Jurisprudence: G.R. No. 142616 July 31, 2001

FIRST DIVISION

G.R. No. 142616            July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL MERCHANDISE, respondents.

KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and set aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order dated October 4, 1999, which denied petitioner's motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of US$300,000.00 secured by real estate mortgages constituted over four (4) parcels of land in Makati City. This credit facility was later increased successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at the Makati City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order before the Regional Trial Court of Makati. The Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on June 8, 1999. At the hearing of the application for preliminary injunction, petitioner was given a period of seven days to file its written opposition to the application. On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction to which the respondents filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity between the petitioner and respondents. On June 30, 1999, the trial court judge issued an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly issued on July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of preliminary injunction before the Court of Appeals. In the impugned decision,1 the appellate court dismissed the petition. Petitioner thus seeks recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101 SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the instant case.3

In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two separate entities, petitioner is still the party-in-interest in the application for preliminary injunction because it is tasked to commit acts of foreclosing respondents' properties.4 Respondents maintain that the entire credit facility is void as it contains stipulations in violation of the principle of mutuality of contracts.5 In addition, respondents justified the act of the court a quo in applying the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the contract:

GROUNDS

I

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.7

Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure and eventual sale of the property in order to protect their rights to said property by reason of void credit facilities as bases for the real estate mortgage over the said property.8

The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, herein petitioner is an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the party to the loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents in their complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid by them in accordance with the terms and conditions in the documents evidencing the credit facilities, and crediting the amount previously paid to PNB by herein respondents.9

Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the contract. Respondents, therefore, do not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL.10 In justifying its ruling, the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may be disregarded where a corporation is the mere alter ego, or business conduit of a person or where the corporation is so organized and controlled and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter.13 The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.

We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court disregarded the separate existence of the parent and the subsidiary on the ground that the latter was formed merely for the purpose of evading the payment of higher taxes. In the case at bar, respondents fail to show any cogent reason why the separate entities of the PNB and PNB-IFL should be disregarded.

While there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent corporation, some factors have been identified that will justify the application of the treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway Co.14 is enlightening. The case involved a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of the former. The Tennessee Supreme Court stated that as a general rule the stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court then outlined the circumstances which may be useful in the determination of whether the subsidiary is but a mere instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that can arise but there are certain common circumstances which are important and which, if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock of Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.15

In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit:

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

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

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

The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to the operation.17

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law or these Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no final determination can be had, an action shall be joined either as plaintiffs or defendants."19 In the case at bar, the injunction suit is directed only against the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct to the main suit.20 A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action. The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ. Further, there is no showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:

SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts complained of during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation.21 Respondents do not deny their indebtedness. Their properties are by their own choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the contract only when petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to prove that they have a right protected and that the acts against which the writ is to be directed are violative of said right.22 The Court is not unmindful of the findings of both the trial court and the appellate court that there may be serious grounds to nullify the provisions of the loan agreement. However, as earlier discussed, respondents committed the mistake of filing the case against the wrong party, thus, they must suffer the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract the provisions of which respondents seek to declare void. Accordingly, the case before the Regional Trial Court must be dismissed and the preliminary injunction issued in connection therewith, must be lifted.

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said case DISMISSED.

SO ORDERED.

Puno, Pardo and Santiago, JJ ., concur.
Davide, Jr., C .J ., on official leave.

Jurisprudence: G.R. No. L-67626 April 18, 1989

FIRST DIVISION

G.R. No. L-67626 April 18, 1989

JOSE REMO, JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC., represented by APIFANIO B. MARCHA, respondents.

Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.



GANCAYCO, J.:

A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats a corporation 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. 1

However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to defeat public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will regard the corporation as an association of persons, or in case of two corporations, will merge them into one." The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of a person." 2 There are many occasions when this Court pierced the corporate veil because of its use to protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing principles.

In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation (hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Bañares, Feliciano Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the corporation may secure from any lending institution. 5

Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of absolute sale. 6 In a side agreement of the same date, the parties agreed on a downpayment in the amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien covering said cargo trucks and the parties may allow an extension of 30 days and thereafter private respondent may ask for a revocation of the contract and the reconveyance of all said trucks. 7

The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private respondent tried to collect from Coprada but the latter promised to pay only upon the release of the DBP loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said letter, Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made. 10

Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting held on March 15, 1978. 11

Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12

In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April 27, 1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental payments were made.

