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PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA),

Petitioners,

- versus - NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANK-MANAGEMENT AND DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY AND HOLDINGS CORPORATION (MEGA PRIME),

Respondents.x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xPHILIPPINE NATIONAL BANK,

Petitioner,

- versus - PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND PANTRANCO ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL BANK-MANAGEMENT DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY HOLDINGS, INC.,

Respondents.

G.R. No. 170689 G.R. No. 170705 Present: YNARES-SANTIAGO, J., Chairperson,CARPIO,*

CHICO-NAZARIO,NACHURA, andPERALTA, JJ.

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Promulgated: March 17, 2009

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DECISION

NACHURA, J.:

Before us are two consolidated petitions assailing the Court of

Appeals (CA) Decision[1] dated June 3, 2005 and its Resolution[2] dated

December 7, 2005 in CA-G.R. SP No. 80599.

In G.R. No. 170689, the Pantranco Employees Association (PEA)

and Pantranco Retrenched Employees Association (PANREA) pray that the

CA decision be set aside and a new one be entered, declaring the Philippine

National Bank (PNB) and PNB Management and Development Corporation

(PNB-Madecor) jointly and solidarily liable for the P722,727,150.22 National

Labor Relations Commission (NLRC) judgment in favor of the Pantranco

North Express, Inc. (PNEI) employees;[3] while in G.R. No. 170705, PNB

prays that the auction sale of the Pantranco properties be declared null and

void.[4]

The facts of the case, as found by the CA,[5] and established

in Republic of the Phils. v. NLRC,[6] Pantranco North Express, Inc. v. NLRC,[7] and PNB MADECOR v. Uy,[8] follow:

The Gonzales family owned two corporations, namely, the PNEI and

Macris Realty Corporation (Macris). PNEI provided transportation services to

the public, and had its bus terminal at the corner of Quezon and Roosevelt

Avenues in Quezon City. The terminal stood on four valuable pieces of real

estate (known as Pantranco properties) registered under the name of

Macris.[9] The Gonzales family later incurred huge financial losses despite

attempts of rehabilitation and loan infusion. In March 1975, their creditors

took over the management of PNEI and Macris. By 1978, full ownership

was transferred to one of their creditors, the National Investment

Development Corporation (NIDC), a subsidiary of the PNB.

Macris was later renamed as the National Realty Development

Corporation (Naredeco) and eventually merged with the National

Warehousing Corporation (Nawaco) to form the new PNB subsidiary, the

PNB-Madecor.

In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a

company owned by Gregorio Araneta III. In 1986, PNEI was among the

several companies placed under sequestration by the Presidential

Commission on Good Government (PCGG) shortly after the historic events

in EDSA. In January 1988, PCGG lifted the sequestration order to pave the

way for the sale of PNEI back to the private sector through the Asset

Privatization Trust (APT). APT thus took over the management of PNEI.

2

In 1992, PNEI applied with the Securities and Exchange

Commission (SEC) for suspension of payments. A management committee

was thereafter created which recommended to the SEC the sale of the

company through privatization. As a cost-saving measure, the committee

likewise suggested the retrenchment of several PNEI

employees. Eventually, PNEI ceased its operation. Along with the cessation

of business came the various labor claims commenced by the former

employees of PNEI where the latter obtained favorable decisions.

