorship is not the plaintiff in this case but rather Loreta Guina in her personal capacity. In fact, the complaint in the lower court acknowledges in its caption that the plaintiff and defendant are Loreta Guina and Anita Mangila, respectively. The title of the petition before us does not state, and rightly so, Anita Mangila v. Air Swift International, but rather Anita Mangila v. Loreta Guina. Logically then, it is the residence of private respondent Guina, the proprietor with the juridical personality, which should be considered as one of the proper venues for this case.

All these considered, private respondent should have filed this case either in San Fernando, Pampanga (petitioner’s residence) or Parañaque (private respondent’s residence). Since private respondent (complainant below) filed this case in Pasay, we hold that the case should be dismissed on the ground of improper venue.

Although petitioner filed an Urgent Motion to Discharge Attachment in the lower court, petitioner expressly stated that she was filing the motion without submitting to the jurisdiction of the court. At that time, petitioner had not been served the summons and a copy of the complaint.43 Thereafter, petitioner timely filed a Motion to Dismiss44 on the ground of improper venue. Rule 16, Section 1 of the Rules of Court provides that a motion to dismiss may be filed "[W]ithin the time for but before filing the answer to the complaint or pleading asserting a claim." Petitioner even raised the issue of improper venue in his Answer45 as a special and affirmative defense. Petitioner also continued to raise the issue of improper venue in her Petition for Review46 before this Court. We thus hold that the dismissal of this case on the ground of improper venue is warranted.

The rules on venue, like other procedural rules, are designed to insure a just and orderly administration of justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom to choose where to file the complaint or petition.47

We find no reason to rule on the other issues raised by petitioner.1âwphi1.nêt

WHEREFORE, the petition is GRANTED on the grounds of improper venue and invalidity of the service of the writ of attachment. The decision of the Court of Appeals and the order of respondent judge denying the motion to dismiss are REVERSED and SET ASIDE. Civil Case No. 5875 is hereby dismissed without prejudice to refiling it in the proper venue. The attached properties of petitioner are ordered returned to her immediately.

SO ORDERED.


J.M. TUASON & CO., INC., represented by its Managing PARTNER, GREGORIO ARANETA, INC.,Plaintiff-Appellee, v. QUIRINO BOLAÑOS, Defendant-Appellant.

1. PARTIES; REAL PARTY IN INTEREST; ATTORNEY MAY BRING ACTION IN THE PLAINTIFF’S NAME. — Section 2 of the Rules of Court requires that an action be brought in the name of, but not necessarily by, the real property interest. In fact the practice is for an attorney-at-law to bring the action, that is, to file the complaint, in the name of the plaintiff.

2. ID.; CORPORATION AS PARTY MAY BE REPRESENTED BY ANOTHER PERSON. NATURAL OR JUDICIAL. — There is nothing against one corporation being represented by another person, natural or juridical, in a suit in court, for the true rule is that "although a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing 2 Fletcher Cyc. E. 1082.)

3. COMPLAINTS; AMENDMENTS TO CONFIRM TO EVIDENCE NOT NECESSARY TO RENDER JUDGMENT ON FACTS PROVED THOUGH NOT ALLEGED. — Where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint is necessary, especially where defendant has himself raised the point on which recovery is based, and the appellate court may treat the pleading as amended to confirm to the evidence, although the pleadings were not actually amended. (Citing Maran, Rules of Court, 1952 ed., 389-390.)

4. LAND REGISTRATION; REOPENING OF DECREE AFTER ONE YEAR, NOT ALLOWED. — A decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, after one year has elapsed from the issuance and entry of the decree. Neither could the decree be collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings, nor could title to that land in derogation of that of plaintiff be acquired by adverse possession or prescription since adverse, notorious and continuous possession under claim of ownership is ineffective against Torrens title ands the right to secure possession under a decree of registration does not prescribe.

5. ACTIONS; IDENTITY OF CAUSE OF ACTION. — Where one action is for the recovery of ownership and the other is for recovery of possession, there is no identity of cause of action.

6. ID.; CLASS SUIT. — Where the action seeks relief for each individual plaintiff and not relief for and on behalf of others, the action is not a class suit.

D E C I S I O N

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover possession of registered land situated in barrio Tatalon, Quezon City.

Plaintiff’s complaint was amended three times with respect to the extent and description of the land sought to be recovered. The original complaint described the land as a portion of a lot registered in plaintiff’s name under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area of 13 hectares more or less. But the complaint was amended by reducing the area to 6 hectares, more or less, after defendant had indicated the plaintiff’s surveyors the portion of land claimed and occupied by him. The second amendment became necessary and was allowed following the testimony of plaintiff’s surveyors that a portion of the area was embraced in another certificate of title, which was plaintiff’s Transfer Certificate of Title No. 37677. And still later, in the course of trial, after defendant’s surveyor and witness, Quirino Feria, had testified that the area occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court, amended its complaint to make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and public and notorious possession (of the land in dispute) under claim of ownership, adverse to the entire world by defendant and his predecessors in interest" from "time immemorial." The answer further alleges that registration of the land in dispute was obtained by plaintiff or its predecessors in interest thru "fraud or error and without knowledge (of) or notice either personal or thru publication to defendant and/or predecessors in interest." The answer therefore prays that the complaint be dismissed with costs and plaintiff required to reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.


Appealing directly to this court because of the value of the property involved, defendant makes the following assignment of errors:jgc:chanrobles.com.ph

"I. The trial court erred in not dismissing the case on the ground that the case was not brought by the real party in interest.

"II. The trial court erred in admitting the third amended complaint.

"III. The trial court erred in denying defendant’s motion to strike.

"IV. The trial court erred in including in its decision land not involved in the litigation.

"V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title Nos. 37686 and 37677.

"VI. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

"VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of P132.62 monthly from January, 1940, until he vacates the premises.

"VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the defendant."cralaw virtua1aw library

As to the first assigned error, there is nothing to the contention that the present action is not brought by the real party in interest, that is, by J. M. Tuason & Co., Inc. What the Rules of Court require is that an action be brought in the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in the name of the plaintiff. That practice appears to have been followed in this case, since the complaint is signed by the law firm of Araneta & Araneta, "counsel for plaintiff" and commences with the statement "Comes now plaintiff, through its undersigned counsel." It is true that the complaint also states that the plaintiff is "represented herein by its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one corporation being represented by another person, natural or juridical, in a suit in court. The contention that Gregorio Araneta, Inc. can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. v. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner" is not in line with the corporate business of either of them.

Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:chanrob1es virtual 1aw library

SEC. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at my time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall be so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence."cralaw virtua1aw library

Under this provision amendment is not even necessary for the purpose of rendering judgment on issues proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in his Rules of Court:jgc:chanrobles.com.ph

"Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint is necessary, especially where defendant has himself raised the point on which recovery is based, and that the appellate court treat the pleadings as amended to conform to the evidence, although the pleadings were not actually amended." (I Moran, Rules of Court, 1952 ed., 389-390.)

Our conclusion therefore is that specification of error II, III, and IV are without merit.

Let us now pass on the errors V and VI. Admitting, through his attorney, at the early stage of the trial, that the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with the name Quirino Bolaños," defendant later changed his lawyer and also his theory and tried to prove that the land in dispute was not covered by plaintiff’s certificate of title. The evidence, however, is against defendant, for it clearly


establishes that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or less, covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an area of 74,789 square meters, more or less, covered by transfer certificate of title No. 37677 of the land records of the same province, both lots having been originally registered on July 8, 1914 under original certificate of title No. 735. The identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino, witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established by the testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses clearly shows that the portion claimed by defendant is made up of a part of lot 4 B- 3-C and major on portion of lot 4-B-4, and is well within the area covered by the two transfer certificates of title already mentioned. This fact also appears admitted in defendant’s answer to the third amended complaint.

As the land in dispute is covered by plaintiff’s Torrens certificate of title and was registered in 1914, the decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more than one year has already elapsed from the issuance and entry of the decree. Neither could the decree be collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings. (Soroñgon v. Makalintal, 1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente v. Judge of CFI of Tarlac, 2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure possession under a decree of registration does not prescribe. (Francisco v. Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case of Jose Alcantara Et. Al., v. Marinao Et. Al., 92 Phil., 796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that ’there was no evidence to sustain the finding that defendant should be sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises." But it appears from the record that the reasonable compensation for the use and occupation of the premises, as stipulated at the hearing was P10 a month for each hectare and that the area occupied by defendant was 13.2619 hectares. The total rent to be paid for the area occupied should therefore be P132.62 a month. It also appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco that as early as 1939 an action of ejectment had already been filed against defendant. And it cannot be supposed that defendant has been paying rents, for he has been asserting all along that the premises in question "have always been since time immemorial in open, continuous, exclusive and public and notorious possession and under claim of ownership adverse to the entire world by defendant and his predecessors in interest." This assignment of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss alleging that there is pending before the Court of First Instance of Rizal another action between the same parties and for the same cause and seeking to sustain that allegation with a copy of the complaint filed in said action. But an examination of that complaint reveals that appellant’s allegation is not correct, for the pretended identity of parties and cause of action in the two suits does not appear. That other case is one for recovery of ownership, while the present one is for recovery of possession. And while appellant claims that he is also involved in that other action because it is a class suit, the complaint does not show that such is really the case. On the contrary, it appears that the action seeks relief for each individual plaintiff and not relief for and on behalf of others. The motion for dismissal is clearly without merit.

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners, vs.SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ,respondents.

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners, vs.THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.

G.R. Nos. 75975-76 December 15, 1989

LUCIANO E. SALAZAR, petitioner, vs.


SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other hand, the Filipino stockholders can nominate only six (6) candidates and in the event they cannot agree on the six (6) nominees, they shall vote only among themselves to determine who the six (6) nominees will be, with cumulative voting to be allowed but without interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and election of the directors of the corporation:

3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine individuals. As long as American-Standard shall own at least 30% of the outstanding stock of the Corporation, three of the nine directors shall be designated by American-Standard, and the other six shall be designated by the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including the grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a member of the Executive Committee whose vote was required for important corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board of Investments for availment of incentives with the condition that at least 60% of the capital stock of the corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered. Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations between the two groups. According to the Filipino group, a basic disagreement was due to their desire to expand the export operations of the company to which ASI objected as it apparently had other subsidiaries of joint joint venture groups in the countries where Philippine exports were contemplated. On March 8, 1983, the annual stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then proceeded to the election of the members of the board of directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar,


who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during the past annual stockholders' meetings to nominate only nine persons as nominees for the nine-member board of directors, and the legal advice of Saniwares' legal counsel. The following events then, transpired:

... There were protests against the action of the Chairman and heated arguments ensued. An appeal was made by the ASI representative to the body of stockholders present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal out of order and no vote on the ruling was taken. The Chairman then instructed the Corporate Secretary to cast all the votes present and represented by proxy equally for the 6 nominees of the Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional persons nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua protested the decision of the Chairman and announced that all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham and the six originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified for the election of the following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then moved to recess the meeting which was duly seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to adjourn was accepted by the Chairman, Baldwin Young, who announced that the motion was carried and declared the meeting adjourned. Protests against the adjournment were registered and having been ignored, Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but only recessed and that the meeting would be reconvened in the next room. The Chairman then threatened to have the stockholders who did not agree to the decision of the Chairman on the casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders, allegedly representing 53 or 54% of the shares of Saniwares, decided to continue the meeting at the elevator lobby of the American Standard Building. The continued meeting was presided by Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the said five directors were certified as elected directors by the Acting Secretary, Andres Gatmaitan, with the explanation that there was a tie among the other six (6) nominees for the four (4) remaining positions of directors and that the body decided not to break the tie. (pp. 37-39, Rollo of 75975-76)

These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second petition was for quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the legitimate directors of the corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate court in its decision ordered the remand of the case to the Securities and Exchange Commission with the directive that a new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the supervision of the Commission.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:


I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements entered into by stockholders and the replacement of the conditions of such agreements with terms never contemplated by the stockholders but merely dictated by the CA .

11.2. The Amended decision would likewise sanction the deprivation of the property rights of stockholders without due process of law in order that a favored group of stockholders may be illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

I

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW.

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)

The issues raised in the petitions are interrelated, hence, they are discussed jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual stockholders' meeting held on March 8, 1983. To answer this question the following factors should be determined: (1) the nature of the business established by the parties whether it was a joint venture or a corporation and (2) whether or not the ASI Group may vote their additional 10% equity during elections of Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some other relation depends upon their actual intention which is determined in accordance with the rules governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)


They object to the admission of other evidence which tends to show that the parties' agreement was to establish a joint venture presented by the Lagdameo and Young Group on the ground that it contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to express the true intent of the parties.

The parol evidence Rule under Rule 130 provides:

Evidence of written agreements-When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and therefore, there can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing, except in the following cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties or the validity of the agreement is put in issue by the pleadings.

(b) When there is an intrinsic ambiguity in the writing.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to wit:

xxx xxx xxx

4. While certain provisions of the Agreement would make it appear that the parties thereto disclaim being partners or joint venturers such disclaimer is directed at third parties and is not inconsistent with, and does not preclude, the existence of two distinct groups of stockholders in Saniwares one of which (the Philippine Investors) shall constitute the majority, and the other ASI shall constitute the minority stockholder. In any event, the evident intention of the Philippine Investors and ASI in entering into the Agreement is to enter into ajoint venture enterprise, and if some words in the Agreement appear to be contrary to the evident intention of the parties, the latter shall prevail over the former (Art. 1370, New Civil Code). The various stipulations of a contract shall be interpreted together attributing to the doubtful ones that sense which may result from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No. 2417)

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties joined their efforts in furtherance of an enterprise for their joint profit, the question whether they intended by their agreement to create a joint adventure, or to assume some other relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)

In the instant cases, our examination of important provisions of the Agreement as well as the testimonial evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint venture and not a corporation. The history of the organization of Saniwares and the unusual arrangements which govern its policy making body are all consistent with a joint venture and not with an ordinary corporation. As stated by the SEC:

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role of minority vis-a-vis the Philippine National group of investors, on the condition that the Agreement should contain provisions to protect ASI as the minority.

An examination of the Agreement shows that certain provisions were included to protect the interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually entitled to designate a member of the Executive Committee and the vote of this member is required for certain transactions [Sec. 3 (b) (i)].

The Agreement also requires a 75% super-majority vote for the amendment of the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the president and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales policy of Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard" products otherwise than through ASI's Export Marketing Services [Sec. 13 (6)]. Under the


Agreement, ASI agreed to provide technology and know-how to Saniwares and the latter paid royalties for the same. (At p. 2).

xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the board of directors for certain actions, in effect gave ASI (which designates 3 directors under the Agreement) an effective veto power. Furthermore, the grant to ASI of the right to designate certain officers of the corporation; the super-majority voting requirements for amendments of the articles and by-laws; and most significantly to the issues of tms case, the provision that ASI shall designate 3 out of the 9 directors and the other stockholders shall designate the other 6, clearly indicate that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock and the Philippine National stockholders who own the balance of 60%, and that 2) ASI is given certain protections as the minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of stockholders who established a corporation with provisions for a special contractual relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate the possibility of the enterprise being treated as partnership for tax purposes and liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local firm are constrained to seek the technology and marketing assistance of huge multinational corporations of the developed world. Arrangements are formalized where a foreign group becomes a minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other such assistance. However, there is always a danger from such arrangements. The foreign group may, from the start, intend to establish its own sole or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group undermines the local majority ownership and actively tries to completely or predominantly take over the entire company. This undermining of joint ventures is not consistent with fair dealing to say the least. To the extent that such subversive actions can be lawfully prevented, the courts should extend protection especially in industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens.

The Lagdameo Group stated in their appellees' brief in the Court of Appeal

In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into agreements regarding the exercise of their voting rights.

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's chapter on close corporations and Saniwares cannot be a close corporation because it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of the disputed stockholders meeting, these 95 stockholders are not separate from each other but are divisible into groups representing a single Identifiable interest. For example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for another 13 stockholders, the Chamsay family for 8 stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If the members of one family and/or business or interest group are considered as one (which, it is respectfully submitted, they should be for purposes of determining how closely held Saniwares is there were as of 8 March


1983, practically only 17 stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).

Secondly, even assuming that Saniwares is technically not a close corporation because it has more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely, appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.

In the United States, many courts have taken a realistic approach to joint venture corporations and have not rigidly applied principles of corporation law designed primarily for public issue corporations. These courts have indicated that express arrangements between corporate joint ventures should be construed with less emphasis on the ordinary rules of law usually applied to corporate entities and with more consideration given to the nature of the agreement between the joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt with legal questions as to the extent to which the requirements arising from the corporate form of joint venture corporations should control, and the courts ruled that substantial justice lay with those litigants who relied on the joint venture agreement rather than the litigants who relied on the orthodox principles of corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from the traditional pattern of corporation management. A noted authority has pointed out that just as in close corporations, shareholders' agreements in joint venture corporations often contain provisions which do one or more of the following: (1) require greater than majority vote for shareholder and director action; (2) give certain shareholders or groups of shareholders power to select a specified number of directors; (3) give to the shareholders control over the selection and retention of employees; and (4) set up a procedure for the settlement of disputes by arbitration (See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that agreements regarding the exercise of voting rights are allowed only in close corporations. As Campos and Lopez-Campos explain:

Paragraph 2 refers to pooling and voting agreements in particular. Does this provision necessarily imply that these agreements can be valid only in close corporations as defined by the Code? Suppose that a corporation has twenty five stockholders, and therefore cannot qualify as a close corporation under section 96, can some of them enter into an agreement to vote as a unit in the election of directors? It is submitted that there is no reason for denying stockholders of corporations other than close ones the right to enter into not voting or pooling agreements to protect their interests, as long as they do not intend to commit any wrong, or fraud on the other stockholders not parties to the agreement. Of course, voting or pooling agreements are perhaps more useful and more often resorted to in close corporations. But they may also be found necessary even in widely held corporations. Moreover, since the Code limits the legal meaning of close corporations to those which comply with the requisites laid down by section 96, it is entirely possible that a corporation which is in fact a close corporation will not come within the definition. In such case, its stockholders should not be precluded from entering into contracts like voting agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination of directors restricts the right of the Agreement's signatories to vote for directors, such contractual provision, as correctly held by the SEC, is valid and binding upon the signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity during elections of Saniwares' board of directors, the Court of Appeals correctly stated:

As in other joint venture companies, the extent of ASI's participation in the management of the corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the Filipino stockholders. This allocation of board seats is obviously in consonance with the minority position of ASI.