On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the month to pay the balance of the purchase price; that he will update the rentals within the week; and in case he fails, then he will return the 13 units should private respondent elect to get back the same. 13 Private respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1, 1978. 14

Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan application from a certain financing company, and that ten (10) trucks have been returned to Bagbag, Novaliches. 15 On December 9, 1978, Coprada informed private respondent anew that he had returned ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron from the State Investment House, Inc. 16

In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13 trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan, Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez, Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered the complaint denying any participation in the transaction and alleging that Akron has a distinct corporate personality. He was, however, declared in default for his failure to attend the pre-trial.

In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended its articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of Akron to private respondent.

After an ex parte reception of the evidence of the private respondent, a decision was rendered on October 28, 1980, the dispositive part of which reads as follows:

Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering them jointly and severally to pay;

a — the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of interest) from the filing of the complaint until the full amount is paid;

b — rentals of Bagbag property at P1,000.00 a month from August 1978 until the premises is cleared of the said trucks;

c — attorneys fees of P10,000.00, and

d — costs of suit.

The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1, 1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00 shall be from August 1, 1978 until the trucks are removed totally from the place." 17

A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30, 1983. The appellate court entered another decision affirming the appealed decision of the trial court, with costs against petitioner.

Hence, this petition for review wherein petitioner raises the following issues:

I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and in holding the petitioner personally liable for the obligation of the Corporation which decision is patently contrary to law and the applicable decision thereon.

II. The Intermediate Appellate Court (IAC) committed grave error of law in its decision by sanctioning the merger of the personality of the corporation with that of the petitioner when the latter was held liable for the corporate debts. 18

We reverse.

The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in December, 1977 petitioner was still a member of the board of directors of Akron and that he participated in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that said resolution was intended to defraud anyone and more particularly private respondent. It was Coprada, President and Chairman of Akron, who negotiated with said respondent for the purchase of 13 cargo trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the payment of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought from the DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the said promissory note so he cannot be personally bound thereby.

Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same and not petitioner.

As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is not inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment to private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted on the 13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retro sale of the 2 units.

As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron Transport International, Inc., petitioner alleges that the change of corporate name was in order to include trucking and container yard operations in its customs brokerage of which private respondent was duly informed in a letter. 19 Indeed, the new corporation confirmed and assumed the obligation of the old corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation to private respondent.

There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case. Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder to dispose of his shares of stock anytime he so desires.

Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has no part in this.

If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that petitioner had any part or participation in the perpetration of the same. Fraud must be established by clear and convincing evidence. If at all, the principal character on whom fault should be attributed is Feliciano Coprada, the President of Akron, whom private respondent dealt with personally all through out. Fortunately, private respondent obtained a judgment against him from the trial court and the said judgment has long been final and executory.

WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and affirmed, without costs.

SO ORDERED.

Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.

Jurisprudence: G.R. No. 93695 February 4, 1992

THIRD DIVISION

G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES, respondents.

Cayanga, Zuniga & Angel Law Offices for petitioners.

Timbol & Associates for private respondents.



GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns the stocks of the corporation under the terms of the voting trust agreement? How long can a voting trust agreement remain valid and effective? Did a director of the corporation cease to be such upon the creation of the voting trust agreement? These are the questions the answers to which are necessary in resolving the principal issue in this petition for certiorari — whether or not there was proper service of summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners as president and vice-president, allegedly, of the subject corporation after the execution of a voting trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank, Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and the petitioners on March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted on August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president and executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer receive summons or any court processes for or on behalf of ALFA. In support of their second motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the other hand, whereby the management and control of ALFA became vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the public respondent which, nonetheless, resolved to give due course thereto on September 21, 1989.

On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with public respondent issued an Order declaring as final the Order dated April 25, 1989. The private respondents in the said Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be constrained to dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private respondents filed a motion for reconsideration on which the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper service of summons on ALFA through the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously applying the rule that the period during which a motion for reconsideration has been pending must be deducted from the 15-day period to appeal. However, in its Resolution dated January 3, 1991, the public respondent set aside the aforestated entry of judgment after further considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)

In their memorandum, the petitioners present the following arguments, to wit:

(1) that the execution of the voting trust agreement by a stockholders whereby all his shares to the corporation have been transferred to the trustee deprives the stockholders of his position as director of the corporation; to rule otherwise, as the respondent Court of Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp. 270-3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided under Rule 14, Section 13 of the Rules of Court authorized to receive service of summons for and in behalf of the private domestic corporation so that the service of summons on ALFA effected through the petitioners is not valid and ineffective; to maintain the respondent Court of Appeals' position that ALFA was properly served its summons through the petitioners would be contrary to the general principle that a corporation can only be bound by such acts which are within the scope of its officers' or agents' authority (Rollo, pp. 273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the nature of a voting trust agreement and the consequent effects upon its creation in the light of the provisions of the Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all purposes, is to be lodged in the trustee, either with or without a reservation to the owners, or persons designated by them, of the power to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a more definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period rights pertaining to the shares for a period not exceeding five (5) years at any one time: Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite period of time; and (3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder's shares is effected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto on the other hand.