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of

Execution[10] commanding the NLRC Sheriffs to levy on the assets of PNEI in

order to satisfy the P722,727,150.22 due its former employees, as full and

final satisfaction of the judgment awards in the labor cases. The sheriffs

were likewise instructed to proceed against PNB, PNB-Madecor and Mega

Prime.[11] In implementing the writ, the sheriffs levied upon the four valuable

pieces of real estate located at the corner of Quezon and Roosevelt

Avenues, on which the former Pantranco Bus Terminal stood. These

properties were covered by Transfer Certificate of Title (TCT) Nos. 87881-

87884, registered under the name of PNB-Madecor.[12] Subsequently, Notice

of Sale of the foregoing real properties was published in the newspaper and

the sale was set on July 31, 2002. Having been notified of the auction sale,

motions to quash the writ were separately filed by PNB-Madecor and Mega

Prime, and PNB. They likewise filed their Third-Party Claims.[13] PNB-

Madecor anchored its motion on its right as the registered owner of the

Pantranco properties, and Mega Prime as the successor-in-interest. For its

part, PNB sought the nullification of the writ on the ground that it was not a

party to the labor case.[14] In its Third-Party Claim, PNB alleged that PNB-

Madecor was indebted to the former and that the Pantranco propertie

s would answer for such debt. As such, the scheduled auction sale of the

aforesaid properties was not legally in order.[15]

On September 10, 2002, the Labor Arbiter declared that the subject

Pantranco properties were owned by PNB-Madecor. It being a corporation

with a distinct and separate personality, its assets could not answer for the

liabilities of PNEI. Considering, however, that PNB-Madecor executed a

promissory note in favor of PNEI for P7,884,000.00, the writ of execution to

the extent of the said amount was concerned was considered valid.[16]

PNB’s third-party claim – to nullify the writ on the ground that it has an

interest in the Pantranco properties being a creditor of PNB-Madecor, – on

the other hand, was denied because it only had an inchoate interest in the

properties.[17]

The dispositive portion of the Labor Arbiter’s September 10, 2002

Resolution is quoted hereunder:

WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is hereby GRANTED and concomitantly the levies made by the sheriffs of the NLRC on the properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment by PNB Madecor to the complainants the amount of P7,884,000.00. The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

3

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY GRANTED insofar as the amount of the writ exceeds P7,884,000.00. The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for want of merit.

The Motion to Expunge from the Records claimants/complainants Opposition dated August 3, 2002 is hereby DENIED for lack of merit. SO ORDERED.[18]

On appeal to the NLRC, the same was denied and the Labor Arbiter’s

disposition was affirmed.[19] Specifically, the NLRC concluded as follows:

(1) PNB-Madecor and Mega Prime

contended that it would be impossible for them to comply with the requirement of the labor arbiter to pay to the PNEI employees the amount of P7.8 million as a condition to the lifting of the levy on the properties, since the credit was already garnished by Gerardo Uy and other creditors of PNEI. The NLRC found no evidence that Uy had satisfied his judgment from the promissory note, and opined that even if the credit was in custodia legis, the claim of the PNEI employees should enjoy preference under the Labor Code.

(2) The PNEI employees contested the

finding that PNB-Madecor was indebted to the PNEI for only P7.8 million without considering the accrual of interest. But the NLRC said that there was no evidence that demand was made as a basis for reckoning interest.

(3) The PNEI employees further argued

that the labor arbiter may not properly conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon City that PNB-Madecor was the owner of the properties as his decision was reconsidered by the next presiding judge, nor from a decision of the Supreme Court that PNEI was a mere lessee of the properties, the fact being that the transfer of the properties to PNB-Madecor

was done to avoid satisfaction of the claims of the employees with the NLRC and that as a result of a civil case filed by Mega Prime, the subsequent sale of the properties by PNB to Mega Prime was rescinded. The NLRC pointed out that while the Macapagal decision was set aside by Judge Bruselas and hence, his findings could not be invoked by the labor arbiter, the titles of PNB-Madecor are conclusive and there is no evidence that PNEI had ever been an owner. The Supreme Court had observed in its decision that PNEI owed back rentals of P8.7 million to PNB-Madecor.