Having entered into a well-defined contractual relationship, it is imperative that the parties should honor and adhere to their respective rights and obligations thereunder. Appellants seem to contend that any allocation of board seats, even in joint venture corporations, are null and void to the extent that such may interfere with the stockholder's rights to cumulative voting as provided in Section 24 of the Corporation Code. This Court should not be prepared to hold that any agreement which curtails in any way cumulative voting should be struck down, even if such agreement has been freely entered into by experienced businessmen and do not prejudice those who are not parties thereto. It may well be that it would be more cogent to hold, as the Securities and Exchange Commission has held in the decision appealed from, that cumulative voting rights may be voluntarily waived by stockholders who enter into special relationships with each other to pursue and implement specific purposes, as in joint venture relationships between foreign and local stockholders, so long as such agreements do not adversely affect third parties.

In any event, it is believed that we are not here called upon to make a general rule on this question. Rather, all that needs to be done is to give life and effect to the particular contractual rights and obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual allocation of board seats Cannot be disregarded. On the other hand, the rights of the stockholders to cumulative voting should also be protected.

In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon further reflection, we feel that the proper and just solution to give due consideration to both factors suggests itself quite clearly. This Court should recognize and uphold the division of the stockholders into two groups, and at the same time uphold the right of the stockholders within each group to cumulative voting in the process of determining who the group's nominees would be. In practical terms, as suggested by appellant Luciano E. Salazar himself, this means that if the Filipino stockholders cannot agree who their six nominees will be, a vote would have to be taken among the Filipino stockholders only. During this voting, each Filipino stockholder can cumulate his votes. ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to designate more than the three directors it is allowed to designate under the Agreement, and may even be able to get a majority of the board seats, a result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization requirements of the Constitution and the laws if ASI is allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or governing body of corporations or associations engaging in partially nationalized activities shall be allowed in proportion to their allowable participation or share in the capital of such entities. (amendments introduced by Presidential Decree 715, section 1, promulgated May 28, 1975)

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of query, however, is whether or not that provision is applicable to a joint venture with clearly defined agreements:

The legal concept of ajoint venture is of common law origin. It has no precise legal definition but it has been generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership, since their elements are similar community of interest in the business, sharing of profits and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction, since under the


Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships. The Supreme Court has however recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981)

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question of whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to cumulative voting in the process of determining who the group's nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating the members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of members of the board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by the appellate court:

... ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to designate more than the three directors it is allowed to designate under the Agreement, and may even be able to get a majority of the board seats, a result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization requirements of the Constitution and the laws if ASI is allowed to nominate more than three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration as regards the possible domination by the foreign investors of the enterprise in violation of the nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share in the capital of the entity. It is to be noted, however, that the same law also limits the election of aliens as members of the board of directors in proportion to their allowance participation of said entity. In the instant case, the foreign Group ASI was limited to designate three directors. This is the allowable participation of the ASI Group. Hence, in future dealings, this limitation of six to three board seats should always be maintained as long as the joint venture agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed upon and embodied in the parties' Agreement to protect the interests arising from the minority status of the foreign investors.

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative voting during the election of the board of directors of the enterprise as ruled by the appellate court and submits that the six (6) directors allotted the Filipino stockholders should be selected by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate" meaning "nominate, delegate or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino stockholders are allowed to select their nominees separately and not as a common slot determined by the majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we stated


earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative voting while section 5(a) relates to the manner of nominating the members of the board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on the directors thus elected being genuine members of the Filipino group, not voters whose interest is to increase the ASI share in the management of Saniwares. The joint venture character of the enterprise must always be taken into account, so long as the company exists under its original agreement. Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish openly. There are substantial safeguards in the Agreement which are intended to preserve the majority status of the Filipino investors as well as to maintain the minority status of the foreign investors group as earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.

SO ORDERED.

PRIMELINK PROPERTIES AND DEVELOPMENT CORPORATION and RAFAELITO W. LOPEZ, petitioners, vs. MA. CLARITA T. LAZATIN-MAGAT, JOSE SERAFIN T. LAZA-TIN, JAIME TEODORO T. LAZATIN and JOSE MARCOS T. LAZATIN, respondents.

Actions; Pleadings and Practice; A pleading may add as general prayer for such further or other relief as may be deemed just and equitable—the prayer in the complaint for other reliefs equitable and just in the premises justifies the grant of a relief not otherwise specifically prayed for.—We agree with petitioners that respondents did not specifically pray in their complaint below that possession of the improvements on the parcels of land which they contributed to the JVA be transferred to them. Respondents made a specific prayer in their complaint that, upon the rescission of the JVA, they be placed in possession of the parcels of land subject of the agreement, and for other “reliefs and such other remedies as are just and equitable in the premises.” However, the trial court was not precluded from awarding possession of the improvements on the parcels of land to respondents in its decision. Section 2(c), Rule 7 of the Rules of Court provides that a pleading shall specify the relief sought but it may add as general prayer for such further or other relief as may be deemed just and equitable. Even without the prayer for a specific remedy, proper relief may be granted by the court if the facts alleged in the complaint and the evidence introduced so warrant. The court shall grant relief warranted by the allegations and the proof even if no such relief is prayed for. The prayer in the complaint for other reliefs equitable and just in the premises justifies the grant of a relief not otherwise specifically prayed for.

Partnerships; Joint Venture Agreements (JVAs); A JVA is a form of partnership, and as such is to be governed by the laws on partnership.—We agree with the CA ruling that petitioner Primelink and respondents entered into a joint venture as evidenced by their JVA which, under the Court’s ruling in Aurbach, is a form of partnership, and as such is to be governed by the laws on partnership.

Same; Same; Dissolution of Partnerships; On dissolution, the partnership is not terminated but continues until the winding up of partnership affairs is completed.—When the RTC rescinded the JVA on complaint of respondents based on the evidence on record that petitioners willfully and persistently committed a breach of the JVA, the court thereby dissolved/cancelled the partnership. With the rescission of the JVA on account of petitioners’ fraudulent acts, all authority of any partner to act for the partnership is terminated except so far as may be necessary to wind up the partnership affairs or to complete transactions begun but not yet finished. On dissolution, the partnership is not terminated but continues until the winding up of partnership affairs is completed. Winding up means the administration of the assets of the partnership for the purpose of terminating the business and discharging the obligations of the partnership.

Same; Same; Same; Unless otherwise agreed, the parties who have not wrongfully dissolved the partnership have the right to wind up the partnership affairs.—The transfer of the possession of the parcels of land and the improvements thereon to respondents was only for a specific purpose: the winding up of partnership affairs, and the partition and distribution of the net partnership assets as provided by law. After all, Article 1836 of the New Civil Code provides that unless otherwise agreed by the parties in their JVA, respondents have the right to wind up the partnership affairs: Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court.


Same; Same; Same; Until the partnership accounts are determined, it cannot be ascertained how much any of the parties is entitled to, if at all.—It must be stressed, too, that although respondents acquired possession of the lands and the improvements thereon, the said lands and improvements remained partnership property, subject to the rights and obligations of the parties, inter se, of the creditors and of third parties under Articles 1837 and 1838 of the New Civil Code, and subject to the outcome of the settlement of the accounts between the parties as provided in Article 1839 of the New Civil Code, absent any agreement of the parties in their JVA to the contrary. Until the partnership accounts are determined, it cannot be ascertained how much any of the parties is entitled to, if at all. It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value of the improvements on the parcels of land owned by the joint venture/partnership. Notably, the JVA of the parties does not contain any provision designating any party to wind up the affairs of the partnership. [Primelink Properties and Development Corporation vs. Lazatin-Magat, 493 SCRA 444(2006)]

CALLEJO, SR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure of the Decision1of the Court of Appeals (CA) in CA-G.R. CV No. 69200 and its Resolution2 denying petitioners’ motion for reconsideration thereof.

The factual and procedural antecedents are as follows:

Primelink Properties and Development Corporation (Primelink for brevity) is a domestic corporation engaged in real estate development. Rafaelito W. Lopez is its President and Chief Executive Officer.3

Ma. Clara T. Lazatin-Magat and her brothers, Jose Serafin T. Lazatin, Jaime T. Lazatin and Jose Marcos T. Lazatin (the Lazatins for brevity), are co-owners of two (2) adjoining parcels of land, with a combined area of 30,000 square meters, located in Tagaytay City and covered by Transfer Certificate of Title (TCT) No. T-108484 of the Register of Deeds of Tagaytay City.

On March 10, 1994, the Lazatins and Primelink, represented by Lopez, in his capacity as President, entered into a Joint Venture Agreement5 (JVA) for the development of the aforementioned property into a residential subdivision to be known as "Tagaytay Garden Villas." Under the JVA, the Lazatin siblings obliged themselves to contribute the two parcels of land as their share in the joint venture. For its part, Primelink undertook to contribute money, labor, personnel, machineries, equipment, contractor’s pool, marketing activities, managerial expertise and other needed resources to develop the property and construct therein the units for sale to the public. Specifically, Primelink bound itself to accomplish the following, upon the execution of the deed:

a.) Survey the land, and prepare the projects master plans, engineering designs, structural and architectural plans, site development plans, and such other need plans in accordance with existing laws and the rules and regulations of appropriate government institutions, firms or agencies;

b.) Secure and pay for all the licenses, permits and clearances needed for the projects;

c.) Furnish all materials, equipment, labor and services for the development of the land in preparation for the construction and sale of the different types of units (single-detached, duplex/twin, cluster and row house);

d.) Guarantee completion of the land development work if not prevented by force majeure or fortuitous event or by competent authority, or other unavoidable circumstances beyond the DEVELOPER’S control, not to exceed three years from the date of the signing of this Joint Venture Agreement, except the installation of the electrical facilities which is solely MERALCO’S responsibility;

e.) Provide necessary manpower resources, like executive and managerial officers, support personnel and marketing staff, to handle all services related to land and housing development (administrative and construction) and marketing (sales, advertising and promotions).6

The Lazatins and Primelink covenanted that they shall be entitled to draw allowances/advances as follows:

1. During the first two years of the Project, the DEVELOPER and the LANDOWNER can draw allowances or make advances not exceeding a total of twenty percent (20%) of the net revenue for that period, on the basis of sixty percent (60%) for the DEVELOPER and forty percent (40%) for the LANDOWNERS.

The drawing allowances/advances are limited to twenty percent (20%) of the net revenue for the first two years, in order to have sufficient reserves or funds to protect and/or guarantee the construction and completion of the different types of units mentioned above.


2. After two years, the DEVELOPER and the LANDOWNERS shall be entitled to drawing allowances and/or advances equivalent to sixty percent (60%) and forty percent (40%), respectively, of the total net revenue or income of the sale of the units.7

They also agreed to share in the profits from the joint venture, thus:

1. The DEVELOPER shall be entitled to sixty percent (60%) of the net revenue or income of the Joint Venture project, after deducting all expenses incurred in connection with the land development (such as administrative management and construction expenses), and marketing (such as sales, advertising and promotions), and

2. The LANDOWNERS shall be entitled to forty percent (40%) of the net revenue or income of the Joint Venture project, after deducting all the above-mentioned expenses.8

Primelink submitted to the Lazatins its Projection of the Sales-Income-Cost of the project:

SALES-INCOME-COST PROJECTION

lawphil.netSELLING

PRICECOST PRICE DIFFERENCE INCOME

CLUSTER:

A1 3,200,000 - A2

1,260,000 = 1,940,000 x 24 = P 46,560,000.

00

TWIN:

B1 2,500,000 - B2 960,000 = 1,540,000 x

24 = 36,960,000.00

SINGLE:

C1 3,500,000 - C2

1,400,000 = 2,100,000 x 16 = 33,600,000.0

0

ROW-TYPE TOWNHOMES:

D1 1,600,000 - D2 700,000 = 900,000 x 24 = 21,600,000.0

0

P138,720,000.

00

(GROSS) Total Cash Price (A1+B1+C1+D1) =P

231,200,000.00

Total Building Expense (A2+B2+C2+D2) = 92,480,000.0

0

COMPUTATION OF ADD’L. INCOME ON INTEREST

TCP x 30% D/P = P 69,360,00

0P 69,360,000.

00

Balance = 70% = 161,840,000

x .03069 x 48 = P

238,409,740238,409,740.

00

Total Amount (TCP + int. earn.)P

307,769,740.00

EXPENSES:


less: A Building expenses P 92,480,000.00

B Commission (8% of TCP) 18,496,000.00

C Admin. & Mgmt. expenses (2% of TCP) 4,624,000.00

D Advertising & Promo exp. (2% of TCP) 4,624,000.00

E Building expenses for the open spaces and Amenities (Development cost not incl. Housing) 400 x 30,000 sqms.

12,000,000.00

TOTAL EXPENSES (A+B+C+D+E)

P132,224,000.

00

RECONCILIATION OF INCOME VS. EXPENSES

Total Projected Income (incl. income from interest earn.)

P307,769,740.

00

less: 132,224,000.00

Total ExpensesP

175,545,740.009

The parties agreed that any unsettled or unresolved misunderstanding or conflicting opinions between the parties relative to the interpretation, scope and reach, and the enforcement/implementation of any provision of the agreement shall be referred to Voluntary Arbitration in accordance with the Arbitration Law.10

The Lazatins agreed to subject the title over the subject property to an escrow agreement. Conformably with the escrow agreement, the owner’s duplicate of the title was deposited with the China Banking Corporation.11However, Primelink failed to immediately secure a Development Permit from Tagaytay City, and applied the permit only on August 30, 1995. On October 12, 1995, the City issued a Development Permit to Primelink.12

In a Letter13 dated April 10, 1997, the Lazatins, through counsel, demanded that Primelink comply with its obligations under the JVA, otherwise the appropriate action would be filed against it to protect their rights and interests. This impelled the officers of Primelink to meet with the Lazatins and enabled the latter to review its business records/papers. In another Letter14 dated October 22, 1997, the Lazatins informed Primelink that they had decided to rescind the JVA effective upon its receipt of the said letter. The Lazatins demanded that Primelink cease and desist from further developing the property.

Subsequently, on January 19, 1998, the Lazatins filed, with the Regional Trial Court (RTC) of Tagaytay City, Branch 18, a complaint for rescission accounting and damages, with prayer for temporary restraining order and/or preliminary injunction against Primelink and Lopez. The case was docketed as Civil Case No. TG-1776. Plaintiffs alleged, among others, that, despite the lapse of almost four (4) years from the execution of the JVA and the delivery of the title and possession of the land to defendants, the land development aspect of the project had not yet been completed, and the construction of the housing units had not yet made any headway, based on the following facts, namely: (a) of the 50 housing units programmed for Phase I, only the following types of houses appear on the site in these condition: (aa) single detached, one completed and two units uncompleted; (bb) cluster houses, one unit nearing completion; (cc) duplex, two units completed and two units unfinished; and (dd) row houses, two units, completed; (b) in Phase II thereof, all that was done by the defendants was to grade the area; the units so far constructed had been the object of numerous complaints by their owners/purchasers for poor workmanship and the use of sub-standard materials in their construction, thus, undermining the project’s marketability. Plaintiffs also alleged that defendants had, without justifiable reason, completely disregarded previously agreed accounting and auditing procedures, checks and balances system installed for the mutual protection of both parties, and the scheduled regular meetings were seldom held to the detriment and disadvantage of plaintiffs. They averred that they sent a letter through counsel, demanding compliance of what was agreed upon under the agreement but defendants


refused to heed said demand. After a succession of letters with still no action from defendants, plaintiffs sent a letter on October 22, 1997, a letter formally rescinding the JVA.

Plaintiffs also claimed that in a sales-income-costs projection prepared and submitted by defendants, they (plaintiffs) stood to receive the amount of P70,218,296.00 as their net share in the joint venture project; to date, however, after almost four (4) years and despite the undertaking in the JVA that plaintiffs shall initially get 20% of the agreed net revenue during the first two (2) years (on the basis of the 60%-40% sharing) and their full 40% share thereafter, defendants had yet to deliver these shares to plaintiffs which by conservative estimates would amount to no less than P40,000,000.00.15

Plaintiffs prayed that, after due proceedings, judgment be rendered in their favor, thus:

WHEREFORE, it is respectfully prayed of this Honorable Court that a temporary restraining order be forthwith issued enjoining the defendants to immediately stop their land development, construction and marketing of the housing units in the aforesaid project; after due proceedings, to issue a writ of preliminary injunction enjoining and prohibiting said land development, construction and marketing of housing units, pending the disposition of the instant case.

After trial, a decision be rendered:

1. Rescinding the Joint Venture Agreement executed between the plaintiffs and the defendants;

2. Immediately restoring to the plaintiffs possession of the subject parcels of land;

3. Ordering the defendants to render an accounting of all income generated as well as expenses incurred and disbursement made in connection with the project;

4. Making the Writ of Preliminary Injunction permanent;

5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount Forty Million Pesos (P40,000,000.00) in actual and/or compensatory damages;

6. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of Two Million Pesos (P2,000,000.00) in exemplary damages;

7. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount equivalent to ten percent (10%) of the total amount due as and for attorney’s fees; and

8. To pay the costs of this suit.

Other reliefs and remedies as are just and equitable are likewise being prayed for.16

Defendants opposed plaintiffs’ plea for a writ of preliminary injunction on the ground that plaintiffs’ complaint was premature, due to their failure to refer their complaint to a Voluntary Arbitrator pursuant to the JVA in relation to Section 2 of Republic Act No. 876 before filing their complaint in the RTC. They prayed for the dismissal of the complaint under Section 1(j), Rule 16 of the Rules of Court:

WHEREFORE, it is respectfully prayed that an Order be issued:

a) dismissing the Complaint on the basis of Section 1(j), Rule 16 of the aforecited Rules of Court, or, in the alternative,

b) requiring the plaintiffs to make initiatory step for arbitration by filing the demand to arbitrate, and then asking the parties to resolve their controversies, pursuant to the Arbitration Law, or in the alternative;

c) staying or suspending the proceedings in captioned case until the completion of the arbitration, and

d) denying the plaintiffs’ prayer for the issuance of a temporary restraining order or writ of preliminary injunction.

Other reliefs and remedies just and equitable in the premises are prayed for.17


In the meantime, before the expiration of the reglementary period to answer the complaint, defendants, invoking their counsel’s heavy workload, prayed for a 15-day extension18 within which to file their answer. The additional time prayed for was granted by the RTC.19 However, instead of filing their answer, defendants prayed for a series of 15-day extensions in eight (8) successive motions for extensions on the same justification.20 The RTC again granted the additional time prayed for, but in granting the last extension, it warned against further extension.21Despite the admonition, defendants again moved for another 15-day extension,22 which, this time, the RTC denied. No answer having been filed, plaintiffs moved to declare the defendants in default,23 which the RTC granted in its Order24 dated June 24, 1998.