The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust agreement. The petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust agreement the petitioners can no longer be considered directors of ALFA. In support of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of which he is a director which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be director . . . (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable owner for the stocks represented by the voting trust certificates and the stock reversible on termination of the trust by surrender. It is said that the voting trust agreement does not destroy the status of the transferring stockholders as such, and thus render them ineligible as directors. But a more accurate statement seems to be that for some purposes the depositing stockholder holding voting trust certificates in lieu of his stock and being the beneficial owner thereof, remains and is treated as a stockholder. It seems to be deducible from the case that he may sue as a stockholder if the suit is in equity or is of an equitable nature, such as, a technical stockholders' suit in right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution — from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of the right to qualify as a director under section 23 of the present Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation. A director who ceases to be the owner of at least one share of the capital stock of a stock corporation of which is a director shall thereby cease to be a director . . . (Emphasis supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of the stocks owned by them respectively and shall do all things necessary for the transfer of their respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of shares transferred, which shall be transferrable in the same manner and with the same effect as certificates of stock subject to the provisions of this agreement;

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or special, upon any resolution, matter or business that may be submitted to any such meeting, and shall possess in that respect the same powers as owners of the equitable as well as the legal title to the stock;

4. The TRUSTEE may cause to be transferred to any person one share of stock for the purpose of qualifying such person as director of ALFA, and cause a certificate of stock evidencing the share so transferred to be issued in the name of such person;

xxx xxx xxx

9. Any stockholder not entering into this agreement may transfer his shares to the same trustees without the need of revising this agreement, and this agreement shall have the same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There appears to be no dispute from the records that DBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group, the petitioners were no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent committed a reversible error when it ruled that:

. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be president and vice-president, respectively, of the corporation at the time of service of summons on them on August 21, 1987, they were at least up to that time, still directors . . .

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions as such.

There can be no reliance on the inference that the five-year period of the voting trust agreement in question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificate as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first mortgage on the manufacturing plant of said company;

WHEREAS, ALFA is also indebted to other creditors for various financial accomodations and because of the burden of these obligations is encountering very serious difficulties in continuing with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had offered and the TRUSTEE has accepted participation in the management and control of the company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo, pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account which included ALFA's assets pursuant to a management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent or any of its directors.

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on service of processes of a corporation enumerates the representatives of a corporation who can validly receive court processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will contravene the general principle that a corporation can only be bound by such acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.

SO ORDERED.

Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

Jurisprudence: G.R. No. 129459 September 29, 1998

FIRST DIVISION

G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.



PANGANIBAN, J.:

May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a parcel of land owned by the corporation?. May the veil of corporate fiction be pierced on the mere ground that almost all of the shares of stock of the corporation are owned by said treasurer and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for Review on Certiorari before us, assailing the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the downpayment of P100,000.00 which she received from plaintiff-appellant. There is no pronouncement as to costs. 4

The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. 5

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City. Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876: that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales Corporation requesting for a computation of the balance to be paid: that said letter was coursed through defendant-appellee's broker. Linda Aduca, who wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance, covered by Metrobank Cashier's Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to meet in the office of plaintiff-appellant but defendant-appellee's treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales Corporation despite repeated demands and in utter disregard of its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales Corporation: that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages which may be assessed against defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-appellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it has been constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos plus appearance fee for every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as affirmative defense that the President and Chairman of Motorich did not sign the agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew this from the very beginning as it was presented a copy of the Transfer of Rights (Annex B of amended complaint) at the time the Agreement (Annex B of amended complaint) was signed; that plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting, without admitting, the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the stipulated period (up to March 2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus they agreed that if the payment be in check, they will meet at a bank designated by plaintiff-appellant where they will encash the check and sign the Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check, by phone, only after banking hours.

On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing plaintiff-appellant's complaint, ruling that:

The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of absolute sale in accordance with the agreement of February 14, 1989: and if so, whether plaintiff is entitled to damage.

As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was indeed authorized by defendant corporation. Motorich Sales, to dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is clearly owned by the corporation. Motorich Sales, then its disposition should be governed by the requirement laid down in Sec. 40. of the Corporation Code of the Philippines, to wit:

Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combination and monopolies, a corporation may by a majority vote of its board of directors . . . sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets including its goodwill . . . when authorized by the vote of the stockholders representing at least two third (2/3) of the outstanding capital stock . . .

No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff should have been on the look out under these circumstances. More so, plaintiff himself [owns] several corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.