(4) The PNEI employees faulted the

labor arbiter for not finding that PNEI, PNB, PNB-Madecor and Mega Prime were all jointly and severally liable for their claims. The NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and had passed through and were under the Asset Privatization Trust (APT) when the labor claims accrued. The labor arbiter was correct in not granting PNB’s third-party claim because at the time the causes of action accrued, the PNEI was managed by a management committee appointed by the PNB as the new owner of PNRI (sic) and Macris through a deed of assignment or transfer of ownership. The NLRC says at length that the same is not true with PNB-Madecor which is now the registered owner of the properties.[20]

The parties’ separate motions for reconsideration were likewise denied.[21] Thereafter, the matter was elevated to the CA by PANREA, PEA-

PTGWO and the Pantranco Association of Concerned Employees. The

latter group, however, later withdrew its petition. The former employees’

petition was docketed as CA-G.R. SP No. 80599.

PNB-Madecor and Mega Prime likewise filed their separate petition

before the CA which was docketed as CA-G.R. SP No. 80737, but the same

was dismissed.[22]

4

In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June

23, 2004, an auction sale was conducted over the Pantranco properties to

satisfy the claim of the PNEI employees, wherein CPAR Realty was

adjudged as the highest bidder.[23]

On June 3, 2005, the CA rendered the assailed decision affirming the

NLRC resolutions.

The appellate court pointed out that PNB, PNB-Madecor and Mega

Prime are corporations with personalities separate and distinct from

PNEI. As such, there being no cogent reason to pierce the veil of corporate

fiction, the separate personalities of the above corporations should be

maintained. The CA added that the Pantranco properties were never owned

by PNEI; rather, their titles were registered under the name of PNB-

Madecor. If PNB and PNB-Madecor could not answer for the liabilities of

PNEI, with more reason should Mega Prime not be held liable being a mere

successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for

reconsideration;[24] while PNB filed its Partial Motion for Reconsideration.

[25] PNB pointed out that PNB-Madecor was made to answer

for P7,884,000.00 to the PNEI employees by virtue of the promissory note it

(PNB-Madecor) earlier executed in favor of PNEI. PNB, however,

questioned the June 23, 2004 auction sale as the P7.8 million debt had

already been satisfied pursuant to this Court’s decision in PNB MADECOR

v. Uy.[26]

Both motions were denied by the appellate court.[27]

In two separate petitions, PNB and the former PNEI employees come

up to this Court assailing the CA decision and resolution. The former PNEI

employees raise the lone error, thus:

The Honorable Court of Appeals palpably departed from the established rules and jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI), Philippine National Bank (PNB), Philippine National Bank Management and Development Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not jointly and severally answerable to the P722,727,150.22 Million NLRC money judgment awards in favor of the 4,000 individual members of the Petitioners.[28]

They claim that PNB, through PNB-Madecor, directly benefited from the

operation of PNEI and had complete control over the funds of PNEI. Hence,

they are solidarily answerable with PNEI for the unpaid money claims of the

employees.[29] Citing A.C. Ransom Labor Union-CCLU v. NLRC,[30] the

employees insist that where the employer corporation ceases to exist and is

no longer able to satisfy the judgment awards in favor of its employees, the

owner of the employer corporation should be made jointly and severally

liable.[31] They added that malice or bad faith need not be proven to make

the owners liable.

5

On the other hand, PNB anchors its petition on this sole assignment of

error, viz.:

THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT OF P7,884,000.00 (THE AMOUNT OF PNB-MADECOR’S PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO THREE (3) PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED AND SOLD ON EXECUTION IN THE “PNB-MADECOR VS. UY” CASE (363 SCRA 128 [2001]) AND “GERARDO C. UY VS. PNEI” (CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38).[32]

PNB insists that the Pantranco properties could no longer be levied

upon because the promissory note for which the Labor Arbiter held PNB-

Madecor liable to PNEI, and in turn to the latter’s former employees, had

already been satisfied in favor of Gerardo C. Uy. It added that the properties

were in fact awarded to the highest bidder. Besides, says PNB, the subject

properties were not owned by PNEI, hence, the execution sale thereof was

not validly effected.[33]

Both petitions must fail.

G.R. No. 170689

Stripped of the non-essentials, the sole issue for resolution raised

by the former PNEI employees is whether they can attach the properties

(specifically the Pantranco properties) of PNB, PNB-Madecor and Mega

Prime to satisfy their unpaid labor claims against PNEI.