On June 25, 1998, defendants filed, via registered mail, their "Answer with Counterclaim and Opposition to the Prayer for the Issuance of a Writ of Preliminary Injunction."25 On July 8, 1998, defendants filed a Motion to Set Aside the Order of Default.26 This was opposed by plaintiffs.27 In an Order28 dated July 14, 1998, the RTC denied defendants’ motion to set aside the order of default and ordered the reception of plaintiffs’ evidence ex parte. Defendants filed a motion for reconsideration29 of the July 14, 1998 Order, which the RTC denied in its Order30dated October 21, 1998.

Defendants thereafter interposed an appeal to the CA assailing the Order declaring them in default, as well as the Order denying their motion to set aside the order of default, alleging that these were contrary to facts of the case, the law and jurisprudence.31 On September 16, 1999, the appellate court issued a Resolution32 dismissing the appeal on the ground that the Orders appealed from were interlocutory in character and, therefore, not appealable. No motion for reconsideration of the Order of the dismissal was filed by defendants.

In the meantime, plaintiffs adduced ex parte their testimonial and documentary evidence. On April 17, 2000, the RTC rendered a Decision, the dispositive part of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants as follows:

1. Ordering the rescission of the Joint Venture Agreement as of the date of filing of this complaint;

2. Ordering the defendants to return possession, including all improvements therein, of the real estate property belonging to the plaintiffs which is described in, and covered by Transfer Certificate of Title No. T-10848 of the Register of Deeds of Tagaytay City, and located in Barangay Anulin, City of Tagaytay;

3. Ordering the defendants to turn over all documents, records or papers that have been executed, prepared and retained in connection with any contract to sell or deed of sale of all lots/units sold during the effectivity of the joint venture agreement;

4. Ordering the defendants to pay the plaintiffs the sum of P1,041,524.26 representing their share of the net income of the P2,603,810.64 as of September 30, 1995, as stipulated in the joint venture agreement;

5. Ordering the defendants to pay the plaintiffs’ attorney’s fees in the amount of P104,152.40;

6. Ordering the defendants to pay the costs.

SO ORDERED.33

The trial court anchored its decision on the following findings:

x x x Evidence on record have shown patent violations by the defendants of the stipulations particularly paragraph II covering Developer’s (defendant) undertakings, as well as paragraph III and paragraph V of the JVA. These violations are not limited to those made against the plaintiffs alone as it appears that some of the unit buyers themselves have their own separate gripes against the defendants as typified by the letters (Exhibits "G" and "H") of Mr. Emmanuel Enciso.

x x x x

Rummaging through the evidence presented in the course of the testimony of Mrs. Maminta on August 6, 1998 (Exhibits "N," "O," "P," "Q" and "R" as well as submarkings, pp. 60 to 62, TSN August 6, 1998) this court has observed, and is thus convinced, that a pattern of what appears to be a scheme or plot to reduce and eventually blot out the net income generated from sales of housing units by defendants, has been established. Exhibit "P-2" is explicit in declaring that, as of September 30, 1995, the joint venture project earned a net income of aboutP2,603,810.64. This amount, however, was drastically reduced in a subsequent financial report submitted by the defendants to P1,954,216.39. Shortly thereafter, and to the dismay of the plaintiffs, the defendants submitted an


income statement and a balance sheet (Exhibits "R" and "R-1") indicating a net loss of P5,122,906.39 as of June 30, 1997.

Of the reported net income of P2,603,810.64 (Exhibit "P-2") the plaintiffs should have received the sum ofP1,041,524.26 representing their 40% share under paragraph II and V of the JVA. But this was not to be so. Even before the plaintiffs could get hold of their share as indicated above, the defendants closed the chance altogether by declaring a net loss. The court perceives this to be one calculated coup-de-grace that would put to thin air plaintiffs’ hope of getting their share in the profit under the JVA.

That this matter had reached the court is no longer a cause for speculation. The way the defendants treated the JVA and the manner by which they handled the project itself vis-à-vis their partners, the plaintiffs herein, there is bound to be certain conflict as the latter repeatedly would received the losing end of the bargain.

Under the intolerable circumstances, the plaintiffs could not have opted for some other recourse but to file the present action to enforce their rights. x x x34

On May 15, 2000, plaintiffs filed a Motion for Execution Pending Appeal35 alleging defendants’ dilatory tactics for its allowance. This was opposed by defendants.36

On May 22, 2000, the RTC resolved the motion for execution pending appeal in favor of plaintiffs.37 Upon posting a bond of P1,000,000.00 by plaintiffs, a writ of execution pending appeal was issued on June 20, 2000.38

Defendants appealed the decision to the CA on the following assignment of errors:

I

THE TRIAL COURT ERRED IN DECIDING THE CASE WITHOUT FIRST REFERRING THE COMPLAINT FOR VOLUNTARY ARBITRATION (RA NO. 876), CONTRARY TO THE MANDATED VOLUNTARY ARBITRATION CLAUSE UNDER THE JOINT VENTURE AGREEMENT, AND THE DOCTRINE IN "MINDANAO PORTLAND CEMENT CORPORATION V. MCDONOUGH CONSTRUCTION COMPANY OF FLORIDA" (19 SCRA 814-815).

II

THE TRIAL COURT ERRED IN ISSUING A WRIT OF EXECUTION PENDING APPEAL EVEN IN THE ABSENCE OF GOOD AND COMPELLING REASONS TO JUSTIFY SAID ISSUANCE, AND DESPITE PRIMELINK’S STRONG OPPOSITION THERETO.

III

THE TRIAL COURT ERRED IN REFUSING TO DECIDE PRIMELINK’S MOTION TO QUASH THE WRIT OF EXECUTION PENDING APPEAL AND THE MOTION FOR RECONSIDERATION, ALTHOUGH THE COURT HAS RETAINED ITS JURISDICTION TO RULE ON ALL QUESTIONS RELATED TO EXECUTION.

IV

THE TRIAL COURT ERRED IN RESCINDING THE JOINT VENTURE AGREEMENT ALTHOUGH PRIMELINK HAS SUBSTANTIALLY DEVELOPED THE PROJECT AND HAS SPENT MORE OR LESS FORTY MILLION PESOS, AND DESPITE APPELLEES’ FAILURE TO PRESENT SUFFICIENT EVIDENCE JUSTIFYING THE SAID RESCISSION.

V

THE TRIAL COURT ERRED IN DECIDING THAT THE APPELLEES HAVE THE RIGHT TO TAKE OVER THE SUBDIVISION AND TO APPROPRIATE FOR THEMSELVES ALL THE EXISTING IMPROVEMENTS INTRODUCED THEREIN BY PRIMELINK, ALTHOUGH SAID RIGHT WAS NEITHER ALLEGED NOR PRAYED FOR IN THE COMPLAINT, MUCH LESS PROVEN DURING THE EX PARTE HEARING, AND EVEN WITHOUT ORDERING APPELLEES TO FIRST REIMBURSE PRIMELINK OF THE SUBSTANTIAL DIFFERENCE BETWEEN THE MARKET VALUE OF APPELLEES’ RAW, UNDEVELOPED AND UNPRODUCTIVE LAND (CONTRIBUTED TO THE PROJECT) AND THE SUM OF MORE OR LESS FORTY MILLION PESOS WHICH PRIMELINK HAD SPENT FOR THE HORIZONTAL AND VERTICAL DEVELOPMENT OF THE PROJECT, THEREBY ALLOWING APPELLEES TO UNJUSTLY ENRICH THEMSELVES AT THE EXPENSE OF PRIMELINK.39

The appeal was docketed in the CA as CA-G.R. CV No. 69200.


On August 9, 2004, the appellate court rendered a decision affirming, with modification, the appealed decision. The fallo of the decision reads:

WHEREFORE, in view of the foregoing, the assailed decision of the Regional Trial Court of Tagaytay City, Branch 18, promulgated on April 17, 2000 in Civil Case No. TG-1776, is hereby AFFIRMED. Accordingly, Transfer Certificate of Title No. T-10848 held for safekeeping by Chinabank pursuant to the Escrow Agreement is ordered released for return to the plaintiffs-appellees and conformably with the affirmed decision, the cancellation by the Register of Deeds of Tagaytay City of whatever annotation in TCT No. 10848 by virtue of the Joint Venture Agreement, is now proper.

SO ORDERED.40

Citing the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation,41 the appellate court ruled that, under Philippine law, a joint venture is a form of partnership and is to be governed by the laws of partnership. The aggrieved parties filed a motion for reconsideration,42 which the CA denied in its Resolution43 dated March 7, 2005.

Petitioners thus filed the instant Petition for Review on Certiorari, alleging that:

1) DID THE HONORABLE COURT OF APPEALS COMMIT A FATAL AND REVERSIBLE LEGAL ERROR AND/OR GRAVE ABUSE OF DISCRETION IN ORDERING THE RETURN TO THE RESPONDENTS OF THE PROPERTY WITH ALL IMPROVEMENTS THEREON, EVEN WITHOUT ORDERING/REQUIRING THE RESPONDENTS TO FIRST PAY OR REIMBURSE PRIMELINK OF ALL EXPENSES INCURRED IN DEVELOPING AND MARKETING THE PROJECT, LESS THE ORIGINAL VALUE OF THE PROPERTY, AND THE SHARE DUE RESPONDENTS FROM THE PROFITS (IF ANY) OF THE JOINT VENTURE PROJECT?

2) IS THE AFORESAID ORDER ILLEGAL AND CONFISCATORY, OPPRESSIVE AND UNCONSCIONABLE, CONTRARY TO THE TENETS OF GOOD HUMAN RELATIONS AND VIOLATIVE OF EXISTING LAWS AND JURISPRUDENCE ON JUDICIAL NOTICE, DEFAULT, UNJUST ENRICHMENT AND RESCISSION OF CONTRACT WHICH REQUIRES MUTUAL RESTITUTION, NOT UNILATERAL APPROPRIATION, OF PROPERTY BELONGING TO ANOTHER?44

Petitioners maintain that the aforesaid portion of the decision which unconditionally awards to respondents "all improvements" on the project without requiring them to pay the value thereof or to reimburse Primelink for all expenses incurred therefore is inherently and essentially illegal and confiscatory, oppressive and unconscionable, contrary to the tenets of good human relations, and will allow respondents to unjustly enrich themselves at Primelink’s expense. At the time respondents contributed the two parcels of land, consisting of 30,000 square meters to the joint venture project when the JVA was signed on March 10, 1994, the said properties were worth not more than P500.00 per square meter, the "price tag" agreed upon the parties for the purpose of the JVA. Moreover, before respondents rescinded the JVA sometime in October/November 1997, the property had already been substantially developed as improvements had already been introduced thereon; petitioners had likewise incurred administrative and marketing expenses, among others, amounting to more or less P40,000,000.00.45

Petitioners point out that respondents did not pray in their complaint that they be declared the owners and entitled to the possession of the improvements made by petitioner Primelink on the property; neither did they adduce evidence to prove their entitlement to said improvements. It follows, petitioners argue, that respondents were not entitled to the improvements although petitioner Primelink was declared in default.

They also aver that, under Article 1384 of the New Civil Code, rescission shall be only to the extent necessary to cover the damages caused and that, under Article 1385 of the same Code, rescission creates the obligation to return the things which were not object of the contract, together with their fruits, and the price with its interest; consequently, it can be effected only when respondents can return whatever they may be obliged to return. Respondents who sought the rescission of the JVA must place petitioner Primelink in the status quo. They insist that respondents cannot rescind and, at the same time, retain the consideration, or part of the consideration received under the JVA. They cannot have the benefits of rescission without assuming its burden. All parties must be restored to their original positions as nearly as possible upon the rescission of a contract. In the event that restoration to the status quo is impossible, rescission may be granted if the Court can balance the equities and fashion an appropriate remedy that would be equitable to both parties and afford complete relief.

Petitioners insist that being defaulted in the court a quo would in no way defeat their claim for reimbursement because "[w]hat matters is that the improvements exist and they cannot be denied."46 Moreover, they point out, the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation47 cited by the CA is not in point.


On the other hand, the CA ruled that although respondents therein (plaintiffs below) did not specifically pray for their takeover of the property and for the possession of the improvements on the parcels of land, nevertheless, respondents were entitled to said relief as a necessary consequence of the ruling of the trial court ordering the rescission of the JVA. The appellate court cited the ruling of this Court in the Aurbach case and Article 1838 of the New Civil Code, to wit:

As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the agreement is silent on any particular issue, the general principles of partnership may be resorted to.48

Respondents, for their part, assert that Articles 1380 to 1389 of the New Civil Code deal with rescissible contracts. What applies is Article 1191 of the New Civil Code, which reads:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

They insist that petitioners are not entitled to rescission for the improvements because, as found by the RTC and the CA, it was petitioner Primelink that enriched itself at the expense of respondents. Respondents reiterate the ruling of the CA, and argue as follows:

PRIMELINK argued that the LAZATINs in their complaint did not allege, did not prove and did not pray that they are and should be entitled to take over the development of the project, and that the improvements and existing structures which were introduced by PRIMELINK after spending more or less Forty Million Pesos – be awarded to them. They merely asked in the complaint that the joint venture agreement be rescinded, and that the parcels of land they contributed to the project be returned to them.

PRIMELINK’s argument lacks merit. The order of the court for PRIMELINK to return possession of the real estate property belonging to the LAZATINs including all improvements thereon was not a judgment that was different in kind than what was prayed for by the LAZATINs. The order to return the property with all the improvements thereon is just a necessary consequence to the order of rescission.

As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the agreement is silent on any particular issue, the general principles of partnership may be resorted to. In Aurbach v. Sanitary Wares Manufacturing Corporation, the Supreme Court discussed the following points regarding joint ventures and partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is, in fact, hardly distinguishable from the partnership, since elements are similar – community of interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176 F.2d 498 [1949]; Carboneau v. Peterson, 95 P.2d 1043 [1939]; Buckley v. Chadwick, 45 Cal.2d 183, 288 P.2d 12, 289 P.2d 242 [1955]) The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. (Tuffs v. Mann, 116 Cal.App. 170, 2 P.2d 500 [1931]; Harmon v. Martin, 395 III. 595, 71 N.E.2d 74 [1947]; Gates v. Megargel, 266 Fed. 811 [1920]) This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that, under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership. The Supreme Court has, however, recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]; Campos and Lopez – Campos Comments, Notes and Selected Cases, Corporation Code 1981) (Emphasis Supplied)

The LAZATINs were able to establish fraud on the part of PRIMELINK which, in the words of the court a quo, was a pattern of what appears to be a scheme or plot to reduce and eventually blot out the net incomes generated from sales of housing units by the defendants. Under Article 1838 of the Civil Code, where the partnership contract is


rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right is entitled to a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advance contributed by him. In the instant case, the joint venture still has outstanding liabilities to third parties or the buyers of the property.

It is not amiss to state that title to the land or TCT No. T-10848 which is now held by Chinabank for safekeeping pursuant to the Escrow Agreement executed between Primelink Properties and Development Corporation and Ma. Clara T. Lazatin-Magat should also be returned to the LAZATINs as a necessary consequence of the order of rescission of contract. The reason for the existence of the Escrow Agreement has ceased to exist when the joint venture agreement was rescinded.49

Respondents stress that petitioners must bear any damages or losses they may have suffered. They likewise stress that they did not enrich themselves at the expense of petitioners.

In reply, petitioners assert that it is unjust and inequitable for respondents to retain the improvements even if their share in the P1,041,524.26 of the net income of the property and the sale of the land were to be deducted from the value of the improvements, plus administrative and marketing expenses in the total amount ofP40,000,000.00. Petitioners will still be entitled to an accounting from respondents. Respondents cannot deny the existence and nature of said improvements as they are visible to the naked eye.

The threshold issues are the following: (1) whether respondents are entitled to the possession of the parcels of land covered by the JVA and the improvements thereon introduced by petitioners as their contribution to the JVA; (2) whether petitioners are entitled to reimbursement for the value of the improvements on the parcels of land.

The petition has no merit.

On the first issue, we agree with petitioners that respondents did not specifically pray in their complaint below that possession of the improvements on the parcels of land which they contributed to the JVA be transferred to them. Respondents made a specific prayer in their complaint that, upon the rescission of the JVA, they be placed in possession of the parcels of land subject of the agreement, and for other "reliefs and such other remedies as are just and equitable in the premises." However, the trial court was not precluded from awarding possession of the improvements on the parcels of land to respondents in its decision. Section 2(c), Rule 7 of the Rules of Court provides that a pleading shall specify the relief sought but it may add as general prayer for such further or other relief as may be deemed just and equitable. Even without the prayer for a specific remedy, proper relief may be granted by the court if the facts alleged in the complaint and the evidence introduced so warrant.50 The court shall grant relief warranted by the allegations and the proof even if no such relief is prayed for.51 The prayer in the complaint for other reliefs equitable and just in the premises justifies the grant of a relief not otherwise specifically prayed for.52

The trial court was not proscribed from placing respondents in possession of the parcels of land and the improvements on the said parcels of land. It bears stressing that the parcels of land, as well as the improvements made thereon, were contributed by the parties to the joint venture under the JVA, hence, formed part of the assets of the joint venture.53 The trial court declared that respondents were entitled to the possession not only of the parcels of land but also of the improvements thereon as a consequence of its finding that petitioners breached their agreement and defrauded respondents of the net income under the JVA.

On the second issue, we agree with the CA ruling that petitioner Primelink and respondents entered into a joint venture as evidenced by their JVA which, under the Court’s ruling in Aurbach, is a form of partnership, and as such is to be governed by the laws on partnership.

When the RTC rescinded the JVA on complaint of respondents based on the evidence on record that petitioners willfully and persistently committed a breach of the JVA, the court thereby dissolved/cancelled the partnership.54With the rescission of the JVA on account of petitioners’ fraudulent acts, all authority of any partner to act for the partnership is terminated except so far as may be necessary to wind up the partnership affairs or to complete transactions begun but not yet finished.55 On dissolution, the partnership is not terminated but continues until the winding up of partnership affairs is completed.56 Winding up means the administration of the assets of the partnership for the purpose of terminating the business and discharging the obligations of the partnership.

The transfer of the possession of the parcels of land and the improvements thereon to respondents was only for a specific purpose: the winding up of partnership affairs, and the partition and distribution of the net partnership assets as provided by law.57 After all, Article 1836 of the New Civil Code provides that unless otherwise agreed by the parties in their JVA, respondents have the right to wind up the partnership affairs:


Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court.