Regarding the question of damages, the Court likewise, does not find substantial evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not in anyway misrepresent herself to be authorized by the corporation to sell the property to plaintiff (tsn dated September 27, 1991, p. 8).

In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at instance for lack of merit.

"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)

For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del Pilar. Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the TRANSFEROR;

— and —

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter referred to as the TRANSFEREE.

WITNESSETH, That:

WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila, containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as follows:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square meter; subject to the following terms:

a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be paid upon the execution of this agreement and shall form part of the total purchase price;

b. Balance shall be payable on or before March 2, 1989;

2. That the monthly amortization for the month of February 1989 shall be for the account of the Transferor; and that the monthly amortization starting March 21, 1989 shall be for the account of the Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-described property and that there [are] no existing liens and/or encumbrances of whatsoever nature;

In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest money shall be forfeited in favor of the Transferor.

That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS

TRANSFEROR TRANSFEREE

[SGD.] [SGD.]

By. NENITA LEE GRUENBERG By: ANDRES T. CO

Treasurer President

Signed In the presence of:

[SGD.] [SGD.]

————————————— ——————————— 6

In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in accordance with the Agreement of February 14, 1989,

2. Plaintiff is entitled to damages. 7

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount remitted as "downpayment" or "earnest money." Hence, this petition before us. 8

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case

II. Whether or not the appellate court may consider matters which the parties failed to raise in the lower court

III. Whether or not there is a valid and enforceable contract between the petitioner and the respondent corporation

IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution of answer in the transcript of stenographic note[s].

V. Whether or not respondents are liable for damages and attorney's fees 9

The Court synthesized the foregoing and will thus discuss them seriatim as follows:

1. Was there a valid contract of sale between petitioner and Motorich?

2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?

3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of stenographic notes material to the disposition of this case?

4. Are respondents liable for damages and attorney's fees?

The Court's Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co affixed their signatures on the contract they both consented to be bound by the terms thereof." Ergo, petitioner contends that the contract is binding on the two corporations. We do not agree.

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized or ratified such sale.

A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's board of directors. 10 Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides;

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that "a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred." 12

Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether the assumed agency be a general or special one bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its assets. 14

In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court contained no proof of such authority. 16 It has not shown any provision of said respondent's articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power.

That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property of the corporation. Selling is obviously foreign to a corporate treasurer's function, which generally has been described as "to receive and keep the funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers." 17

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of Motorich is marketing, distribution, export and import in relation to a general merchandising business. 18 Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell real property, an activity which falls way beyond the scope of her general authority.

Art. 1874 and 1878 of the Civil Code of the Philippines provides:

Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing: otherwise, the sale shall be void.

Art. 1878. Special powers of attorney are necessary in the following case:

xxx xxx xxx

(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration;

xxx xxx xxx.

Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its "acceptance of benefits," as evidenced by the receipt issued by Respondent Gruenberg. 19 Petitioner is clutching at straws.

As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But when these officers exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them." 20

In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on the receipt which, however, does not prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove that her acts were authorized or ratified by Motorich.

Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the obligation which is established." As found by the trial court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. This factual finding of the two courts is binding on this Court. 23 As the consent of the seller was not obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.

Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot be ratified. 24

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no authorization from the board to enter into the subject contract. 26 It adds that, being solely owned by the Spouses Gruenberg, the company can treated as a close corporation which can be bound by the acts of its principal stockholder who needs no specific authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly, 27 not having done so during the trial, but only when it filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of the proceedings. It is well-settled the points of law, theories and arguments not brought to the attention of the trial court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first time on appeal. 29 Allowing petitioner to change horses in midstream, as it were, is to run roughshod over the basic principles of fair play, justice and due process.

Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no reason to uphold it. True, one of the advantages of a corporate form of business organization is the limitation of an investor's liability to the amount of the investment. 30 This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. 31 On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. 32

Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals." 33

We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality or inequity committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close corporation as follows:

Sec. 96. Definition and Applicability of Title. — A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. . . . .

The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation. 35 Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere ownership by a single stockholder or by another corporation of all or capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities." 36 So, too, a narrow distribution of ownership does not, by itself, make a close corporation.

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court ruled that ". . . petitioner corporation is classified as a close corporation and, consequently, a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president." 38 But the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of real property was contracted by the president of a close corporation with the knowledge and acquiescence of its board of directors. 39 In the present case, Motorich is not a close corporation, as previously discussed, and the agreement was entered into by the corporate treasurer without the knowledge of the board of directors.