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that

is, PNEI. Nowhere in the records was it shown that PNEI owned the

Pantranco properties. Petitioners, in fact, never alleged in any of their

pleadings the fact of such ownership. What was established, instead,

in PNB MADECOR v. Uy[34] and PNB v. Mega Prime Realty and Holdings

Corporation/Mega Prime Realty and Holdings Corporation v. PNB[35] was that

the properties were owned by Macris, the predecessor of PNB-

Madecor. Hence, they cannot be pursued against by the creditors of PNEI.

We would like to stress the settled rule that the power of the court

in executing judgments extends only to properties unquestionably belonging

to the judgment debtor alone.[36] To be sure, one man’s goods shall not be

sold for another man’s debts.[37] A sheriff is not authorized to attach or levy

on property not belonging to the judgment debtor, and even incurs liability if

he wrongfully levies upon the property of a third person.[38]

Second, PNB, PNB-Madecor and Mega Prime are corporations with

personalities separate and distinct from that of PNEI. PNB is sought to be

held liable because it acquired PNEI through NIDC at the time when PNEI

6

was suffering financial reverses. PNB-Madecor is being made to answer for

petitioners’ labor claims as the owner of the subject Pantranco properties

and as a subsidiary of PNB. Mega Prime is also included for having

acquired PNB’s shares over PNB-Madecor.

The general rule is that a corporation has a personality separate

and distinct from those of its stockholders and other corporations to which it

may be connected.[39] This is a fiction created by law for convenience and to

prevent injustice.[40] Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI

are corporations with their own personalities. The “separate personalities” of

the first three corporations had been recognized by this Court in PNB v.

Mega Prime Realty and Holdings Corporation/Mega Prime Realty and

Holdings Corporation v. PNB[41] where we stated that PNB was only a

stockholder of PNB-Madecor which later sold its shares to Mega Prime; and

that PNB-Madecor was the owner of the Pantranco properties. Moreover,

these corporations are registered as separate entities and, absent any valid

reason, we maintain their separate identities and we cannot treat them as

one.

Neither can we merge the personality of PNEI with PNB simply

because the latter acquired the former. Settled is the rule that where one

corporation sells or otherwise transfers all its assets to another corporation

for value, the latter is not, by that fact alone, liable for the debts and liabilities

of the transferor.[42]

Lastly, while we recognize that there are peculiar circumstances or

valid grounds that may exist to warrant the piercing of the corporate

veil, [43] none applies in the present case whether between PNB and PNEI; or

PNB and PNB-Madecor.

Under the doctrine of “piercing the veil of corporate fiction,” the

court looks at the corporation as a mere collection of individuals or an

aggregation of persons undertaking business as a group, disregarding the

separate juridical personality of the corporation unifying the group.

[44] Another formulation of this doctrine is that when two business enterprises

are owned, conducted and controlled by the same parties, both law and

equity will, when necessary to protect the rights of third parties, disregard the

legal fiction that two corporations are distinct entities and treat them as

identical or as one and the same.[45]

Whether the separate personality of the corporation should be

pierced hinges on obtaining facts appropriately pleaded or

proved. However, any piercing of the corporate veil has to be done with

caution, albeit the Court will not hesitate to disregard the corporate veil when

it is misused or when necessary in the interest of justice. After all, the

concept of corporate entity was not meant to promote unfair objectives.[46]

As between PNB and PNEI, petitioners want us to disregard their

separate personalities, and insist that because the company, PNEI, has

already ceased operations and there is no other way by which the judgment

in favor of the employees can be satisfied, corporate officers can be held

7

jointly and severally liable with the company. Petitioners rely on the

pronouncement of this Court inA.C. Ransom Labor Union-CCLU v.

NLRC[47] and subsequent cases.[48]

This reliance fails to persuade. We find the aforesaid decisions

inapplicable to the instant case.