It must be stressed, too, that although respondents acquired possession of the lands and the improvements thereon, the said lands and improvements remained partnership property, subject to the rights and obligations of the parties, inter se, of the creditors and of third parties under Articles 1837 and 1838 of the New Civil Code, and subject to the outcome of the settlement of the accounts between the parties as provided in Article 1839 of the New Civil Code, absent any agreement of the parties in their JVA to the contrary.58 Until the partnership accounts are determined, it cannot be ascertained how much any of the parties is entitled to, if at all.

It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value of the improvements on the parcels of land owned by the joint venture/partnership. Notably, the JVA of the parties does not contain any provision designating any party to wind up the affairs of the partnership.

Thus, under Article 1837 of the New Civil Code, the rights of the parties when dissolution is caused in contravention of the partnership agreement are as follows:

(1) Each partner who has not caused dissolution wrongfully shall have:

(a) All the rights specified in the first paragraph of this article, and

(b) The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.

(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under the second paragraph, No. 1(b) of this article, and in like manner indemnify him against all present or future partnership liabilities.

(3) A partner who has caused the dissolution wrongfully shall have:

(a) If the business is not continued under the provisions of the second paragraph, No. 2, all the rights of a partner under the first paragraph, subject to liability for damages in the second paragraph, No. 1(b), of this article.

(b) If the business is continued under the second paragraph, No. 2, of this article, the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damage caused to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by a bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner’s interest the value of the good-will of the business shall not be considered.

And under Article 1838 of the New Civil Code, the party entitled to rescind is, without prejudice to any other right, entitled:

(1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him;

(2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and

(3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.

The accounts between the parties after dissolution have to be settled as provided in Article 1839 of the New Civil Code:


Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all the liabilities specified in No. 2.

(2) The liabilities of the partnership shall rank in order of payment, as follows:

(a) Those owing to creditors other than partners,

(b) Those owing to partners other than for capital and profits,

(c) Those owing to partners in respect of capital,

(d) Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of the liabilities.

(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the liabilities.

(5) An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in the preceding number.

(6) Any partner or his legal representative shall have the right to enforce the contributions specified in No. 4, to the extent of the amount which he has paid in excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4.

(8) When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors.

(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 69200 are AFFIRMED insofar as they conform to this Decision of the Court.

Costs against petitioners.

SO ORDERED.

SMITH, BELL & COMPANY (LTD.), petitioner, vs. JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.1.CONSTITUTIONAL LAW; PHILIPPINE BlLL OF RlGHTS; CONSTRUCTION.—The guaranties extended by the Congress of the United States to the Philippine Islands have been used in the same sense as like provisions found in the United States Constitution.2.ID.; ID.; FOURTEENTH AMENDMENT TO THE UNITED STATES CONSTITUTION; DUE PROCESS OF LAW AND EQUAL PROTECTION OF THE LAWS; ALIENS.—The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, are universal in their application to all persons within the territorial jurisdiction, without regard to any differences of race, color, or nationality.51 | P a g e || FULL TEXT OF CASES FOR COPORATION CODE ||

3.ID.; ID.; ID.; ID.; ID.—The word "person" found in the Fourteenth Amendment and in the first sentence of the first paragraph of the Philippine Bill of Rights includes aliens.4.ID. ; ID. ; ID. ; ID. ; ID.—Private corporations are "persons" within the scope of the guaranties in so far as their property is concerned.5.ID. ; ID. ; ID. ; ID. ; ID.—Statutes which have attempted arbitrarily to forbid aliens to engage in any kind of business to earn their living have been held unconstitutional, while other statutes denying certain rights to aliens have been held constitutional.6.ID. ; ID.; ID. ; ID. ; ID. ; POLICE POWER.—Neither the Fourteenth Amendment to the United States Constitution, broad and comprehensive as it is, nor any other amendment, "was designed to interfere with the power of the State, sometimes termed its 'police power,' to prescribe regulations to promote the health, peace, morals, education and good order of the people, and to legislate so as to increase the industries of the State, develop its resources and add to its wealth and prosperity. From the very necessities of society, legislation of a special character, having these objects in view, must often be had in certain districts." (Barbier vs. Connolly [1884], 113 U. S., 27; New Orleans Gas Co. vs. Louisiana Light Co. [1885], 115 U. S., 650.)7.ID. ; ID. ; ID. ; ID.; ID. ; ID.—None of the provisions of the Philippine Organic Law could have had the effect of denying to the Government of the Philippine Islands, acting through its Legislature, the right to exercise that most essential, insistent, and illimitable of powers, the. sovereign police power, in the promotion of the general welfare and the public interest.8.ID.; ID.; ID.; ID.; ID.; ID.—The public domain or the common property or resources of the people of the State may be so regulated or distributed as to limit the use to its citizens.9.ID. ; ID. ; ID. ; ID. ; ID. ; ID.—The limitation of employment in the construction of public works by, or for, a state or a municipality to citizens of the United States or of a State is permitted.10.ID. ; ID. ; ID. ; ID. ; ID. ; ID.—Our local experience and our peculiar local conditions, often of controlling effect, have caused the executive branch of the Government of the Philippine Islands, always later with the sanction of the judicial branch, to take a firm stand with reference to the presence of undesirable foreigners. The Government has thus assumed to act for the allsufficient and primitive reasons of the benefit and protection of its own citizens and of the self-preservation and integrity of its dominion.11.ID.; ID.; ID.; ID.; ID.; ID.—Common carriers which, in the Philippines as in the United States and other countries, are affected with a public interest, can only be permitted to use the public waters, deemed a part of the national domain and open to public use, as a privilege, and under such conditions as to the Legislature may seem wise.12.ID.; CONSTRUCTION; PUBLIC POLICY.—The judiciary, alive to the dictates of the national welfare, can properly incline the scales of their decisions in favor of that solution which will most effectively promote the public policy.13.ID. ; ID. ; PRESUMPTION.—All the presumption is in f avor of the constitutionality of the law, and without good and strong reasons a court should not attempt to nullify the action of the Legislature.14.ID.; ID. ; ID.—That is the true construction which will best carry legislative intention into effect.15.ID.; COMMERCE; UNITED STATES COASTWISE TRADE.—The power to regulate commerce, expressly delegated to the Congress by the Constitution, includes the power to nationalize ships built and owned in the United States by registries and enrollments, and the recording of the muniments of title of American vessels.16.ID.; ID.; ID.—Under the Acts of Congress of December 31, 1792, and February 18, 1793 (1 Stat. at L., 287, 305) in case of alienation to a foreigner, all the privileges of an American bottom were ipso facto forfeited. No vessel in which a foreigner was directly or indirectly interested could lawfully be registered as a vessel of the United States.17. ID.; ID.; ID.—The Act of Congress of May 28, 1895 (29 Stat. at L., 188) extended the privileges of registry from vessels wholly owned by a citizen or citizens of the United States to corporations created under the laws of any of the states thereof. This law made it possible for a domestic corporation to obtain the registry or enrollment of its vessels even though some stock of the corporation was owned by aliens.18.ID. ; ID. ; PHILIPPINE COASTWISE TRADE; ACT No. 2761, VALIDITY.—The history of the different laws which have concerned the Philippine coastwise trade is set out in the opinion. The last Act on the subject, No. 2761, has returned to the restrictive idea of the original Customs Administrative Act which in turn was merely a reflection of the statutory language of the first American Congress,19.ID.; ID.; ID. ; ID.—Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an antialien shipping act. The 'ultimate purpose of the Legislature is to encourage Philippine ship-building.20.ID.; ID. ; ID.; ID.—The Philippine Legislature made up entirely of Filipinos, representing the mandate of the Filipino people and the guardian of their rights, acting under practically autonomous powers, and imbued with a strong sense of Philippinism, has desired for these Islands safety from foreign interlopers, the use of the common property exclusively by its citizens and the citizens of the United States, and protection for the common good of the people.21.ID.; ID. ; ID. ; ID.—Act No. 2761 of the Philippine Legislature, limiting' certificates of the Philippine registry to vessels of domestic ownership vested in some one or more of the following classes of persons: (a) citizens or native inhabitants of the Philippine Islands; (b) citizens of the United States residing in the Philippine Islands; (c) any corporation or company composed wholly of citizens of the Philippine Islands or of the United States or both, is authorized by the Act of Congress of April 29, 1908, with its specific delegation of authority to the Government of the Philippine Islands to regulate the transportation of merchandise and passengers between ports or places therein, and by the grant by the Act of Congress of August 29, 1916, of general legislative power to the Philippine Legislature.22.ID. ; ID. ; ID. ; ID.—While the plaintiff, a corporation having alien stockholders, is entitled to the protection afforded by the due process of law and equal protection of the laws clause of the Philippine Bill of Rights, yet Act No. 2761, in denying to corporations such as the plaintiff the right to register vessels in the Philippine coastwise trade, does not belong to that vicious species of class legislation which must always be condemned, but falls within authorized exceptions, notably, within the purview of the police power.


23.ID. ; ID.; ID. ; ID.—Act No. 2761 does not violate the provisions of paragraph 1 of section 3 of the Act of Congress of August 29, 1916, providing "that no law shall be enacted in said Islands which shall deprive any person of life, liberty, or property without due process of law, or deny to any person therein the equal protection of the laws."24.ID. ; ID. ; ID. ; ID.—Act No. 2761 is held to be valid and constitutional. [Smith, Bell & Co. vs. Natividad., 40 Phil. 136(1919)]

MALCOLM, J.:

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad, Collector of Customs of the port of Cebu, Philippine Islands, to compel him to issue a certificate of Philippine registry to the petitioner for its motor vessel Bato. The Attorney-General, acting as counsel for respondent, demurs to the petition on the general ground that it does not state facts sufficient to constitute a cause of action. While the facts are thus admitted, and while, moreover, the pertinent provisions of law are clear and understandable, and interpretative American jurisprudence is found in abundance, yet the issue submitted is not lightly to be resolved. The question, flatly presented, is, whether Act. No. 2761 of the Philippine Legislature is valid — or, more directly stated, whether the Government of the Philippine Islands, through its Legislature, can deny the registry of vessels in its coastwise trade to corporations having alien stockholders.

FACTS.

Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine Islands. A majority of its stockholders are British subjects. It is the owner of a motor vessel known as the Bato built for it in the Philippine Islands in 1916, of more than fifteen tons gross The Bato was brought to Cebu in the present year for the purpose of transporting plaintiff's merchandise between ports in the Islands. Application was made at Cebu, the home port of the vessel, to the Collector of Customs for a certificate of Philippine registry. The Collector refused to issue the certificate, giving as his reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the United States or of the Philippine Islands. The instant action is the result.

LAW.

The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but reenacting a portion of section 3 of this Law, and still in force, provides in its section 1:

That until Congress shall have authorized the registry as vessels of the United States of vessels owned in the Philippine Islands, the Government of the Philippine Islands is hereby authorized to adopt, from time to time, and enforce regulations governing the transportation of merchandise and passengers between ports or places in the Philippine Archipelago. (35 Stat. at L., 70; Section 3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)

The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in force, provides in section 3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as follows.

SEC. 3. That no law shall be enacted in said Islands which shall deprive any person of life, liberty, or property without due process of law, or deny to any person therein the equal protection of the laws. . . .

SEC. 6. That the laws now in force in the Philippines shall continue in force and effect, except as altered, amended, or modified herein, until altered, amended, or repealed by the legislative authority herein provided or by Act of Congress of the United States.

SEC. 7. That the legislative authority herein provided shall have power, when not inconsistent with this Act, by due enactment to amend, alter modify, or repeal any law, civil or criminal, continued in force by this Act as it may from time to time see fit

This power shall specifically extend with the limitation herein provided as to the tariff to all laws relating to revenue provided as to the tariff to all laws relating to revenue and taxation in effect in the Philippines.

SEC. 8. That general legislative power, except as otherwise herein provided, is hereby granted to the Philippine Legislature, authorized by this Act.

SEC. 10. That while this Act provides that the Philippine government shall have the authority to enact a tariff law the trade relations between the islands and the United States shall continue to be governed exclusively by laws of the Congress of the United States: Provided, That tariff acts or acts amendatory to the tariff of the Philippine Islands shall not become law until they shall receive the approval of the President of the United States, nor shall any act of the Philippine Legislature affecting immigration or the currency or coinage laws of the Philippines become a law until it has been approved by the President of the United States: Provided further, That the President shall approve or disapprove any act mentioned in the foregoing proviso within six months from and after its enactment and submission for his approval, and if not disapproved within such time it shall become a law the same as if it had been specifically approved.


SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict with any of the provisions of this Act are hereby continued in force and effect." (39 Stat at L., 546.)

On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section of this law amended section 1172 of the Administrative Code to read as follows:

SEC. 1172. Certificate of Philippine register. — Upon registration of a vessel of domestic ownership, and of more than fifteen tons gross, a certificate of Philippine register shall be issued for it. If the vessel is of domestic ownership and of fifteen tons gross or less, the taking of the certificate of Philippine register shall be optional with the owner.

"Domestic ownership," as used in this section, means ownership vested in some one or more of the following classes of persons: (a) Citizens or native inhabitants of the Philippine Islands; (b) citizens of the United States residing in the Philippine Islands; (c) any corporation or company composed wholly of citizens of the Philippine Islands or of the United States or of both, created under the laws of the United States, or of any State thereof, or of thereof, or the managing agent or master of the vessel resides in the Philippine Islands

Any vessel of more than fifteen gross tons which on February eighth, nineteen hundred and eighteen, had a certificate of Philippine register under existing law, shall likewise be deemed a vessel of domestic ownership so long as there shall not be any change in the ownership thereof nor any transfer of stock of the companies or corporations owning such vessel to person not included under the last preceding paragraph.

Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative Code to read as follows:

SEC. 1176. Investigation into character of vessel. — No application for a certificate of Philippine register shall be approved until the collector of customs is satisfied from an inspection of the vessel that it is engaged or destined to be engaged in legitimate trade and that it is of domestic ownership as such ownership is defined in section eleven hundred and seventy-two of this Code.

The collector of customs may at any time inspect a vessel or examine its owner, master, crew, or passengers in order to ascertain whether the vessel is engaged in legitimate trade and is entitled to have or retain the certificate of Philippine register.

SEC. 1202. Limiting number of foreign officers and engineers on board vessels. — No Philippine vessel operating in the coastwise trade or on the high seas shall be permitted to have on board more than one master or one mate and one engineer who are not citizens of the United States or of the Philippine Islands, even if they hold licenses under section one thousand one hundred and ninety-nine hereof. No other person who is not a citizen of the United States or of the Philippine Islands shall be an officer or a member of the crew of such vessel. Any such vessel which fails to comply with the terms of this section shall be required to pay an additional tonnage tax of fifty centavos per net ton per month during the continuance of said failure.

ISSUES.

Predicated on these facts and provisions of law, the issues as above stated recur, namely, whether Act No 2761 of the Philippine Legislature is valid in whole or in part — whether the Government of the Philippine Islands, through its Legislature, can deny the registry of vessel in its coastwise trade to corporations having alien stockholders .

OPINION.

1. Considered from a positive standpoint, there can exist no measure of doubt as to the power of the Philippine Legislature to enact Act No. 2761. The Act of Congress of April 29, 1908, with its specific delegation of authority to the Government of the Philippine Islands to regulate the transportation of merchandise and passengers between ports or places therein, the liberal construction given to the provisions of the Philippine Bill, the Act of Congress of July 1, 1902, by the courts, and the grant by the Act of Congress of August 29, 1916, of general legislative power to the Philippine Legislature, are certainly superabundant authority for such a law. While the Act of the local legislature may in a way be inconsistent with the Act of Congress regulating the coasting trade of the Continental United States, yet the general rule that only such laws of the United States have force in the Philippines as are expressly extended thereto, and the abnegation of power by Congress in favor of the Philippine Islands would leave no starting point for convincing argument. As a matter of fact, counsel for petitioner does not assail legislative action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport [1859] 22 How., 227.)

2. It is from the negative, prohibitory standpoint that counsel argues against the constitutionality of Act No. 2761. The first paragraph of the Philippine Bill of Rights of the Philippine Bill, repeated again in the first paragraph of the Philippine Bill of Rights as set forth in the Jones Law, provides "That no law shall be enacted in said Islands which shall deprive any person of life, liberty, or property without due process of law, or deny to any person therein the equal protection of the laws." Counsel says that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equal protection of the laws because it, in effect, prohibits the corporation from owning vessels, and because classification of corporations based on the citizenship of one or more of their stockholders is capricious, and that Act No. 2761 deprives the corporation of its properly without due process of law because by the passage of the law company was


automatically deprived of every beneficial attribute of ownership in the Bato and left with the naked title to a boat it could not use .

The guaranties extended by the Congress of the United States to the Philippine Islands have been used in the same sense as like provisions found in the United States Constitution. While the "due process of law and equal protection of the laws" clause of the Philippine Bill of Rights is couched in slightly different words than the corresponding clause of the Fourteenth Amendment to the United States Constitution, the first should be interpreted and given the same force and effect as the latter. (Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has been announced in classic decisions of the United States Supreme Court. Even at the expense of restating what is so well known, these basic principles must again be set down in order to serve as the basis of this decision.

The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, are universal in their application to all person within the territorial jurisdiction, without regard to any differences of race, color, or nationality. The word "person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.) Private corporations, likewise, are "persons" within the scope of the guaranties in so far as their property is concerned. (Santa Clara County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford [1896], 164 U. S., 578.) Classification with the end in view of providing diversity of treatment may be made among corporations, but must be based upon some reasonable ground and not be a mere arbitrary selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws held unconstitutional because of unlawful discrimination against aliens could be cited. Generally, these decisions relate to statutes which had attempted arbitrarily to forbid aliens to engage in ordinary kinds of business to earn their living. (State vs. Montgomery [1900], 94 Maine, 192, peddling — but see. Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board of Examiners of Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356, discrimination against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481; Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187 Penn., 193, all relating to the employment of aliens by private corporations.)

A literal application of general principles to the facts before us would, of course, cause the inevitable deduction that Act No. 2761 is unconstitutional by reason of its denial to a corporation, some of whole members are foreigners, of the equal protection of the laws. Like all beneficient propositions, deeper research discloses provisos. Examples of a denial of rights to aliens notwithstanding the provisions of the Fourteenth Amendment could be cited. (Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell spirituous liquors denied to persons not citizens of the United States; Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the right to peddle; Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of any wild bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442, discriminating in favor of citizens with reference to the taking for private use of the common property in fish and oysters found in the public waters of the State; Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York [1915], 239 U. S., 195, limiting employment on public works by, or for, the State or a municipality to citizens of the United States.)