The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the controlling stockholder, may be considered as a binding corporate act and a board action as nothing more than a mere formality." 40 The present case, however, is not one of them.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent Motorich. 41 Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned exception does not apply. Granting arguendo that the corporate veil of Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the same was acquired during their marriage. There being no indication that said spouses, who appear to have been married before the effectivity of the Family Code, have agreed to a different property regime, their property relations would be governed by conjugal partnership of gains. 42 As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in favor of another his or interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the partnership has been legally dissolved." 43

Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of property, the sale would still be invalid. Under this regime, "alienation of community property must have the written consent of the other spouse or he authority of the court without which the disposition or encumbrance is void." 44 Both requirements are manifestly absent in the instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):

Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?

A Yes, sir. 45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an initial scribbled above it. 46 This, however, is insufficient to prove that Nenita Gruenberg was authorized to represent Respondent Motorich in the sale of its immovable property. Said excerpt be understood in the context of her whole testimony. During her cross-examination. Respondent Gruenberg testified:

Q So, you signed in your capacity as the treasurer?

[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not authorized?

A Yes, sir.

Q You stated on direct examination that you did not represent that you were authorized to sell the property?

A Yes, sir.

Q But you also did not say that you were not authorized to sell the property, you did not tell that to Mr. Co, is that correct?

A That was not asked of me.

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the president who [was] also authorized to sign on behalf of the corporation.

Q You did not say that you were not authorized nor did you say that you were authorized?

A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest money at that time. That was our first meeting. 47

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand, her testimony demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw caution to the wind by offering and paying the earnest money without first verifying Gruenberg's authority to sell the lot.

Fourth Issue:
Damages and Attorney's Fees

Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and bad faith, respondents attempted and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite the receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act." 48 Assuming that Respondent Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by [R]espondent [C]orporation." 49

As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack factual bases. Hence, an award of damages or attorney's fees cannot be justified. The amount paid as "earnest money" was not proven to have redounded to the benefit of Respondent Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich, because "it was deposited with the account of Aren Commercial c/o Motorich Sales Corporation." 50 Respondent Gruenberg, however, disputes the allegations of petitioner. She testified as follows:

Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was encashed.

A Yes. sir, the check was paid in my name and I deposit[ed] it.

Q In your account?

A Yes, sir. 51

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push through." 52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president of Petitioner Corporation for more than ten years and has also served as chief executive of two other corporate entities. 53 Co cannot feign ignorance of the scope of the authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's authorization to enter into a contract to sell a parcel of land belonging to Motorich.

Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably, petitioner appears to be the victim of its own officer's negligence in entering into a contract with and paying an unauthorized officer of another corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the amount she received as earnest money, as "no one shall enrich himself at the expense of another." 54 a principle embodied in Article 2154 of Civil Code. 55 Although there was no binding relation between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to sell the property of Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake in the contruction or application of a difficult question of law may come within the scope of the preceding article."

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

Jurisprudence: G.R. No. L-39050 February 24, 1981

FIRST DIVISION

G.R. No. L-39050 February 24, 1981

CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC., respondents.



DE CASTRO, J.:

Private respondent Insular Sawmill, Inc. is a corporation organized on September 17, 1945 with a corporate life of fifty (50) years, or up to September 17, 1995, with the primary purpose of carrying on a general lumber and sawmill business. To carry on this business, private respondent leased the paraphernal property of petitioner-wife Guillermina M. Gelano at the corner of Canonigo and Otis, Paco, Manila for P1,200.00 a month. It was while private respondent was leasing the aforesaid property that its officers and directors had come to know petitioner-husband Carlos Gelano who received from the corporation cash advances on account of rentals to be paid by the corporation on the land.

Between November 19, 1947 to December 26, 1950 petitioner Carlos Gelano obtained from private respondent cash advances of P25,950.00. The said sum was taken and received by petitioner Carlos Gelano on the agreement that private respondent could deduct the same from the monthly rentals of the leased premises until said cash advances are fully paid. Out of the aforementioned cash advances in the total sum of P25,950.00, petitioner Carlos Gelano was able to pay only P5,950.00 thereby leaving an unpaid balance of P20,000.00 which he refused to pay despite repeated demands by private respondent. Petitioner Guillermina M. Gelano refused to pay on the ground that said amount was for the personal account of her husband asked for by, and given to him, without her knowledge and consent and did not benefit the family.

On various occasions from May 4, 1948 to September 11, 1949 petitioners husband and wife also made credit purchases of lumber materials from private respondent with a total price of P1,120.46 in connection with the repair and improvement of petitioners' residence. On November 9, 1949 partial payment was made by petitioners in the amount of P91.00 and in view of the cash discount in favor of petitioners in the amount of P83.00, the amount due private respondent on account of credit purchases of lumber materials is P946.46 which petitioners failed to pay.