For one, in the said cases, the persons made liable after the

company’s cessation of operations were the officers and agents of the

corporation. The rationale is that, since the corporation is an artificial

person, it must have an officer who can be presumed to be the employer,

being the person acting in the interest of the employer. The corporation,

only in the technical sense, is the employer.[49] In the instant case, what is

being made liable is another corporation (PNB) which acquired the debtor

corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations

Commission[50] and McLeod v. National Labor Relations Commission,[51] the

Court explained the doctrine laid down in AC Ransom relative to the

personal liability of the officers and agents of the employer for the debts of

the latter. In AC Ransom, the Court imputed liability to the officers of the

corporation on the strength of the definition of an employer in Article 212(c)

(now Article 212[e]) of the Labor Code. Under the said

provision,employer includes any person acting in the interest of an employer,

directly or indirectly, but does not include any labor organization or any of its

officers or agents except when acting as employer. It was clarified

in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does

not make a corporate officer personally liable for the debts of the

corporation. It added that the governing law on personal liability of directors

or officers for debts of the corporation is still Section 31[52] of the Corporation

Code.

More importantly, as aptly observed by this Court in AC Ransom, it

appears that Ransom, foreseeing the possibility or probability of payment of

backwages to its employees, organized Rosario to replace Ransom, with the

latter to be eventually phased out if the strikers win their case. The

execution could not be implemented against Ransom because of the

disposition posthaste of its leviable assets evidently in order to evade its just

and due obligations.[53] Hence, the Court sustained the piercing of the

corporate veil and made the officers of Ransom personally liable for the

debts of the latter.

Clearly, what can be inferred from the earlier cases is that the

doctrine of piercing the corporate veil applies only in three (3) basic areas,

namely: 1) defeat of public convenience as when the corporate fiction is

used as a vehicle for the evasion of an existing obligation; 2) fraud cases or

when the corporate entity is used to justify a wrong, protect fraud, or defend

a crime; or 3) alter egocases, where a corporation is merely a farce since it

is a mere alter ego or business conduit of a person, or where the corporation

is so organized and controlled and its affairs are so conducted as to make it

merely an instrumentality, agency, conduit or adjunct of another corporation.

[54] In the absence of malice, bad faith, or a specific provision of law making

8

a corporate officer liable, such corporate officer cannot be made personally

liable for corporate liabilities.[55]

Applying the foregoing doctrine to the instant case, we quote with

approval the CA disposition in this wise:

It would not be enough, then, for the petitioners in

this case, the PNEI employees, to rest on their laurels with evidence that PNB was the owner of PNEI. Apart from proving ownership, it is necessary to show facts that will justify us to pierce the veil of corporate fiction and hold PNB liable for the debts of PNEI. The burden undoubtedly falls on the petitioners to prove their affirmative allegations. In line with the basic jurisprudential principles we have explored, they must show that PNB was using PNEI as a mere adjunct or instrumentality or has exploited or misused the corporate privilege of PNEI.

We do not see how the burden has been

met. Lacking proof of a nexus apart from mere ownership, the petitioners have not provided us with the legal basis to reach the assets of corporations separate and distinct from PNEI.[56]

Assuming, for the sake of argument, that PNB may be held liable for

the debts of PNEI, petitioners still cannot proceed against the Pantranco

properties, the same being owned by PNB-Madecor, notwithstanding the

fact that PNB-Madecor was a subsidiary of PNB. The general rule remains

that PNB-Madecor has a personality separate and distinct from PNB. 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 shall

be respected, and the liability of the parent corporation as well as the

subsidiary will be confined to those arising in their respective businesses.[57]

In PNB v. Ritratto Group, Inc.,[58] we outlined the circumstances

which are useful in the determination of whether a subsidiary is but a mere

instrumentality of the parent-corporation, to wit:

1. The parent corporation owns all or most of

the capital stock of the subsidiary;

2. The parent and subsidiary corporations have common directors or officers;

3. The parent corporation finances the

subsidiary;

4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;

5. The subsidiary has grossly inadequate

capital;

6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;

7. The subsidiary has substantially no business

except with the parent corporation or no assets except those conveyed to or by the parent corporation;

8. 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;

9. The parent corporation uses the property of

the subsidiary as its own;

9

10. 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;

11. The formal legal requirements of the

subsidiary are not observed.