One of the exceptions to the general rule, most persistent and far reaching in influence is, that neither the Fourteenth Amendment to the United States Constitution, broad and comprehensive as it is, nor any other amendment, "was designed to interfere with the power of the State, sometimes termed its `police power,' to prescribe regulations to promote the health, peace, morals, education, and good order of the people, and legislate so as to increase the industries of the State, develop its resources and add to its wealth and prosperity. From the very necessities of society, legislation of a special character, having these objects in view, must often be had in certain districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police power which the United States Supreme Court say "extends to so dealing with the conditions which exist in the state as to bring out of them the greatest welfare in of its people." (Bacon vs. Walker [1907], 204 U.S., 311.) For quite similar reasons, none of the provision of the Philippine Organic Law could could have had the effect of denying to the Government of the Philippine Islands, acting through its Legislature, the right to exercise that most essential, insistent, and illimitable of powers, the sovereign police power, in the promotion of the general welfare and the public interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32 Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable exception permits of the regulation or distribution of the public domain or the common property or resources of the people of the State, so that use may be limited to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391; Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still another exception permits of the limitation of employment in the construction of public works by, or for, the State or a municipality to citizens of the United States or of the State. (Atkin vs. Kansas [1903],191 U. S., 207; Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New York [1915], 239 U. S., 195.) Even as to classification, it is admitted that a State may classify with reference to the evil to be prevented; the question is a practical one, dependent upon experience. (Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S., 138.)

To justify that portion of Act no. 2761 which permits corporations or companies to obtain a certificate of Philippine registry only on condition that they be composed wholly of citizens of the Philippine Islands or of the United States or both, as not infringing Philippine Organic Law, it must be done under some one of the exceptions here mentioned


This must be done, moreover, having particularly in mind what is so often of controlling effect in this jurisdiction — our local experience and our peculiar local conditions.

To recall a few facts in geography, within the confines of Philippine jurisdictional limits are found more than three thousand islands. Literally, and absolutely, steamship lines are, for an Insular territory thus situated, the arteries of commerce. If one be severed, the life-blood of the nation is lost. If on the other hand these arteries are protected, then the security of the country and the promotion of the general welfare is sustained. Time and again, with such conditions confronting it, has the executive branch of the Government of the Philippine Islands, always later with the sanction of the judicial branch, taken a firm stand with reference to the presence of undesirable foreigners. The Government has thus assumed to act for the all-sufficient and primitive reason of the benefit and protection of its own citizens and of the self-preservation and integrity of its dominion. (In re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S., 549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners, particularly by such solid and reputable firms as the instant claimant, might indeed traverse the waters of the Philippines for ages without doing any particular harm. Again, some evilminded foreigner might very easily take advantage of such lavish hospitality to chart Philippine waters, to obtain valuable information for unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino or American commerce. Moreover, under the Spanish portion of Philippine law, the waters within the domestic jurisdiction are deemed part of the national domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish Law of Waters of August 3, 1866, arts 1, 2, 3.) Common carriers which in the Philippines as in the United States and other countries are, as Lord Hale said, "affected with a public interest," can only be permitted to use these public waters as a privilege and under such conditions as to the representatives of the people may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)

In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein before mentioned, Justice Holmes delivering the opinion of the United States Supreme Court said:

This statute makes it unlawful for any unnaturalized foreign-born resident to kill any wild bird or animal except in defense of person or property, and `to that end' makes it unlawful for such foreign-born person to own or be possessed of a shotgun or rifle; with a penalty of $25 and a forfeiture of the gun or guns. The plaintiff in error was found guilty and was sentenced to pay the abovementioned fine. The judgment was affirmed on successive appeals. (231 Pa., 46; 79 Atl., 928.) He brings the case to this court on the ground that the statute is contrary to the 14th Amendment and also is in contravention of the treaty between the United States and Italy, to which latter country the plaintiff in error belongs .

Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of property, and discrimination against such aliens as a class. But the former really depends upon the latter, since it hardly can be disputed that if the lawful object, the protection of wild life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct. Rep., 600), warrants the discrimination, the, means adopted for making it effective also might be adopted. . . .

The discrimination undoubtedly presents a more difficult question. But we start with reference to the evil to be prevented, and that if the class discriminated against is or reasonably might be considered to define those from whom the evil mainly is to be feared, it properly may be picked out. A lack of abstract symmetry does not matter. The question is a practical one, dependent upon experience. . . .

The question therefore narrows itself to whether this court can say that the legislature of Pennsylvania was not warranted in assuming as its premise for the law that resident unnaturalized aliens were the peculiar source of the evil that it desired to prevent. (Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)

Obviously the question, so stated, is one of local experience, on which this court ought to be very slow to declare that the state legislature was wrong in its facts (Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular speech in some states it was right; but it is enough that this court has no such knowledge of local conditions as to be able to say that it was manifestly wrong. . . .

Judgment affirmed.

We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders, is entitled to the protection afforded by the due-process of law and equal protection of the laws clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying to corporations such as Smith, Bell &. Co. Ltd., the right to register vessels in the Philippines coastwise trade, does not belong to that vicious species of class legislation which must always be condemned, but does fall within authorized exceptions, notably, within the purview of the police power, and so does not offend against the constitutional provision.

This opinion might well be brought to a close at this point. It occurs to us, however, that the legislative history of the United States and the Philippine Islands, and, probably, the legislative history of other countries, if we were to take the time to search it out, might disclose similar attempts at restriction on the right to enter the coastwise trade, and might thus furnish valuable aid by which to ascertain and, if possible, effectuate legislative intention.

3. The power to regulate commerce, expressly delegated to the Congress by the Constitution, includes the power to nationalize ships built and owned in the United States by registries and enrollments, and the recording of


the muniments of title of American vessels. The Congress "may encourage or it may entirely prohibit such commerce, and it may regulate in any way it may see fit between these two extremes." (U.S. vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden [1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)

Acting within the purview of such power, the first Congress of the United States had not been long convened before it enacted on September 1, 1789, "An Act for Registering and Clearing Vessels, Regulating the Coasting Trade, and for other purposes." Section 1 of this law provided that for any ship or vessel to obtain the benefits of American registry, it must belong wholly to a citizen or citizens of the United States "and no other." (1 Stat. at L., 55.) That Act was shortly after repealed, but the same idea was carried into the Acts of Congress of December 31, 1792 and February 18, 1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided that in order to obtain the registry of any vessel, an oath shall be taken and subscribed by the owner, or by one of the owners thereof, before the officer authorized to make such registry, declaring, "that there is no subject or citizen of any foreign prince or state, directly or indirectly, by way of trust, confidence, or otherwise, interested in such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even went so far as to say "that if any licensed ship or vessel shall be transferred to any person who is not at the time of such transfer a citizen of and resident within the United States, ... every such vessel with her tackle, apparel, and furniture, and the cargo found on board her, shall be forefeited." In case of alienation to a foreigner, Chief Justice Marshall said that all the privileges of an American bottom were ipso facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the Attorney-General of the United States was of the opinion that under the provisions of the Act of December 31, 1792, no vessel in which a foreigner is directly or indirectly interested can lawfully be registered as a vessel of the United. States. (14 Op. Atty.-Gen. [U.S.], 340.)

These laws continued in force without contest, although possibly the Act of March 3, 1825, may have affected them, until amended by the Act of May 28, 1896 (29 Stat. at L., 188) which extended the privileges of registry from vessels wholly owned by a citizen or citizens of the United States to corporations created under the laws of any of the states thereof. The law, as amended, made possible the deduction that a vessel belonging to a domestic corporation was entitled to registry or enrollment even though some stock of the company be owned by aliens. The right of ownership of stock in a corporation was thereafter distinct from the right to hold the property by the corporation (Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)

On American occupation of the Philippines, the new government found a substantive law in operation in the Islands with a civil law history which it wisely continued in force Article fifteen of the Spanish Code of Commerce permitted any foreigner to engage in Philippine trade if he had legal capacity to do so under the laws of his nation. When the Philippine Commission came to enact the Customs Administrative Act (No. 355) in 1902, it returned to the old American policy of limiting the protection and flag of the United States to vessels owned by citizens of the United States or by native inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same body reverted to the existing Congressional law by permitting certification to be issued to a citizen of the United States or to a corporation or company created under the laws of the United States or of any state thereof or of the Philippine Islands (Act No. 1235, sec. 3.) The two administration codes repeated the same provisions with the necessary amplification of inclusion of citizens or native inhabitants of the Philippine Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act No. 2761 has returned to the restrictive idea of the original Customs Administrative Act which in turn was merely a reflection of the statutory language of the first American Congress.

Provisions such as those in Act No. 2761, which deny to foreigners the right to a certificate of Philippine registry, are thus found not to be as radical as a first reading would make them appear.

Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an anti-alien shipping act. The ultimate purpose of the Legislature is to encourage Philippine ship-building. This, without doubt, has, likewise, been the intention of the United States Congress in passing navigation or tariff laws on different occasions. The object of such a law, the United States Supreme Court once said, was to encourage American trade, navigation, and ship-building by giving American ship-owners exclusive privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198 U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)

In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the following:

Licensing acts, in fact, in legislation, are universally restraining acts; as, for example, acts licensing gaming houses, retailers of spirituous liquors, etc. The act, in this instance, is distinctly of that character, and forms part of an extensive system, the object of which is to encourage American shipping, and place them on an equal footing with the shipping of other nations. Almost every commercial nation reserves to its own subjects a monopoly of its coasting trade; and a countervailing privilege in favor of American shipping is contemplated, in the whole legislation of the United States on this subject. It is not to give the vessel an American character, that the license is granted; that effect has been correctly attributed to the act of her enrollment. But it is to confer on her American privileges, as contradistinguished from foreign; and to preserve the. Government from fraud by foreigners, in surreptitiously intruding themselves into the American commercial marine, as well as frauds upon the revenue in the trade coastwise, that this whole system is projected.

The United States Congress in assuming its grave responsibility of legislating wisely for a new country did so imbued with a spirit of Americanism. Domestic navigation and trade, it decreed, could only be carried on by citizens of the United States. If the representatives of the American people acted in this patriotic manner to advance the national


policy, and if their action was accepted without protest in the courts, who can say that they did not enact such beneficial laws under the all-pervading police power, with the prime motive of safeguarding the country and of promoting its prosperity? Quite similarly, the Philippine Legislature made up entirely of Filipinos, representing the mandate of the Filipino people and the guardian of their rights, acting under practically autonomous powers, and imbued with a strong sense of Philippinism, has desired for these Islands safety from foreign interlopers, the use of the common property exclusively by its citizens and the citizens of the United States, and protection for the common good of the people. Who can say, therefore, especially can a court, that with all the facts and circumstances affecting the Filipino people before it, the Philippine Legislature has erred in the enactment of Act No. 2761?

Surely, the members of the judiciary are not expected to live apart from active life, in monastic seclusion amidst dusty tomes and ancient records, but, as keen spectators of passing events and alive to the dictates of the general — the national — welfare, can incline the scales of their decisions in favor of that solution which will most effectively promote the public policy. All the presumption is in favor of the constitutionally of the law and without good and strong reasons, courts should not attempt to nullify the action of the Legislature. "In construing a statute enacted by the Philippine Commission (Legislature), we deem it our duty not to give it a construction which would be repugnant to an Act of Congress, if the language of the statute is fairly susceptible of another construction not in conflict with the higher law." (In re Guariña [1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true construction which will best carry legislative intention into effect.

With full consciousness of the importance of the question, we nevertheless are clearly of the opinion that the limitation of domestic ownership for purposes of obtaining a certificate of Philippine registry in the coastwise trade to citizens of the Philippine Islands, and to citizens of the United States, does not violate the provisions of paragraph 1 of section 3 of the Act of Congress of August 29, 1916 No treaty right relied upon Act No. 2761 of the Philippine Legislature is held valid and constitutional .

The petition for a writ of mandamus is denied, with costs against the petitioner. So ordered.

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, petitioners, vs. HON.JUDGE VIVENCIO M. RUIZ,MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, ARTURO LOGRONIO,RODOLFO DE LEON, GAVINO VELASQUEZ,MIMIR DELLOSA,NICANOR ALCORDO,JOHN DOE,JOHN DOE,JOHN DOE, and JOHN DOE, respondents.Remedial law; Search warrant; Procedure for the issuance warrant; Examination of the complainant and witnesses by the judge himself.—The examination of the complainant and the witnesses he may produce, required by Art. 111, Sec. 1, par. 3, of the Constitution, and Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the judge himself and net by others. The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it requires the judge, before issuing a search warrant, to personally examine on oath or affirmation the complainant and any witnesses he may produce. Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the existence or non-existence of a probable cause, pursuant to Art. 111, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of warrants except “upon probable cause.” The determination of whether or not a probable cause exists calls for the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the absence of any rule to the contrary.Same; Same; Deposition taken by Deputy Clerk of Court does not comply with constitutional mandate.—The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M-70 was thus limited to listening to the stenographer’s reading of her notes, to a few words of warning against the commission of perjury, and to administering the oath to the complainant and his witness. This cannot be considered as a personal examination. If there was an examination at all of the complainant and his witness, it was the one conducted by the Deputy Clerk of Court. But the Constitution and the rules required a personal examination by the judge. It was precisely on account of the intention of the delegates to the Constitutional Convention to make it a duty of the issuing judge to personally examine the complainant and his witnesses that the question of how much time would be consumed by the judge in examining them came up before the Convention. The reading of the stenographic notes to respondent judge did not constitute sufficient compliance with the constitutional mandate and the rule; for by that manner respondent judge did not have opportunity to observe the demeanor of the complainant and his witness, and to propound initial and follow-up questions which the judicial mind, on account of its training, was in the best position to conceive. These were important in arriving at a sound inference on the all-important question of whether or not there was probable cause.Same; Same; Search warrant to issue for one specific offense.—The Supreme Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court by providing in its counterpart, under the Revised Rules of Court, that “a search warrant shall not issue but upon probable cause in connection with one specific offense.” Not satisfied with this qualification, the Supreme Court added thereto a paragraph, directing that “no search warrant shall issue for more than one specific offense.”Same; Same; Particular description of things to be seized.—Under Art. 111, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, the warrant should particularly describe the things to be seized.Same; Seizure; Seizure of records pertaining to all business transactions not a particular description.—The warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and corporations, whatever their nature, thus openly contravening the explicit command of the Bill of


Rights—that the things to be seized be particularly described —as well as tending to defeat its major objective; the elimination of general warrants.Same; Same; Purpose of particular description of things to be seized.—A search warrant should particularly describe the place to be searched and the things to be seized. The evident purpose and intent of this requirement is to limit the things to be seized to those, and only those, particularly described in the search warrant—to leave the officers of the law with no discretion regarding what articles they shall seize, to the end that “unreasonable searches and seizures may not be made,—that abuses may not be committed.Same; Same; Where there is a particular description of things to be seized.—A search warrant may be said to particularly describe the things to be seized when the description therein is as specific as the circumstances will ordinarily allow; or when the description expresses a conclusion of fact—not of law—by which the warrant officer may be guided in making the search and seizure; or when the things described are limited to those which bear direct relation to the offense for which the warrant is being issued. If the articles desired to be seized have any direct relation to an offense committed, the applicant must necessarily have some evidence, other than those articles, to prove the said offense; and the articles subject of search and seizure should come in handy merely to strengthen such evidence.Special civil action; Certiorari; When motion for reconsideration is not a prerequisite to the institution of petition for certiorari.—When the questions raised before the Supreme Court are the same as those which were squarely raised in and passed upon by the court below, the filing of a motion for reconsideration in said court before certiorari can be instituted in the Supreme Court is no longer a prerequisite. The rule requiring the filing of a motion for reconsideration before an application for a writ of certiorari can be entertained was never intended to be applied without considering the circumstances. The rule does not apply where, the deprivation of petitioners’ fundamental right to due process taints the proceeding against them in the court below not only with irregularity but also with nullity.Remedial law; Search and seizures; Right of corporation against unreasonable searches and seizures.—A corporation is entitled to immunity against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected against unlawful discrimination.Same; Same; Who can contest legality of seizure.—It is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby, and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations, since the right to object belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity. [Bache & Co. (Phil.), Inc. vs. Ruiz, 37 SCRA 823(1971)]

D E C I S I O N

VILLAMOR, J.:

This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order respondents to desist from enforcing the same and/or keeping the documents, papers and effects seized by virtue thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to have been made on the basis of the said documents, papers and effects, and to order the return of the latter to petitioners. We gave due course to the petition but did not issue the writ of preliminary injunction prayed for therein.

The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw library

On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to make and file the application for search warrant which was attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers: respondent Vera’s aforesaid letter-request; an application for search warrant already filled up but still unsigned by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon; a deposition in printed form of respondent Logronio already accomplished and signed by him but not yet subscribed; and a search warrant already accomplished but still unsigned by respondent Judge.

At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned, respondent


Judge was informed that the depositions had already been taken. The stenographer, upon request of respondent Judge, read to him her stenographic notes; and thereafter, respondent Judge asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis, he could be charged for perjury. Respondent Judge signed respondent de Leon’s application for search warrant and respondent Logronio’s deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and accordingly issued.

Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners’ lawyers protested the search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The agents nevertheless proceeded with their search which yielded six boxes of documents.

On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be issued, that the search warrant be declared null and void, and that the respondents be ordered to pay petitioners, jointly and severally, damages and attorney’s fees. On March 18, 1970, the respondents, thru the Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent Judge, issued on July 29, 1970, an order dismissing the petition for dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners came to this Court.

The petition should be granted for the following reasons:chanrob1es virtual 1aw library

1. Respondent Judge failed to personally examine the complainant and his witness.

The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court are:jgc:chanrobles.com.ph

"(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized." (Art. III, Sec. 1, Constitution.)

"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon probable cause in connection with one specific offense to be determined by the judge or justice of the peace after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched and the persons or things to be seized.

"No search warrant shall issue for more than one specific offense.

"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing the warrant, personally examine on oath or affirmation the complainant and any witnesses he may produce and take their depositions in writing, and attach them to the record, in addition to any affidavits presented to him." (Rule 126, Revised Rules of Court.)

The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the judge himself and not by others. The phrase "which shall be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce," appearing in the said constitutional provision, was introduced by Delegate Francisco as an amendment to the draft submitted by the Sub-Committee of Seven. The following discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph

"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.

En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o si Su Señoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los derechos del individuo en su persona, bienes etcetera, etcetera.

"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la siguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se atendra solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.


"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito siempre requeriria algun tiempo?.

"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males debemos escoger. el menor.

x x x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our constitution something of a fundamental character. Now, before a judge could issue a search warrant, he must be under the obligation to examine personally under oath the complainant and if he has any witness, the witnesses that he may produce . . ."cralaw virtua1aw library

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it requires the judge, before issuing a search warrant, to "personally examine on oath or affirmation the complainant and any witnesses he may produce . . ."cralaw virtua1aw library

Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of warrants except "upon probable cause." The determination of whether or not a probable cause exists calls for the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the absence of any rule to the contrary.