On July 14, 1952, in order to accommodate and help petitioners renew previous loans obtained by them from the China Banking Corporation, private respondent, through Joseph Tan Yoc Su, executed a joint and several promissory note with Carlos Gelano in favor of said bank in the amount of P8,000.00 payable in sixty (60) days. For failure of Carlos Gelano to pay the promissory note upon maturity, the bank collected from the respondent corporation the amount of P9,106.00 including interests, by debiting it from the corporation's current account with the bank. Petitioner Carlos Gelano was able to pay private respondent the amount of P5,000.00 but the balance of P4,106.00 remained unsettled. Guillermina M. Gelano refused to pay on the ground that she had no knowledge about the accommodation made by the corporation in favor of her husband.

On May 29, 1959 the corporation, thru Atty. German Lee, filed a complaint for collection against herein petitioners before the Court of First Instance of Manila. Trial was held and when the case was at the stage of submitting memorandum, Atty. Lee retired from active law practice and Atty. Eduardo F. Elizalde took over and prepared the memorandum.

In the meantime, private respondent amended its Articles of Incorporation to shorten its term of existence up to December 31, 1960 only. The amended Articles of Incorporation was filed with, and approved by the Securities and Exchange Commission, but the trial court was not notified of the amendment shortening the corporate existence and no substitution of party was ever made. On November 20, 1964 and almost four (4) years after the dissolution of the corporation, the trial court rendered a decision in favor of private respondent the dispositive portion of which reads as follows:

WHEREFORE, judgment is rendered, ordering:

1. Defendant Carlos Gelano to pay plaintiff the sum of:

(a) P19,650.00 with interest thereon at the legal rate from the date of the filing of the complaint on May 29, 1959, until said sum is fully paid;

(b) P4,106.00, with interest thereon at the legal rate from the date of the filing of the complaint until said sum is fully paid;

2. Defendants Carlos Gelano and Guillermina Mendoza to pay jointly and severally the sum of:

(a) P946.46, with interest thereon, at the agreed rate of 12% per annum from October 6, 1946, until said sum is fully paid;

(b) P550.00, with interest thereon at the legal rate from the date of the filing of the complaint until the said sum is fully paid;

(c) Costs of the suit; and

3. Defendant Carlos Gelano to pay the plaintiff the sum of P2,000.00 attorney's fees.

The Countered of defendants are dismissed.

SO ORDERED. 1

Both parties appealed to the Court of Appeals, private respondent also appealing because it insisted that both Carlos Gelano and Guillermina Gelano should be held liable for the substantial portion of the claim.

On August 23, 1973, the Court of Appeals rendered a decision modifying the judgment of the trial court by holding petitioner spouses jointly and severally liable on private respondent's claim and increasing the award of P4,106.00. The dispositive portion of the decision reads as follows:

WHEREFORE, modified in the sense that the amount of P4,160.00 under paragraph 1 (b) is raised to P8,160.00 and the clarification that the conjugal partnership of the spouses is jointly and severally liable for the obligations adjudged against defendant Carlos Gelano, the judgment appealed from is affirmed in all other respects. 2

After petitioners received a copy of the decision on August 24, 1973, they came to know that the Insular Sawmill Inc. was dissolved way back on December 31, 1960. Hence, petitioners filed a motion to dismiss the case and/or reconsideration of the decision of the Court of Appeals on grounds that the case was prosecuted even after dissolution of private respondent as a corporation and that a defunct corporation cannot maintain any suit for or against it without first complying with the requirements of the winding up of the affairs of the corporation and the assignment of its property rights within the required period.

Incidentally, after receipt of petitioners' motion to dismiss and/or reconsideration or on October 28, 1973, private respondent thru its former directors filed a Petition for Receivership before the Court of First Instance of Manila, docketed as Special Proceedings No. 92303, 3 which petition is still pending before said court.

On November 5, 1973, private respondent filed comment on the motion to dismiss and or reconsideration and after the parties have filed reply and rejoinder, the Court of Appeals on July 5, 1974 issued a resolution 4 denying the aforesaid motion.

Hence, the present petition for review, petitioners assigning the following errors:

I

THE "RESPONDENT COURT" ERRED IN DENYING PETlTIONERS MOTION TO DISMISS THIS CASE DESPITE THE CLEAR FINDING THAT "RESPONDENT" HAD ALREADY CEASED TO EXIST AS A CORPORATION SINCE DECEMBER 31, 1960 YET.

II

THE "RESPONDENT COURT" ERRED IN NOT HOLDING THAT ACTIONS PENDING FOR OR AGAINST A DEFUNCT CORPORATION ARE DEEMED ABATED.