None of the foregoing circumstances is present in the instant case. Thus,

piercing of PNB-Madecor’s corporate veil is not warranted. Being a mere

successor-in-interest of PNB-Madecor, with more reason should no liability

attach to Mega Prime.

G.R. No. 170705

In its petition before this Court, PNB seeks the annulment of the June

23, 2004 execution sale of the Pantranco properties on the ground that the

judgment debtor (PNEI) never owned said lots. It likewise contends that the

levy and the eventual sale on execution of the subject properties was null

and void as the promissory note on which PNB-Madecor was made liable

had already been satisfied.

It has been repeatedly stated that the Pantranco properties which

were the subject of execution sale were owned by Macris and later, the

PNB-Madecor. They were never owned by PNEI or PNB. Following our

earlier discussion on the separate personalities of the different corporations

involved in the instant case, the only entity which has the right and interest to

question the execution sale and the eventual right to annul the same, if any,

is PNB-Madecor or its successor-in-interest. Settled is the rule that

proceedings in court must be instituted by the real party in interest.

A real party in interest is the party who stands to be benefited or

injured by the judgment in the suit, or the party entitled to the avails of the

suit.[59] “Interest” within the meaning of the rule means material interest, an

interest in issue and to be affected by the decree, as distinguished from

mere interest in the question involved, or a mere incidental interest.[60] The

interest of the party must also be personal and not one based on a desire to

vindicate the constitutional right of some third and unrelated party. [61] Real

interest, on the other hand, means a present substantial interest, as

distinguished from a mere expectancy or a future, contingent, subordinate,

or consequential interest.[62]

Specifically, in proceedings to set aside an execution sale, the real

party in interest is the person who has an interest either in the property sold

or the proceeds thereof. Conversely, one who is not interested or is not

injured by the execution sale cannot question its validity.[63]

In justifying its claim against the Pantranco properties, PNB alleges

that Mega Prime, the buyer of its entire stockholdings in PNB-Madecor was

indebted to it (PNB). Considering that said indebtedness remains unpaid,

PNB insists that it has an interest over PNB-Madecor and Mega Prime’s

assets.

10

Again, the contention is bereft of merit. While PNB has an apparent

interest in Mega Prime’s assets being the creditor of the latter for a

substantial amount, its interest remains inchoate and has not yet ripened

into a present substantial interest, which would give it the standing to

maintain an action involving the subject properties. As aptly observed by the

Labor Arbiter, PNB only has an inchoate right to the properties of Mega

Prime in case the latter would not be able to pay its indebtedness. This is

especially true in the instant case, as the debt being claimed by PNB is

secured by the accessory contract of pledge of the entire stockholdings of

Mega Prime to PNB-Madecor.[64]

The Court further notes that the Pantranco properties (or a portion

thereof ) were sold on execution to satisfy the unpaid obligation of PNB-

Madecor to PNEI. PNB-Madecor was thus made liable to the former PNEI

employees as the judgment debtor of PNEI. It has long been established

in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an

unpaid obligation to PNEI amounting to more or less P7 million which could

be validly pursued by the creditors of the latter. Again, this strengthens the

proper parties’ right to question the validity of the execution sale, definitely

not PNB.

Besides, the issue of whether PNB has a substantial interest over

the Pantranco properties has already been laid to rest by the Labor Arbiter.

[65] It is noteworthy that in its Resolution dated September 10, 2002, the

Labor Arbiter denied PNB’s Third-Party Claim primarily because PNB only

has an inchoate right over the Pantranco properties.[66] Such conclusion was

later affirmed by the NLRC in its Resolution dated June 30, 2003.