In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant (respondent De Leon) and his witness (respondent Logronio). While it is true that the complainant’s application for search warrant and the witness’ printed-form deposition were subscribed and sworn to before respondent Judge, the latter did not ask either of the two any question the answer to which could possibly be the basis for determining whether or not there was probable cause against herein petitioners. Indeed, the participants seem to have attached so little significance to the matter that notes of the proceedings before respondent Judge were not even taken. At this juncture it may be well to recall the salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the court below shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took the depositions of the complainant and his witness, and that stenographic notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala hearing a case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De Leon and witness Logronio went to respondent Judge’s chamber and informed the Judge that they had finished the depositions. Respondent Judge then requested the stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales testified as follows:jgc:chanrobles.com.ph

"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them, requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and without legal basis, he can be charged criminally for perjury. The Honorable Court told Mr. Logronio whether he affirms the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he?

"A The Honorable Judge.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor."cralaw virtua1aw library

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M-70 was thus limited to listening to the stenographer’s readings of her notes, to a few words of warning against the commission of perjury, and to administering the oath to the complainant and his witness. This cannot be consider a personal examination. If there was an examination at all of the complainant and his witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the rules require a personal examination by the judge. It was precisely on account of the intention of the delegates to the Constitutional Convention to make it a duty of the issuing judge to personally examine the complainant and his witnesses that the question of how much time would be consumed by the judge in examining them came up before the Convention, as can be seen from the record of the proceedings quoted above. The reading of the stenographic notes to respondent Judge did not constitute


sufficient compliance with the constitutional mandate and the rule; for by that manner respondent Judge did not have the opportunity to observe the demeanor of the complainant and his witness, and to propound initial and follow-up questions which the judicial mind, on account of its training, was in the best position to conceive. These were important in arriving at a sound inference on the all-important question of whether or not there was probable cause.

2. The search warrant was issued for more than one specific offense.

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said search warrant issued "in connection with one specific offense," as required by Sec. 3, Rule 126?

To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to above. Thus we find the following:chanrob1es virtual 1aw library

Sec. 46(a) requires the filing of income tax returns by corporations.

Sec. 53 requires the withholding of income taxes at source.

Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent returns.

Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information required under the Tax Code.

Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of any article subject to specific tax . . .," and provides that in the case of a corporation, partnership, or association, the official and/or employee who caused the violation shall be responsible.

Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed, or to pay the tax due thereon.

The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated. The second is the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of Sec. 208 (unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209 (failure to make a return of receipts, sales, business or gross value of output actually removed or to pay the tax due thereon). Even in their classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and Occupation).

Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not applicable, because there the search warrants were issued for "violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for violation of only one code, i.e., the National Internal Revenue Code. The distinction more apparent than real, because it was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of Court took effect on January 1, 1964, that this Court amended the former rule by inserting therein the phrase "in connection with one specific offense," and adding the sentence "No search warrant shall issue for more than one specific offense," in what is now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph

"Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that ‘a search warrant shall not issue but upon probable cause in connection with one specific offense.’ Not satisfied with this qualification, the Court added thereto a paragraph, directing that ‘no search warrant shall issue for more than one specific offense.’"

3. The search warrant does not particularly describe the things to be seized.

The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this manner:jgc:chanrobles.com.ph

"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books, customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory notes and deeds of sale; telex and coded messages; business communications, accounting and business records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign remittances, covering the years 1966 to 1970."cralaw virtua1aw library

The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the things to be seized.


In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said:jgc:chanrobles.com.ph

"The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit:chanrob1es virtual 1aw library

‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or paper showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements.’

"Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights — that the things to be seized be particularly described — as well as tending to defeat its major objective: the elimination of general warrants."cralaw virtua1aw library

While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general warrants, for the language used therein is so all-embracing as to include all conceivable records of petitioner corporation, which, if seized, could possibly render its business inoperative.

In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the purpose of the requirement that the warrant should particularly describe the place to be searched and the things to be seized, to wit:jgc:chanrobles.com.ph

". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search warrant should particularly describe the place to be searched and the things to be seized. The evident purpose and intent of this requirement is to limit the things to be seized to those, and only those, particularly described in the search warrant — to leave the officers of the law with no discretion regarding what articles they shall seize, to the end that ‘unreasonable searches and seizures’ may not be made, — that abuses may not be committed. That this is the correct interpretation of this constitutional provision is borne out by American authorities."cralaw virtua1aw library

The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in this case.

A search warrant may be said to particularly describe the things to be seized when the description therein is as specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description expresses a conclusion of fact — not of law — by which the warrant officer may be guided in making the search and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited to those which bear direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein search warrant does not conform to any of the foregoing tests. If the articles desired to be seized have any direct relation to an offense committed, the applicant must necessarily have some evidence, other than those articles, to prove the said offense; and the articles subject of search and seizure should come in handy merely to strengthen such evidence. In this event, the description contained in the herein disputed warrant should have mentioned, at least, the dates, amounts, persons, and other pertinent data regarding the receipts of payments, certificates of stocks and securities, contracts, promissory notes, deeds of sale, messages and communications, checks, bank deposits and withdrawals, records of foreign remittances, among others, enumerated in the warrant.

Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit. In the first place, when the questions raised before this Court are the same as those which were squarely raised in and passed upon by the court below, the filing of a motion for reconsideration in said court before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the filing of a motion for reconsideration before an application for a writ of certiorari can be entertained was never intended to be applied without considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax assessments sought to be enforced by respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account of which immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners’ fundamental right to due process taints the proceeding against them in the court below not only with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)

It is next contended by respondents that a corporation is not entitled to protection against unreasonable search and seizures. Again, we find no merit in the contention.

"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not wish to be understood as holding that a corporation is not entitled to immunity, under the 4th Amendment, against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its


property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected, under the 14th Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a corporation, the ground that it was not privileged from producing its books and papers. But the rights of a corporation against unlawful search and seizure are to be protected even if the same result might have been achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L. ed. 319.)

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to object against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph

"As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or the interest of each of them in said corporations, whatever, the offices they hold therein may be. Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby, and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity . . ."cralaw virtua1aw library

In the Stonehill case only the officers of the various corporations in whose offices documents, papers and effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized documents belong, and whose rights have thereby been impaired, is itself a petitioner. On that score, petitioner corporation here stands on a different footing from the corporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by petitioners — at least partly — as in effect admitted by respondents — based on the documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized served as basis for the assessments. Those assessments should therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent Judge is declared null and void; respondents are permanently enjoined from enforcing the said search warrant; the documents, papers and effects seized thereunder are ordered to be returned to petitioners; and respondent officials the Bureau of Internal Revenue and their representatives are permanently enjoined from enforcing the assessments mentioned in Annex "G" of the present petition, as well as other assessments based on the documents, papers and effects seized under the search warrant herein nullified, and from using the same against petitioners in any criminal or other proceeding. No pronouncement as to costs.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ., concur.

Reyes, J.B.L., J., concurs with Mr. Justice Barredo.

Castro, J., concurs in the result.

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners, vs. HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his capacity as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR., and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City Branch and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents.Constitutional Law; Search warrants; Corporations; Only party affected may contest legality of seizure effected by search warrants.—Officers of certain corporations, from which documents, papers and things were seized by means of search warrants, have no cause of action to assail the legality of the seizures because said corporations have personalities distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby. The objection to an unlawful search is purely personal and cannot be availed of by third parties.Same; Evidence: When illegally seized evidence is admissible.—Officers of certain corporations cannot validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations since the right to object to their admission in evidence belongs exclusively to the corporations, to which the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity.


Same; Requisites for issuing search warrants.—The Constitution provides that no warrant shall issue but upon probable cause, to be determined by the judge, and that the warrant shall particularly describe the things to be seized.Same; General search warrants.—Search warrants, issued upon applications stating that the natural and juridical persons therein named had committed a violation of Central Bank laws, tariff and customs laws, Tax Code and Revised Penal Code do not satisfy the constitutional requirements because no specific offense had been alleged in said applications. It was impossible for the judges, who issued the warrants, to have found the existence of probable cause, which presupposes the introduction of competent proof that the party against whom it is sought has performed particular acts or committed specific omissions in violation of a specific penal provision.Same; Why general warrants are outlawed.—General search warrants are outlawed because they place the sanctity of the domicile and the privacy of communication and correspondence at the mercy of the whims, caprice or passion of peace officers.Same; Provision of Revised Rules of Court.—To prevent the issuance of general warrants, the Supreme Court amended the Old Rules of Court by providing in the Revised Rules of Court that "no search warrant shall issue for more than one specific offense".Same; Warrants not describing particularly the things to be seized.—Search warrants authorizing the seizure of books of accounts and records "showing all the business transactions" of certain persons, regardless of whether the transactions were legal or illegal, contravene the explicit command of the Bill of Rights that the things to be seized should be particularly described and defeat its major objective of eliminating general warrants.Same; Evidence; Abandonment of Moncado ruling; Illegally seized documents are not admissible in evidence.—The Moncado ruling, that illegally seized documents, papers and things are admissible in evidence, must be abandoned. The exclusion of such evidence is the only practical means of enforcing the constitutional injunction against unreasonable searches and seizures. The non-exclusionary rule is contrary to the letter and spirit of the prohibition against unreasonable searches and seizures. If there is competent evidence to establish probable cause of the commission of a given crime by the party against whom the warrant is intended, then there is no reason why the applicant should not comply with the constitutional requirements If he has no such evidence, then it is not possible for the judge to find that there is a probable cause, and, hence, no justification for the issuance of the warrant. The only possible explanation for the issuance in that case is the necessity of fishing for evidence of the commission of a crime. Such a fishing expedition is indicative of the absence of evidence to establish a probable cause. [Stonehill vs. Diokno, 20 SCRA 383(1967)]

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin1 — hereinafter referred to as Respondents-Prosecutors — several judges2 — hereinafter referred to as Respondents-Judges — issued, on different dates,3 a total of 42 search warrants against petitioners herein4 and/or the corporations of which they were officers,5 directed to the any peace officer, to search the persons above-named and/or the premises of their offices, warehouses and/or residences, and to seize and take possession of the following personal property to wit:

Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursements receipts, balance sheets and profit and loss statements and Bobbins (cigarette wrappers).

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended to be used as the means of committing the offense," which is described in the applications adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal Code."

Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the Rules of Court — because, inter alia: (1) they do not describe with particularity the documents, books and things to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants were issued to fish evidence against the aforementioned petitioners in deportation cases filed against them; (4) the searches and seizures were made in an illegal manner; and (5) the documents, papers and cash money seized were not delivered to the courts that issued the warrants, to be disposed of in accordance with law — on March 20, 1962, said petitioners filed with the Supreme Court this original action for certiorari, prohibition, mandamus and injunction, and prayed that, pending final disposition of the present case, a writ of preliminary injunction be issued restraining Respondents-Prosecutors, their agents and /or representatives from using the effects seized as aforementioned or any copies thereof, in the deportation cases already adverted to, and that, in due course, thereafter, decision be rendered quashing the contested search warrants and declaring the same null and void, and commanding the respondents, their agents or representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash moneys seized or confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid and have been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners' consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners, regardless of the alleged illegality of the aforementioned searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the papers, documents and things


seized from the offices of the corporations above mentioned are concerned; but, the injunction was maintained as regards the papers, documents and things found and seized in the residences of petitioners herein.7

Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may be split into two (2) major groups, namely: (a) those found and seized in the offices of the aforementioned corporations, and (b) those found and seized in the residences of petitioners herein.

As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or of the interest of each of them in said corporations, and whatever the offices they hold therein may be.8 Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby,9 and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. 10 Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity. 11 Indeed, it has been held:

. . . that the Government's action in gaining possession of papers belonging to the corporation did not relate to nor did it affect the personal defendants. If these papers were unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the rights of the corporation and not the rights of the other defendants. Next, it is clear that a question of the lawfulness of a seizure can be raised only by one whose rights have been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had not been seized or the privacy of whose homes had not been disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its violation, if any, was with reference to the rights of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It follows, therefore, that the question of the admissibility of the evidence based on an alleged unlawful search and seizure does not extend to the personal defendants but embraces only the corporation whose property was taken. . . . (A Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.)

With respect to the documents, papers and things seized in the residences of petitioners herein, the aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by this Court, 12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence against petitioners herein.

In connection with said documents, papers and things, two (2) important questions need be settled, namely: (1) whether the search warrants in question, and the searches and seizures made under the authority thereof, are valid or not, and (2) if the answer to the preceding question is in the negative, whether said documents, papers and things may be used in evidence against petitioners herein.1äwphï1.ñët

Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and that accordingly, the seizures effected upon the authority there of are null and void. In this connection, the Constitution 13 provides:

The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized.

Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall issue but upon probable cause, to be determined by the judge in the manner set forth in said provision; and (2) that the warrant shall particularly describe the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed, the same were issued upon applications stating that the natural and juridical person therein named had committed a "violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other words, no specific offense had been alleged in said applications. The averments thereof with respect to the offense committed were abstract. As a consequence, it was impossible for the judges who issued the warrants to have found the existence of probable cause, for the same presupposes the introduction of competent proof that the party against whom it is sought has performed particular acts, or committed specific omissions, violating a given provision of our criminal laws. As a matter of fact, the applications involved in this case do not allege any specific acts performed by herein petitioners. It would be the legal heresy, of the highest order, to convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code," — as alleged in the aforementioned applications — without reference to any determinate provision of said laws or

To uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of communication and correspondence at the mercy of the whims caprice or passion of peace officers. This is precisely


the evil sought to be remedied by the constitutional provision above quoted — to outlaw the so-called general warrants. It is not difficult to imagine what would happen, in times of keen political strife, when the party in power feels that the minority is likely to wrest it, even though by legal means.

Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court 14 by providing in its counterpart, under the Revised Rules of Court 15 that "a search warrant shall not issue but upon probable cause in connection with one specific offense." Not satisfied with this qualification, the Court added thereto a paragraph, directing that "no search warrant shall issue for more than one specific offense."

The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit:

Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements.

Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights — that the things to be seized be particularly described — as well as tending to defeat its major objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the searches and seizures under consideration were unconstitutional, the documents, papers and things thus seized are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are unanimously of the opinion that the position taken in the Moncado case must be abandoned. Said position was in line with the American common law rule, that the criminal should not be allowed to go free merely "because the constable has blundered," 16 upon the theory that the constitutional prohibition against unreasonable searches and seizures is protected by means other than the exclusion of evidence unlawfully obtained, 17 such as the common-law action for damages against the searching officer, against the party who procured the issuance of the search warrant and against those assisting in the execution of an illegal search, their criminal punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as may be provided by other laws.

However, most common law jurisdictions have already given up this approach and eventually adopted the exclusionary rule, realizing that this is the only practical means of enforcing the constitutional injunction against unreasonable searches and seizures. In the language of Judge Learned Hand:

As we understand it, the reason for the exclusion of evidence competent as such, which has been unlawfully acquired, is that exclusion is the only practical way of enforcing the constitutional privilege. In earlier times the action of trespass against the offending official may have been protection enough; but that is true no longer. Only in case the prosecution which itself controls the seizing officials, knows that it cannot profit by their wrong will that wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

If letters and private documents can thus be seized and held and used in evidence against a citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be secure against such searches and seizures, is of no value, and, so far as those thus placed are concerned, might as well be stricken from the Constitution. The efforts of the courts and their officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the sacrifice of those great principles established by years of endeavor and suffering which have resulted in their embodiment in the fundamental law of the land.19

This view was, not only reiterated, but, also, broadened in subsequent decisions on the same Federal Court. 20 After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):

. . . Today we once again examine the Wolf's constitutional documentation of the right of privacy free from unreasonable state intrusion, and after its dozen years on our books, are led by it to close the only courtroom door remaining open to evidence secured by official lawlessness in flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that very same unlawful conduct. We hold that all evidence obtained by searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a State.

Since the Fourth Amendment's right of privacy has been declared enforceable against the States through the Due Process Clause of the Fourteenth, it is enforceable against them by the same sanction of exclusion as it used against the Federal Government. Were it otherwise, then just as without the Weeks rule the assurance against unreasonable federal searches and seizures would be "a form of words," valueless and underserving of mention in a perpetual charter of inestimable human liberties, so too, without that rule the freedom from state invasions of privacy would be so ephemeral and so neatly severed from its conceptual nexus with the freedom from all brutish means of coercing


evidence as not to permit this Court's high regard as a freedom "implicit in the concept of ordered liberty." At the time that the Court held in Wolf that the amendment was applicable to the States through the Due Process Clause, the cases of this Court as we have seen, had steadfastly held that as to federal officers the Fourth Amendment included the exclusion of the evidence seized in violation of its provisions. Even Wolf "stoutly adhered" to that proposition. The right to when conceded operatively enforceable against the States, was not susceptible of destruction by avulsion of the sanction upon which its protection and enjoyment had always been deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the substantive protections of due process to all constitutionally unreasonable searches — state or federal — it was logically and constitutionally necessarily that the exclusion doctrine — an essential part of the right to privacy — be also insisted upon as an essential ingredient of the right newly recognized by the Wolf Case. In short, the admission of the new constitutional Right by Wolf could not tolerate denial of its most important constitutional privilege, namely, the exclusion of the evidence which an accused had been forced to give by reason of the unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its privilege and enjoyment. Only last year the Court itself recognized that the purpose of the exclusionary rule to "is to deter — to compel respect for the constitutional guaranty in the only effectively available way — by removing the incentive to disregard it" . . . .