III

THE "RESPONDENT COURT" ERRED IN HOLDING INSTEAD THAT EVEN IF THERE WAS NO COMPLIANCE WITH SECTIONS 77 AND 78 OF THE CORPORATION LAW FOR THE WINDING UP OF THE AFFAIRS OF THE CORPORATION BY THE CONVEYANCE OF CORPORATE PROPERTY AND PROPERTY RIGHTS TO AN ASSIGNEE, OR TRUSTEE OR THE APPOINTMENT OF A RECEIVER WITHIN THREE YEARS FROM THE DISSOLUTION OF SUCH CORPORATION, ANY LITIGATION FILED BY OR AGAINST THE DISSOLVED CORPORATION, INSTITUTED WITHIN THREE YEARS AFTER SUCH DISSOLUTION BUT WHICH COULD NOT BE TERMINATED WITHIN SAID PERIOD, MAY STILL BE CONTINUED AS IT IS NOT DEEMED ABATED.

IV

THE "RESPONDENT COURT" ERRED IN THE APPLICATION TO THIS CASE OF ITS RULING IN PASAY CREDIT AND FINANCE CORPORATION, VERSUS LAZARO, ET AL., 46 O.G. (11) 5528, AND IN OVERLOOKING THE DISTINCTION LAID DOWN BY THIS HONORABLE COURT IN NUMEROUS DECIDED CASES THAT ONLY CASES FILED IN THE NAME OF ASSIGNEES, TRUSTEES OR RECEIVERS (FOR A DEFUNCT CORPORATION), AI)POINTED WITHIN THREE YEARS FROM ITS DISSOLUTION, MAY BE PROSECUTED BEYOND THE SAID THREE YEAR PERIOD, AND THAT, ALL OTHERS ARE DEEMED ABATED.

V

THE "RESPONDENT COURT" ERRED IN HOLDING THAT WITH THE FILING OF SPECIAL PROCEEDINGS NO. 92303 IN THE COURT OF FIRST INSTANCE OF MANILA BY FORMER DIRECTORS OF "PRIVATE RESPONDENT" ON OCTOBER 23,1973, OR, THIRTEEN YEARS AFTER ITS DISSOLUTION, A LEGAL, PERSONALITY WILL BE APPOINTED TO REPRESENT THE CORPORATION.

VI

THE "RESPONDENT COURT" ERRED IN PRACTICALLY RULING THAT THE THREE-YEAR PERIOD PROVIDED FOR BY THE CORPORATION LAW WITHIN WHICH ASSIGNEES, TRUSTEES FOR RECEIVERS MAY BE APPOINTED MAY BE EXTENDED.

VII

THE "RESPONDENT COURT" ERRED IN NOT HOLDING THAT THE FAILURE OF "PRIVATE RESPONDENT" OR ITS AUTHORIZED COUNSEL TO NOTIFY THE TRIAL COURT OF ITS DISSOLUTION OR OF ITS "CIVIL DEATH" MAY BE CONSIDERED AS AN ABANDONMENT OF ITS CAUSE OF ACTION AMOUNTING TO A FAILURE TO PROSECUTE AND RESULTING IN THE ABATEMENT OF THE SUIT.

VIII

THE "RESPONDENT COURT" ERRED IN RECOGNIZING THE PERSONALITY OF COUNSEL APPEARING FOR PRIVATE RESPONDENT' DESPITE HIS ADMISSION THAT HE DOES NOT KNOW THE "PRIVATE RESPONDENT" NOR HAS HE MET ANY OF ITS DIRECTORS AND OFFICERS.

IX

THE "RESPONDENT COURT" ERRED IN AFFIRMING THE DECISION OF THE TRIAL COURT HOLDING IN FAVOR OF "PRIVATE RESPONDENT".

X

THE "RESPONDENT COURT" ERRED IN MODIFYING THE TRIAL COURT'S DECISION AND HOLDING EVEN THE CONJUGAL PARTNERSHIP OF PETITIONERS JOINTLY AND SEVERALLY LIABLE FOR THE OBLIGATION ADJUDGED AGAINST PETITIONER-HUSBAND, CARLOS GELANO.

The main issue raised by petitioner is whether a corporation, whose corporate life had ceased by the expiration of its term of existence, could still continue prosecuting and defending suits after its dissolution and beyond the period of three years provided for under Act No. 1459, otherwise known as the Corporation law, to wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assignee.

The complaint in this case was filed on May 29, 1959 when private respondent Insular Sawmill, Inc. was still existing. While the case was being tried, the stockholders amended its Articles of Incorporation by shortening the term of its existence from December 31, 1995 to December 31, 1960, which was approved by the Securities and Exchange Commission.