[67] Notwithstanding said conclusion, PNB did not elevate the matter to the

CA via a petition for review. Hence it is presumed to be satisfied with the

adjudication therein.[68] That decision of the NLRC has become final as

against PNB and can no longer be reviewed, much less reversed, by this

Court.[69] This is in accord with the doctrine that a party who has not

appealed cannot obtain from the appellate court any affirmative relief other

than the ones granted in the appealed decision.[70]

WHEREFORE, premises considered, the petitions are

hereby DENIED for lack of merit.

SO ORDERED.

11

2 G.R. No. L-22973 January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,vs.PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines Norte, defendants-appellees.

Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.Tomas Besa and Jose B. Galang for defendants-appellees.

ANGELES, J.:

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

In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be restated as follows:

1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure sale of its real property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB thereafter was more than sufficient to liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattels unlawful;

2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum of P298.54 as expenses of the foreclosure sale;

3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had already settled its indebtedness to the PNB at the time

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the sale was effected, but also for the reason that the said sale was not conducted in accordance with the provisions of theChattel Mortgage Law and the venue agreed upon by the parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and

5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof after the sale thru force, intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to plaintiff for damages and attorney's fees.

The antecedent facts of the case, as found by the trial court, are as follows:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant PNB and the former offered real estate, machinery, logging and transportation equipments as collaterals. The application, however, was approved for a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings and improvements existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte, and covered by Transfer Certificate of Title No. 381 of the land records of said province, as well as various sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in its compound in the aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for whichthe plaintiff signed a promissory note wherein it promised to pay to the PNB the said sum in five equal yearly installments at the rate of P6,528.40 beginning July 31, 1957, and every year thereafter, the last of which would be on July 31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan granted to the plaintiff and so on the said date, the latter executed another promissory note wherein it agreed to pay to the former the said sum in five equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and ending on July 31, 1961.

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

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to take possession of the parcel of land, together with the improvements existing thereon, covered by Transfer Certificate of Title No. 381 of the land records of Camarines Norte, and to sell it at public auction in accordance with the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59, excluding attorney's fees. In compliance with the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-judicial sale and sent a copy thereof to the plaintiff. According to the notice, the mortgaged property would be sold at public auction at 10:00 a.m. on November 21, 1961, at the ground floor of the Court House in Daet, Camarines Norte.

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to take possession of the chattels mortgaged to it by the plaintiff and sell them at public auction also on November 21, 1961, for the satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees equivalent to 10% of the amount due and the costs and expenses of the sale. On the same day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially thechattels mortgaged by the latter and that the auction sale thereof would be held on November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the mortgaged chattels were situated.

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of thechattels mortgaged by the plaintiff and made an inventory thereof in the presence of a PC Sergeant and a policeman of the municipality of Jose Panganiban. On November 9, 1961, the said Deputy Sheriff issued the corresponding notice of public auction sale of the mortgagedchattels to be held on November 21, 1961, at 10:00 a.m., at the

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plaintiff's compound situated in the municipality of Jose Panganiban, Province of Camarines Norte.

On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff of Camarines Norte, protesting against the foreclosure of the real estate and chattel mortgages on the grounds that they could not be effected unless a Court's order was issued against it (plaintiff) for said purpose and that the foreclosure proceedings, according to the terms of the mortgage contracts, should be made in Manila. In said letter to the Naga Branch of the PNB, it was intimated that if the public auction sale would be suspended and the plaintiff would be given an extension of ninety (90) days, its obligation would be settled satisfactorily because an important negotiation was then going on for the sale of its "whole interest" for an amount more than sufficient to liquidate said obligation.

The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for extension of the foreclosure sale of the mortgaged chattels and so it advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the same time and place. A copy of said advice was sent to the plaintiff for its information and guidance.

The foreclosure sale of the parcel of land, together with the buildings and improvements thereon, covered by Transfer Certificate of Title No. 381, was, however, held on November 21, 1961, and the said property was sold to the PNB for the sum of P56,908.00, subject to the right of the plaintiff to redeem the same within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed a certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff.