The ignoble shortcut to conviction left open to the State tends to destroy the entire system of constitutional restraints on which the liberties of the people rest. Having once recognized that the right to privacy embodied in the Fourth Amendment is enforceable against the States, and that the right to be secure against rude invasions of privacy by state officers is, therefore constitutional in origin, we can no longer permit that right to remain an empty promise. Because it is enforceable in the same manner and to like effect as other basic rights secured by its Due Process Clause, we can no longer permit it to be revocable at the whim of any police officer who, in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision, founded on reason and truth, gives to the individual no more than that which the Constitution guarantees him to the police officer no less than that to which honest law enforcement is entitled, and, to the courts, that judicial integrity so necessary in the true administration of justice. (emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the constitutional injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has competent evidence to establish probable cause of the commission of a given crime by the party against whom the warrant is intended, then there is no reason why the applicant should not comply with the requirements of the fundamental law. Upon the other hand, if he has no such competent evidence, then it is not possible for the Judge to find that there is probable cause, and, hence, no justification for the issuance of the warrant. The only possible explanation (not justification) for its issuance is the necessity of fishing evidence of the commission of a crime. But, then, this fishing expedition is indicative of the absence of evidence to establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration, overlooks the fact that violations thereof are, in general, committed By agents of the party in power, for, certainly, those belonging to the minority could not possibly abuse a power they do not have. Regardless of the handicap under which the minority usually — but, understandably — finds itself in prosecuting agents of the majority, one must not lose sight of the fact that the psychological and moral effect of the possibility 21 of securing their conviction, is watered down by the pardoning power of the party for whose benefit the illegality had been committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects seized in the offices of the corporations above referred to include personal belongings of said petitioners and other effects under their exclusive possession and control, for the exclusion of which they have a standing under the latest rulings of the federal courts of federal courts of the United States. 22

We note, however, that petitioners' theory, regarding their alleged possession of and control over the aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been Advanced, not in their petition or amended petition herein, but in the Motion for Reconsideration and Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be readjustment of that followed in said petitions, to suit the approach intimated in the Resolution sought to be reconsidered and amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said motion for reconsideration, or submitted in support thereof, contain either inconsistent allegations, or allegations inconsistent with the theory now advanced by petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions said motion for reconsideration, and the contents of the aforementioned affidavits and other papers submitted in support of said motion, have sufficiently established the facts or conditions contemplated in the cases relied upon by the petitioners; to warrant application of the views therein expressed, should we agree thereto. At any rate, we do not deem it necessary to express our opinion thereon, it being best to leave the matter open for determination in appropriate cases in the future.


We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that the warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the documents, papers and other effects so seized in the aforementioned residences are concerned; that the aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other effects seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution, without special pronouncement as to costs.

It is so ordered

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner, vs. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.Constitutional Law; Executive Orders Nos. 1 and 2 issued to implement a constitutional mandate, valid and constitutional—The impugned executive orders are avowedly meant to carry out the explicit command of the Provisional Constitution, ordained by Proclamation No. 3, that the President—in the exercise of legislative power which she was authorized to continue to wield "(u)ntil a legislature is elected and convened under a new Constitution"—"shall give priority to measures to achieve the mandate of the people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts."Same; Same; Executive orders not bill of attainder.—Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. "A bill of attainder is a legislative act which inflicts punishment without judicial trial." "Its essence is the substitution of a legislative for a judicial determination of guilt." In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.Same; Same; Same; Right against self-incrimination has no application to juridical persons and the constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar either.—BASECO also contends that its right against self-incrimination and unreasonable searches and seizures had been transgressed by the Order of April 18,1986 which required it "to produce corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do so." The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the production of such books, papers, contracts, records, statements of accounts and other documents as may be material to the investigation conducted by the Commission," and paragraph (3), Executive Order No. 2 dealing with its power to "(r)equire all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same **." The contention lacks merit. 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. * *" At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to individuals required to produce evidence before the PCGG against any possible violation of his right against self-incrimination. It gives them immunity from prosecution on the basis of testimony or information he is compelled to present. As amended, said Section 4 now provides that—"* * * * 'The witness may not refuse to comply with the order on the basis of his privilege against self-incrimination; but no testimony or other information compelled under the order (or any information directly or indirectly derived from such testimony, or other information) may be used against the witness in any criminal case, except a prosecution for perjury, giving a false statement, or otherwise failing to comply with the order." The constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar either. There has been no search undertaken by any agent or representative of the PCGG, and of course no seizure on the occasion thereof.PCGG; Its creation and powers.—Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad." Upon these premises, the Presidential Commission on Good Government was created, "charged with the task of assisting the President in regard to * * (certain specified) matters," among which was precisely—"* * The recovery of all ill-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, whether located in the Philippines or abroad, including the takeover or sequestration of all business enterprises and entities owned or controlled by them, during his administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship." In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission, the PCGG was granted "power and authority" to do the following particular acts, to wit: 1. 'To sequester or place or cause to be placed under its control or possession any building or office wherein any ill-gotten wealth or properties may be found, and any records pertaining thereto, in order to prevent their destruction, concealment or disappearance which would


frustrate or hamper the investigation or otherwise prevent the Commission from accomplishing its task." 2. "To provisionally take over in the public interest or to prevent the disposal or dissipation, business enterprises and properties taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate authorities." 3. 'To enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual the efforts of the Commission to carry out its task under this order." So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations; require submission of evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish for contempt. It was given power also to promulgate such rules and regulations as may be necessary to carry out the purposes of * * (its creation)." Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It declares that: 1) "* * the Government of the Philippines is in possession of evidence showing that there are assets and properties purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines;" and 2) "* * said assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world." Upon these premises, the President—1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents, or nominees have any interest or participation;" 2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives, subordinates, business associates, dummies, agents, or nominees from transferring, conveying, encumbering, concealing or dissipating said assets or properties in the Philippines and abroad, pending the outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired by them through or as a result of improper or illegal use of or the conversion of funds belonging to the Government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their official position, authority, relationship, connection or influence to unjustly enrich themselves at the expense and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines;" 3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or concealing such assets and properties or from assisting or taking part in their transfer, encumbrance, concealment or dissipation under pain of such penalties as are prescribed by law;" and 4) required "all persons in the Philippines holding such assets or properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same to the Commission on Good Government within thirty (30) days from publication of * (the) Executive Order, * *." A third executive order is relevant: Executive Order No. 14, by which the PCGG is empowered, "with the assistance of the Office of the Solicitor General and other government agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its findings." All such cases, whether civil or criminal, are to be filed "with the Sandiganbayan, which shall have exclusive and original jurisdiction thereof." Executive Order No. 14 also pertinently provides that "(c)ivil suits for restitution, reparation of damages, or indemnification for consequential damages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may be filed separately from and proceed independently of any criminal proceedings and may be proved by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and evidence shall not be strictly applied to * * (said) civil cases.''Same; Same; PCGG is not and was never intended to act as a judge; General functions of PCGG.—It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and was never intended to act as, a judge. Its general function is to conduct investigations in order to collect evidence establishing instances of "ill-gotten wealth;" issue sequestration, and such orders as may be warranted by the evidence thus collected and as may be necessary to preserve and conserve the assets of which it takes custody and control and prevent their disappearance, loss or dissipation; and eventually file and prosecute in the proper court of competent jurisdiction all cases investigated by it as may be warranted by its findings. It does not try and decide, or hear and determine, or adjudicate with any character of finality or compulsion, cases involving the essential issue of whether or not property should be forfeited and transferred to the State because "ill-gotten" within the meaning of the Constitution and the executive orders. This function is reserved to the designated court, in this case, the Sandiganbayan. There can therefore be no serious regard accorded to the accusation, leveled by BASECO, that the PCGG plays the perfidious role of prosecutor and judge at the same time.Same; Same; Same; PCGG is not an owner but a conservator who can exercise only powers of administration over property sequestered, frozen or provisionally taken over.—One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over. As already earlier stressed with no little insistence, the act of sequestration, freezing or provisional takeover of property does not import or bring about a divestment of title over said property; does not make the PCGG the owner thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict ownership; and this is specially true in the situations contemplated by the sequestration rules where, unlike cases of receivership, for example, no court exercises effective supervision or can upon due application and hearing, grant authority for the performance of acts of dominion. Equally evident is that the resort to the provisional remedies in question should entail the least possible interference with business


operations or activities so that, in the event that the accusation of the business enterprise being "ill-gotten" be not proven, it may be returned to its rightful owner as far as possible in the same condition as it was at the time of sequestration. The PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over, much like a court-appointed receiver, such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of the government. In the case of sequestered businesses generally (i.e., going concerns, businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.Same; Same; Same; Same; Need of provisional measures to collect and conserve assets pending suits; Provisional remedies prescribed by law.—Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary, provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of the assets and properties subject of the suits, or to restrain or foil acts that may render moot and academic, or effectively hamper, delay, or negate efforts to recover the same. To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2) freeze orders; and (3) provisional takeover. Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where "business enterprises and properties (were) taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos."Same; Same; Same; Same; Same; Sequestration, Freeze Order and Provisional Takeover, meaning.—By the clear terms of the law, the power of the PCGG to sequester property claimed to be "illgotten" means to place or cause to be placed under its possession or control said property, or any building or office wherein any such property and any records pertaining thereto may be found, including "business enterprises and entities,"—for the purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and preserving, the same—until it can be determined, through appropriate judicial proceedings, whether the property was in truth "ill-gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of funds belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of official position, authority, relationship, connection or influence, resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the State. And this, too, is the sense in which the term is commonly understood in other jurisdictions. A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing such property, or from assisting or taking part in its transfer, encumbrance, concealment, or dissipation." In other words, it commands the possessor to hold the property and conserve it subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession or control, and thus becomes in a sense an involuntary depositary thereof, In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between "ill-gotten" "business enterprises and entities" (going concerns, businesses in actual operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred that the remedy entails no interference, or the least possible interference with the actual management and operations thereof; and "business enterprises which were taken over by the government of the Marcos Administration or by entities or persons close to him," in particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent disposal or dissipation of the enterprises." Such a "provisional takeover" imports something more than sequestration or freezing, more than the placing of the business under physical possession and control, albeit without or with the least possible interference with the management and carrying on of the business itself. In a "provisional takeover," what is taken into custody is not only the physical assets of the business enterprise or entity, but the business operation as well. It is in fine the assumption of control not only over things, but over operations or on-going activities. But, to repeat, such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the government of the Marcos Administration or by entities or persons close to former President t Marcos.''Same; Same; Same; Same; Same; Same; Same; Remedies maybe resorted to by PCGG only for a particular exigency. The law was not meant to divest title or right of the owner over the property sequestered, frozen or takenover.—lt may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just described. Indeed the law plainly qualifies the remedy of takeover by the adjective, "provisional." These remedies may be resorted to only for a particular exigency: to prevent in the public interest the disappearance or dissipation of property or business, and conserve it pending adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to the property sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. This can be done only for the causes and by the processes laid down by law. That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood and exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate authorities." Executive Order No. 2 declares that the assets or properties therein mentioned shall remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired" by illegal means. Executive Order No. 14 makes clear that judicial proceedings are


essential for the resolution of the basic issue of whether or not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.Same; Same; Same; Same; Same; Same; Same; Same; Same; Duration of these provisional remedies.—There is thus no cause for the apprehension voiced by BASECO that sequestration, freezing or provisional takeover is designed to be an end in itself, that it is the device through which persons may be deprived of their property branded as "ill-gotten," that it is intended to bring about a permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly declared by the governing rules. Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisional remedies. Section 26 of its Transitory Provisions lays down the relevant rule in plain terms, apart from extending ratification or confirmation (although not really necessary) to the institution by presidential fiat of the remedy of sequestration and freeze orders: "SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986 in rela-tion to the recovery of ill-gotten wealth shall remain operative f or not more than eighteen months after the ratification of this Constitution. However, in the national interest, as certified by the President, the Congress may extend said period. "A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued before the ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six months from the issuance thereof. "The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as herein provided." As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of preliminary attachment, or receivership. By attachment, a sheriff seizes property of a defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that may be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the action. By receivership, property, real or personal, which is subject of litigation, is placed in the possession and control of a receiver appointed by the Court, who shall conserve it pending final determination of the title or right of possession over it. All these remedies—sequestration, freezing, provisional takeover, attachment and receivership—are provisional, temporary, designed for particular exigencies, attended by no character of permanency or finality, and always subject to the control of the issuing court or agency.Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Remedies non-judicial and writs may be issued exparte.—Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936 the Commissioner of Internal Revenue has been by law authorized to issue against property of a delinquent taxpayer. BASECO itself declares that it has not manifested "a rigid insistence on sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding position, is that any change in procedure, or the institution of a new one, should conform to due process and the other prescriptions of the Bill of Rights of the Constitution." It is, to be sure, a proposition on which there can be no disagreement. Like the remedy of preliminary attachment and receivership, as well as delivery of personal property in replevin suits, sequestration and provisional takeover writs may issue ex parte. And as in preliminary attachment, receivership, and delivery of personalty, no objection of any significance may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its fundamental character of temporariness or conditionality; and taking account specially of the constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people;" as well as the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident, that "any transfer, disposition, concealment or disappearance of said assets and properties would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof.Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Requisites for validity of sequestration, freeze or takeover order.—What is indispensable is that, again as in the case of attachment and receivership, there exist a prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate and fair opportunity to contest it and endeavor to cause its negation or nullification. Both are assured under the executive orders in question and the rules and regulations promulgated by the PCGG. Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due process." Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets and properties, "it is the position of the new democratic government that President Marcos * * (and other parties affected) be afforded fair opportunity to contest these claims before appropriate Philippine authorities." Section 7 of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue upon the authority of at least two commissioners, based on the affirmation or complaint of an interested party, or motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted. A similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or freeze order shall be issued only upon showing of a prima facie case." And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seek to set aside a writ of sequestration or freeze order, viz: "SECTION 5. Who may contend—The person against whom a writ of sequestration or freeze or hold order is directed may request the lifting thereof in writing, either personally or through counsel within five (5) days from receipt of the writ or order, or in the case of a hold order, from date of knowledge thereof. "SECTION 6. Procedure for review of writ or order.—After due hearing or motu proprio for good cause shown, the Commission may lift the writ or order unconditionally or subject to such conditions as it may deem necessary, taking into consideration the evidence and the circumstance of the case. The resolution of the Commission may be appealed by the party concerned to the Office of the President of the Philippines within fifteen (15) days from receipt thereof." Parenthetically, even if the requirement for a prima facie showing of "ill-gotten wealth" were not expressly imposed by some rule or regulation as a condition to warrant the


sequestration or freezing of property contemplated in the executive orders in question, it would nevertheless be exigible in this jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in fact or law, or are whimsical and capricious, are condemned and struck down.

Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Same; Remedies and authority of PCGG to issue writs and orders, constitutionality approved and sanctioned.—lf any doubt should still persist in the face of the foregoing considerations as to the validity and propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these particular remedies and the authority of the PCGG to issue them have received constitutional approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution recognizes the power and duty of the President to enact "measures to achieve the mandate of the people to * * * (r)ecover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution treats of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986." The institution of these provisional remedies is also premised upon the State's inherent police power, regarded as "the power of promoting the public welfare by restraining and regulating the use of liberty and property," and as "the most essential, insistent and illimitable of powers * * in the promotion of general welfare and the public interest," and said to be "co-extensive with self-protection and * * not inaptly termed (also) the 'law of overruling necessity.' " [Bataan Shipyard & Engineering Co., Inc. vs. Presidential Commission on Good Government, 150 SCRA 181(1987)]

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by President Corazon C. Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the sequestration, takeover, and other orders issued, and acts done, in accordance with said executive orders by the Presidential Commission on Good Government and/or its Commissioners and agents, affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of the agents of the Commission, hereafter simply referred to as PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good Government, by authority of the President of the Philippines, you are hereby directed to sequester the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care and maintenance of these assets until such time that the Office of the President through the Commission on Good Government should decide otherwise.

3. To report to the Commission on Good Government periodically.


Further, you are authorized to request for Military/Security Support from the Military/Police authorities, and such other acts essential to the achievement of this sequestration order. 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG, addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm, reiterating an earlier request for the production of certain documents, to wit:

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986

2.4. Minutes of the Regular and Special Meetings of the Board of Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973 to 1986 duly certified by the Corporate Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others from 1973 to December 31, 1985.

5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.

8. Updated schedule of Accounts Receivable and Accounts Payable.

9. Complete list of depository banks for all funds with the authorized signatories for withdrawals thereof.

10. Schedule of company investments and placements. 2

The letter closed with the warning that if the documents were not submitted within five days, the officers would be cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to carry out the basic sequestration order. He sent a letter to BASECO's Vice-President for Finance, 3 terminating the contract for security services within the Engineer Island compound between BASECO and "Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the amendment in part of their contracts with BASECO in the sense that the stipulated charges for use of the BASECO road network were made payable "upon entry and not anymore subject to monthly billing as was originally agreed upon." 4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce improvements costing approximately P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor condition, avowedly to "optimize its utilization and in return maximize the revenue which would flow into the government coffers," in


consideration of Deltamarine's being granted "priority in using the improved portion of the wharf ahead of anybody" and exemption "from the payment of any charges for the use of wharf including the area where it may install its bagging equipments" "until the improvement remains in a condition suitable for port operations." 5 It seems however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new management is not in a position to honor the said contract" and thus "whatever improvements * * (may be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by conventional methods;" but afterwards, Commissioner Bautista, in representation of the PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an agreement to this effect having been executed by them on September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura was also "authorized to clean and beautify the Company's compound," and in this connection, to dispose of or sell "metal scraps" and other materials, equipment and machineries no longer usable, subject to specified guidelines and safeguards including audit and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the PCGG of BASECO, "the Philippine Dockyard Corporation and all their affiliated companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive Order No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or dissipation, business enterprises and properties taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco, and was given the following powers:

1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the companies;

4. Ensures that the assets of the companies are not dissipated and used effectively and efficiently; revenues are duly accounted for; and disburses funds only as may be necessary;

5. Does actions including among others, seeking of military support as may be necessary, that will ensure compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on Good Government on all aspects related to this take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to repeat, petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and acts done on the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination of the services of the BASECO executives. 11


a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action, might be made within the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution was promulgated, under the principle that the law promulgated by the ruler under a revolutionary regime is the law of the land, it ceased to be acceptable when the same ruler opted to promulgate the Freedom Constitution on March 25, 1986 wherein under Section I of the same, Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among others, that "No person shall be deprived of life, liberty and property without due process of law." (Const., Art. I V, Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * * and Takeover Order * * issued purportedly under the authority of said Executive Orders, rests on four fundamental considerations: First, no notice and hearing was accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a purely investigative agency and therefore not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions any proceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the same has been effected; and Fourthly, being directed against specified persons, and in disregard of the constitutional presumption of innocence and general rules and procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently already complied with, was issued without court authority and infringed its constitutional right against self-incrimination, and unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and against the will of the contracting parties; and amending the mode of payment of entry fees stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts being in violation of the non-impairment clause of the constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO premises; 16

3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19

7) planning to elect its own Board of Directors; 20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been buried therein. 22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders have been engendered by misapprehension, or incomplete comprehension if not indeed downright ignorance of the law governing these remedies. It is needful that these misconceptions and doubts be dispelled so that uninformed and useless debates about them may be avoided, and arguments tainted b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end, this opinion will essay an exposition of the law on the matter. In the process many of the objections raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3


The impugned executive orders are avowedly meant to carry out the explicit command of the Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of legislative power which she was authorized to continue to wield "(until a legislature is elected and convened under a new Constitution" — "shall give priority to measures to achieve the mandate of the people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad." 25 Upon these premises, the Presidential Commission on Good Government was created, 26 "charged with the task of assisting the President in regard to (certain specified) matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, whether located in the Philippines or abroad, including the takeover or sequestration of all business enterprises and entities owned or controlled by them, during his administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission, the PCGG was granted "power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any building or office wherein any ill-gotten wealth or properties may be found, and any records pertaining thereto, in order to prevent their destruction, concealment or disappearance which would frustrate or hamper the investigation or otherwise prevent the Commission from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the disposal or dissipation, business enterprises and properties taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual the efforts of the Commission to carry out its task under this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations; require submission of evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish for contempt. 29 It was given power also to promulgate such rules and regulations as may be necessary to carry out the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence showing that there are assets and properties purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents, or nominees have any interest or participation;


2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives, subordinates, business associates, duties, agents, or nominees from transferring, conveying, encumbering, concealing or dissipating said assets or properties in the Philippines and abroad, pending the outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired by them through or as a result of improper or illegal use of or the conversion of funds belonging to the Government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their official position, authority, relationship, connection or influence to unjustly enrich themselves at the expense and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or concealing such assets and properties or from assisting or taking part in their transfer, encumbrance, concealment or dissipation under pain of such penalties as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same to the Commission on Good Government within thirty (30) days from publication of * (the) Executive Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered, "with the assistance of the Office of the Solicitor General and other government agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its findings." 34 All such cases, whether civil or criminal, are to be filed "with the Sandiganbayan which shall have exclusive and original jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or indemnification for consequential damages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may be filed separately from and proceed independently of any criminal proceedings and may be proved by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and evidence shall not be strictly applied to* * (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous regime"; 37

a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, * * located in the Philippines or abroad, * * (and) business enterprises and entities (came to be) owned or controlled by them, during * * (the Marcos) administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, Connections or relationship; 38

b) otherwise stated, that "there are assets and properties purportedly pertaining to former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the Government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines"; 39

c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts, shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world;" 40 and

2) that certain "business enterprises and properties (were) taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above described factual premises of the Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery from Marcos, his family and his dominions of the assets and properties involved, is not only a right but a duty on the part of Government.