In American corporate law, upon which our Corporation Law was patterned, it is well settled that, unless the statutes otherwise provide, all pending suits and actions by and against a corporation are abated by a dissolution of the corporation. 5 Section 77 of the Corporation Law provides that the corporation shall "be continued as a body corporate for three (3) years after the time when it would have been ... dissolved, for the purpose of prosecuting and defending suits By or against it ...," so that, thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason, Section 78 of the same law authorizes the corporation, "at any time during said three years ... to convey all of its property to trustees for the benefit of members, Stockholders, creditors and other interested," evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period. 6 Commenting on said sections, Justice Fisher said:

It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but that there is no time limited within which the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the authority of Section 78 may sue and be sued as such in all matters connected with the liquidation. By the terms of the statute the effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders. 7

When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the Corporation Law, it stin has the right until December 31, 1963 to prosecute in its name the present case. After the expiration of said period, the corporation ceased to exist for all purposes and it can no longer sue or be sued. 8

However, a corporation that has a pending action and which cannot be terminated within the three-year period after its dissolution is authorized under Section 78 to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the Three-year period although private respondent (did not appoint any trustee, yet the counsel who prosecuted and defended the interest of the corporation in the instant case and who in fact appeared in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. Said counsel had been handling the case when the same was pending before the trial court until it was appealed before the Court of Appeals and finally to this Court. We therefore hold that there was a substantial compliance with Section 78 of the Corporation Law and as such, private respondent Insular Sawmill, Inc. could still continue prosecuting the present case even beyond the period of three (3) years from the time of its dissolution.

From the above quoted commentary of Justice Fisher, the trustee may commence a suit which can proceed to final judgment even beyond the three-year period. No reason can be conceived why a suit already commenced By the corporation itself during its existence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation should not be accorded similar treatment allowed — to proceed to final judgment and execution thereof.

The word "trustee" as sued in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted in the instant case, the prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders. Debtors like the petitioners herein may not take advantage of the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer which petitioner has failed to show, in the first place. To sustain petitioners' contention would be to allow them to enrich themselves at the expense of another, which all enlightened legal systems condemn.

The observation of the Court of Appeals on the issue now before Us that:

Under Section 77 of the Corporation Law, when the corporate existence is terminated in any legal manner, the corporation shall nevertheless continue as a body corporate for three (3) years after the time when it would have been dissolved, for the purpose of prosecuting and defending suits by or against it. According to authorities, the corporation "becomes incapable of making contracts or receiving a grant. It does not, however, cease to be a body corporate for all purposes." In the case of Pasay Credit and Finance Corp. vs. Isidro Lazaro and others, 46 OG (11) 5528, this Court held that "a corporation may continue a pending 'litigation even after the lapse of the 3-year period granted by Section 77 of Act 1459 to corporation subsequent to their dissolution to continue its corporate existence for the purpose of winding up their affairs and settling all the claims by and against same." We note that the plaintiff Insular Sawmill, Inc. ceased as a corporation on December 30, 1960 but the case at bar was instituted on May 29, 1959, during the time when the corporation was still very much alive. Accordingly, it is our view that "any litigation filed by or against it instituted within the period, but which could not be terminated, must necessarily prolong that period until the final termination of said litigation as otherwise corporations in liquidation would lose what should justly belong to them or would be exempt from the payment of just obligations through a mere technicality, something that courts should prevent" (Philippine Commercial Laws by Martin, 1962 Ed., Vol. 2, p. 1716).

merits the approval of this Court.

The last two assigned errors refer to the disposition of the main case. Petitioners contend that the obligations contracted by petitioner Carlos Gelano from November 19, 1947 until August 18, 1950 (before the effectivity of the New Civil Code) and from December 26, 1950 until July 14, 1952 (during the effectivity of the New Civil Code) were his personal obligations, hence, petitioners should not be held jointly and severally liable. As regards the said issues, suffice it to say that with the findings of the Court of Appeals that the obligation contracted by petitioner-husband Carlos Gelano redounded to the benefit of the family, the inevitable conclusion is that the conjugal property is liable for his debt pursuant to paragraph 1, Article 1408, Civil Code of 1889 9 which provision incidentally can still be found in paragraph 1, Article 161 of the New Civil Code. 10 Only the conjugal partnership is liable, not joint and several as erroneously described by the Court of Appeals, the conjugal partnership being only a single entity.

WHEREFORE, with the modification that only the conjugal partnership is liable, the appealed decision is hereby affirmed in all other respects. Without pronouncement as to costs.

SO ORDERED.

Makasiar, Fernandez, and Guerrero, JJ., concur.

Teehankee, J., concur in the result.

Mr. Justice de Castro was designated to sit with the First Division under Special Order No. 225.