But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling necessity that a proper respect be accorded and adequate protection assured, the fundamental rights of private property and free enterprise which are deemed pillars of a free society such as ours, and to which all members of that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are included economic freedom and freedom of enterprise within reasonable bounds and under proper control. * * Evincing much concern for the protection of property, the Constitution distinctly recognizes the preferred position which real estate has occupied in law for ages. Property is bound up with every aspect of social life in a democracy as democracy is conceived in the Constitution. The Constitution realizes the indispensable role which property, owned in reasonable quantities and used legitimately, plays in the stimulation to economic effort and the formation and growth of a solid social middle class that is said to be the bulwark of democracy and the backbone of every progressive and happy country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated; although there are some who maintain that the fact-that an immense fortune, and "vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad," and they have resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions-is within the realm of judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may, the requirement of evidentiary substantiation has been expressly acknowledged, and the procedure to be followed explicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary, provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of the assets and properties subject of the suits, or to restrain or foil acts that may render moot and academic, or effectively hamper, delay, or negate efforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where "business enterprises and properties (were) taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means to place or cause to be placed under its possession or control said property, or any building or office wherein any such property and any records pertaining thereto may be found, including "business enterprises and entities,"-for the purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and preserving, the same-until it can be determined, through appropriate judicial proceedings, whether the property was in truth will- gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of funds belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of official position, authority relationship, connection or influence, resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the State. 44 And this, too, is the sense in which the term is commonly understood in other jurisdictions. 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing such property, or from assisting or taking part in its transfer, encumbrance, concealment, or dissipation." 46 In other words, it commands the possessor to hold the property and conserve it subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession or control, and thus becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover


In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between "ill gotten" "business enterprises and entities" (going concerns, businesses in actual operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred that the remedy entails no interference, or the least possible interference with the actual management and operations thereof; and "business enterprises which were taken over by the government government of the Marcos Administration or by entities or persons close to him," in particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent disposal or dissipation of the enterprises." 48 Such a "provisional takeover" imports something more than sequestration or freezing, more than the placing of the business under physical possession and control, albeit without or with the least possible interference with the management and carrying on of the business itself. In a "provisional takeover," what is taken into custody is not only the physical assets of the business enterprise or entity, but the business operation as well. It is in fine the assumption of control not only over things, but over operations or on- going activities. But, to repeat, such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just described. Indeed the law plainly qualifies the remedy of take-over by the adjective, "provisional." These remedies may be resorted to only for a particular exigency: to prevent in the public interest the disappearance or dissipation of property or business, and conserve it pending adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to the property sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. This can be done only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood and exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate authorities." 49 Executive Order No. 2 declares that the assets or properties therein mentioned shall remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired" by illegal means. Executive Order No. 14 makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or provisional takeover is designed to be an end in itself, that it is the device through which persons may be deprived of their property branded as "ill-gotten," that it is intended to bring about a permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly declared by the governing rules.

Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisional remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule in plain terms, apart from extending ratification or confirmation (although not really necessary) to the institution by presidential fiat of the remedy of sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag remain operative for not more than eighteen months after the ratification of this Constitution. However, in the national interest, as certified by the President, the Congress may extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued before the ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of a defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that may be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the action. 54 By receivership, property, real or personal, which is subject of litigation, is placed in the possession and control of a receiver appointed by the Court, who shall conserve it pending


final determination of the title or right of possession over it. 55 All these remedies — sequestration, freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designed for-particular exigencies, attended by no character of permanency or finality, and always subject to the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936 the Commissioner of Internal Revenue has been by law authorized to issue against property of a delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence on sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding position, is that any change in procedure, or the institution of a new one, should conform to due process and the other prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property in replevin suits, sequestration and provisional takeover writs may issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of personality, no objection of any significance may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its fundamental character of temporariness or conditionality; and taking account specially of the constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people;" 59 as well as the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident, that "any transfer, disposition, concealment or disappearance of said assets and properties would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate and fair opportunity to contest it and endeavor to cause its negation or nullification. 61

Both are assured under the executive orders in question and the rules and regulations promulgated by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due process." 62 Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets and properties, "it is the position of the new democratic government that President Marcos * * (and other parties affected) be afforded fair opportunity to contest these claims before appropriate Philippine authorities." 63 Section 7 of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue upon the authority of at least two commissioners, based on the affirmation or complaint of an interested party, or motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or freeze order shall be issued only upon showing of a prima facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seek to set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or hold order is directed may request the lifting thereof in writing, either personally or through counsel within five (5) days from receipt of the writ or order, or in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good cause shown, the Commission may lift the writ or order unconditionally or subject to such conditions as it may deem necessary, taking into consideration the evidence and the circumstance of the case. The resolution of the commission may be appealed by the party concerned to the Office of the President of the Philippines within fifteen (15) days from receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not expressly imposed by some rule or regulation as a condition to warrant the sequestration or freezing of property contemplated in the executive orders in question, it would nevertheless be exigible in this jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in fact or law, or are whimsical and capricious, are condemned and struck down. 66


9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these particular remedies and the authority of the PCGG to issue them have received constitutional approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution recognizes the power and duty of the President to enact "measures to achieve the mandate of the people to * * * (recover ill- gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution 67 treats of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power, regarded, as t lie power of promoting the public welfare by restraining and regulating the use of liberty and property," 68 and as "the most essential, insistent and illimitable of powers * * in the promotion of general welfare and the public interest," 69 and said to be co-extensive with self-protection and * * not inaptly termed (also) the'law of overruling necessity." " 70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and was never intended to act as, a judge. Its general function is to conduct investigations in order to collect evidence establishing instances of "ill-gotten wealth;" issue sequestration, and such orders as may be warranted by the evidence thus collected and as may be necessary to preserve and conserve the assets of which it takes custody and control and prevent their disappearance, loss or dissipation; and eventually file and prosecute in the proper court of competent jurisdiction all cases investigated by it as may be warranted by its findings. It does not try and decide, or hear and determine, or adjudicate with any character of finality or compulsion, cases involving the essential issue of whether or not property should be forfeited and transferred to the State because "ill-gotten" within the meaning of the Constitution and the executive orders. This function is reserved to the designated court, in this case, the Sandiganbayan. 71 There can therefore be no serious regard accorded to the accusation, leveled by BASECO, 72 that the PCGG plays the perfidious role of prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President Marcos "during his administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence, " and that it was by and through the same means, that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities.

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and shipping executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed, and its main shipyard is located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum of P3,035,000.00 has been paid by the incorporators. 74 The same articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and Transfer Book. 75 Their names and the number of shares respectively held by them are as follows:

1. Jose A. Rojas

1,248 shares

2. Severino G. de la Cruz

1,248 shares

3. Emilio T. Yap


2,508 shares

4. Jose Fernandez

1,248 shares

5. Jose Francisco

128 shares

6. Manuel S. Mendoza

96 shares

7. Anthony P. Lee

1,248 shares

8. Hilario M. Ruiz

32 shares

9. Constante L. Fariñas

8 shares

10. Fidelity Management, Inc.

65,882 shares

11. Trident Management

7,412 shares

12. United Phil. Lines

1,240 shares

13. Renato M. Tanseco

8 shares

14. Fidel Ventura

8 shares

15. Metro Bay Drydock

136,370 shares

16. Manuel Jacela

1 share

17. Jonathan G. Lu

1 share

18. Jose J. Tanchanco

1 share

19. Dioscoro Papa

128 shares

20. Edward T. Marcelo


4 shares

TOTAL

218,819 shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for NASSCO's Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all its structures, buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed on February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from completion of the inventory undertaken pursuant to the contract. The balance of P41,600,000.00, with interest at seven percent (7%) per annum, compounded semi-annually, was stipulated to be paid in equal semi-annual installments over a term of nine (9) years, payment to commence after a grace period of two (2) years from date of turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00, about eight (8) months later. A document to this effect was executed on October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines, as General Manager. 77 This agreement bore, at the top right corner of the first page, the word "APPROVED" in the handwriting of President Marcos, followed by his usual full signature. The document recited that a down payment of P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was payable in equal semi-annual installments over nine (9) years after a grace period of two (2) years, with interest at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO which had not been included in the first two (2) purchase documents. This was accomplished by a deed entitled "Contract of Purchase and Sale," 79 which, like the Memorandum of Agreement dated October 9, 1973 supra also bore at the upper right-hand corner of its first page, the handwritten notation of President Marcos reading, "APPROVED, July 29, 1973," and underneath it, his usual full signature. Transferred to BASECO were NASSCO's "ownership and all its titles, rights and interests over all equipment and facilities including structures, buildings, shops, quarters, houses, plants and expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer Island Shops, including all the equipment of the Bataan National Shipyards (BNS) which were excluded from the sale of NBS to BASECO but retained by BASECO and all other selected equipment and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO committed itself to cooperate with BASECO for the acquisition from the National Government or other appropriate Government entity of Engineer Island. Consideration for the sale was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over a term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together with the general manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got another loan also from the NDC in the amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has been made that not a single centavo has been paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in a


confidential memorandum dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of BASECO, and that of a Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no orders or demands for ship construction" for some time and expressed the fear that if that state of affairs persisted, BASECO would not be able to pay its debts to the Government, which at the time stood at the not inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by an entirely new corporation to be created;" and towards this end, he informed Marcos that BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to BASECO amounting to P341.165M and assuming and converting a portion of BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will participate by absorbing and converting a portion of the REPACOM loan of Bay Shipyard and Drydock, Inc., amounting to P32.538M. 86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due chiefly to the fact that "orders to build ships as expected * * did not materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart attack," he made the following quite revealing, and it may be added, quite cynical and indurate recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock book prior to the implementation of your instructions to pass a board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and waivers; 89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in "Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";

5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment at Mariveles, Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at Engineer Island, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;


10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing facilities for BASECO's rank-and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when BASECO will have enough orders for ships in order for the company to meet loan obligations," and that —

An LOI may be issued to government agencies using floating equipment, that a linkage scheme be applied to a certain percent of BASECO's net profit as part of BASECO's amortization payments to make it justifiable for you, Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of BASECO, yet he has presented a report on BASECO to President Marcos, and his report demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco of the Philippine National Oil Company and Chairman Constante Fariñas of the National Development Company, directing them "to participate in the formation of a new corporation resulting from the spin-off of the shipbuilding component of BASECO along the following guidelines:

a. Equity participation of government shall be through LUSTEVECO and NDC in the amount of P115,903,000 consisting of the following obligations of BASECO which are hereby authorized to be converted to equity of the said new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and Geronimo Z. Velasco, in representation of their respective corporations, executed a PRE-INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their president's instructions. It would seem that the new corporation ultimately formed was actually named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February 14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National Development Company (NDC). What is commanded therein is summarized by the Solicitor General, with pithy and not inaccurate observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of s allegedly representing the handling and incidental expenses incurred by BASECO in the installation of said equipment (so instead of NDC getting paid on its loan to BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the shipbuilding equipment procured from reparations through EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be invested by LUSTEVECO, acting through PNOC and NDC, as the government's equity participation in a shipbuilding corporation to be established in partnership with the private sector.

xxx xxx xxx


And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's REPACOM loan of P32.438M were wiped out and converted into non-voting preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the control by President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos not only exercised control over BASECO, but also that he actually owns well nigh one hundred percent of its outstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of stock outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three corporations, among themselves, own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found in Malacanang shortly after the sudden flight of President Marcos, were certificates corresponding to more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together with deeds of assignment of practically all the outstanding shares of stock of the three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. — which supposedly owns as aforesaid 65,882 shares of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay Drydock Corporation — which allegedly owns 136,370 shares of BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. — which allegedly owns 7,412 shares of BASECO stock, assigned in blank; 98 and

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of BASECO stock; that is, all but 5 % — all endorsed in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO stockholders were still in possession of their respective stock certificates and had "never endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "to SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension; and in his motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties, among whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof from them." 102 On the same day he filed another motion praying that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of Stock of petitioner's stockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to secure copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their) certificates of stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in Malacañang after the former President and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the petitioner * * to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion filed on December 5, 1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to


produce the originals of the stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * * some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure performance of obligations, while others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently omitted, nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not impressed on the supposed stockholders the primordial importance of convincing this Court of their present custody of the originals of the stock, or if he had done so, why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be exhibited to the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are "dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the private corporation known as BASECO was "owned or controlled by former President Ferdinand E. Marcos * * during his administration, * * through nominees, by taking advantage of * * (his) public office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of the government had been taken over by BASECO; and the situation justified the sequestration as well as the provisional takeover of the corporation in the public interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the requisite actions with the Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it sustains the acts of sequestration and takeover by the PCGG as being in accord with the law, and, in view of what has thus far been set out in this opinion, pronounces to be without merit the theory that said acts, and the executive orders pursuant to which they were done, are fatally defective in not according to the parties affected prior notice and hearing, or an adequate remedy to impugn, set aside or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and seizures had been transgressed by the Order of April 18, 1986 which required it "to produce corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do so." The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the production of such books, papers, contracts, records, statements of accounts and other documents as may be material to the investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same * *." The contention lacks merit.

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 ofsuchprivileges * * 113


Relevant jurisprudence is also cited by the Solicitor General. 114

* * 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 the 4th Amendment's Search and Seizure provisions. 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." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).

* * 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. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. 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. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to individuals required to produce evidence before the PCGG against any possible violation of his right against self-incrimination. It gives them immunity from prosecution on the basis of testimony or information he is compelled to present. As amended, said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege against self-incrimination; but no testimony or other information compelled under the order (or any information directly or indirectly derived from such testimony, or other information) may be used against the witness in any criminal case, except a prosecution for perjury, giving a false statement, or otherwise failing to comply with the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar either. There has been no search undertaken by any agent or representative of the PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers that may be wielded by the PCGG with regard to the properties or businesses placed under sequestration or provisionally taken over. Obviously, it is not a question to which an answer can be easily given, much less one which will suffice for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over. AS already earlier stressed with no little insistence, the act of sequestration; freezing or provisional takeover of property does not import or bring about a divestment of title over said property; does not make the PCGG the owner thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict ownership; and this is specially true in the situations contemplated by the sequestration rules where, unlike cases of receivership, for example, no court exercises effective supervision or can upon due application and hearing, grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least possible interference with business operations or activities so that, in the event that the accusation of the business enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far as possible in the same condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may be


necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going concerns, businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going concerns, or business enterprises in operation, something more than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the operation, running, or management of the business itself. But even in this special situation, the intrusion into management should be restricted to the minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of management officials or change of policies, particularly in respect of viable establishments. In fact, such a replacement or substitution should be avoided if at all possible, and undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without saying that where replacement of management officers may be called for, the greatest prudence, circumspection, care and attention - should accompany that undertaking to the end that truly competent, experienced and honest managers may be recruited. There should be no role to be played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The business is not to be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration and control of business enterprises provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * * (sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of directors, declaration of dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed in such a manner as to be consistent with, and not contradictory of the Executive Orders earlier promulgated on the same matter. There should be no exercise of the right to vote simply because the right exists, or because the stocks sequestered constitute the controlling or a substantial part of the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial changes in policy, program or practice of the corporation except for demonstrably weighty and defensible grounds, and always in the context of the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue disposal of the corporate assets. Directors are not to be voted out simply because the power to do so exists. Substitution of directors is not to be done without reason or rhyme, should indeed be shunned if at an possible, and undertaken only when essential to prevent disappearance or wastage of corporate property, and always under such circumstances as assure that the replacements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This is why, in its Resolution of October 28, 1986; 118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through its designated directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the management of the company's affairs should henceforth be guided and governed by the norms herein laid down. They should never for a moment allow themselves to forget that they are conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the premises, required.

25. No Sufficient Showing of Other Irregularities


As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the execution of certain contracts, inclusive of the termination of the employment of some of its executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is not necessary to do so. The issues arising therefrom may and will be left for initial determination in the appropriate action. But the Court will state that absent any showing of any important cause therefor, it will not normally substitute its judgment for that of the PCGG in these individual transactions. It is clear however, that as things now stand, the petitioner cannot be said to have established the correctness of its submission that the acts of the PCGG in question were done without or in excess of its powers, or with grave abuse of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14, 1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.