In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of the balance of the obligation of the plaintiff after the application thereto of the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel of land described in Transfer Certificate of Title No. 381. In the said letter, the plaintiff reiterated its request that the foreclosure sale of the mortgaged chattels be discontinued on the grounds that the mortgaged indebtedness had been fully paid and that it could not be legally effected at a place other than the City of Manila.

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte that it had fully paid its obligation to the PNB, and enclosed therewith a copy of its letter to the latter dated December 14, 1961.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff acknowledging the remittance of P738.59 with the advice, however, that as of that date the balance of the account of the plaintiff was P9,161.76, to which should be added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day beginning December 19, 1961. It was further explained in said letter that the sum of P57,646.59, which was stated in the request for the foreclosure of the real estate mortgage, did not include the 10% attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st of said month would be stopped if a remittance of P9,161.76, plus interest thereon and guarding fees, would be made.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff Heraldo.

In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the plaintiff giving it priority to repurchase the chattels acquired by the former at public auction. This offer was reiterated in a letter dated January 3, 1962, of the Attorney of the Naga Branch of the PNB to the plaintiff, with the suggestion that it exercise its right of redemption and that it apply for the condonation of the attorney's fees. The plaintiff did not follow the advice but on the contrary it made known of its intention to file appropriate action or actions for the protection of its interests.

On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief Security Guard of the premises, that the properties therein had been auctioned and bought by the PNB, which in turn sold them to Mariano Bundok. Upon being advised that the purchaser would take delivery of the things he bought, Salgado was at first reluctant to allow any piece of property to be taken out of the compound of the plaintiff. The employees of the PNB explained that should Salgado refuse, he would be exposing himself to a litigation wherein he could be held liable to pay big sum of money by way of damages. Apprehensive of the risk that he would take,

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Salgado immediately sent a wire to the President of the plaintiff in Manila, asking advice as to what he should do. In the meantime, Mariano Bundok was able to take out from the plaintiff's compound two truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing him not to deliver the "chattels" without court order, with the information that the company was then filing an action for damages against the PNB. On the following day, May 25, 1962, two trucks and men of Mariano Bundok arrived but Salgado did not permit them to take out any equipment from inside the compound of the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the trucks of Mariano Bundok were able finally to haul the properties originally mortgaged by the plaintiff to the PNB, which were bought by it at the foreclosure sale and subsequently sold to Mariano Bundok.

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

We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the amount of its indebtedness to the PNB arising out of the principal loans and the accrued interest thereon. It is contended that its obligation under the terms of the two promissory notes it had executed in favor of the PNB amounts only to P56,485.87 as of November 21, 1961, when the sale of real property was effected, and not P58,213.51 as found by the trial court.

There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00 — P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per promissory note of the same date (Exhibit C-4) — was six per cent (6%) per annum from the respective date of said notes "until paid". In the statement of account of the appellant as of

September 22, 1961, submitted by the PNB, it appears that in arriving at the total indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and the accrued 6% interest thereon each time the yearly amortizations became due, and on the basis of these compounded amounts charged additional delinquency interest on them up to September 22, 1961; and to this erroneously computed total of P57,646.59, the trial court added 6% interest per annum from September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed, and the trial court has adjudicated to it, interest on accrued interests from the time the various amortizations of the loan became due until the real estate mortgage executed to secure the loan was extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the new Civil Code which provides that interest due shall earn legal interest only from the time it is judicially demanded, and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn interest. Of course, the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to be found in the terms of the promissory notes involved in this case. Clearly therefore, the trial court fell into error when it awarded interest on accrued interests, without any agreement to that effect and before they had been judicially demanded.

Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the PNB. With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of the real property, appellant maintains that the same has no basis, factual or legal, and should not have been awarded. It likewise decries the award of attorney's fees which, according to the appellant, should not be deducted from the proceeds of the sale of the real property, not only because there is no express agreement in the real estate mortgage contract to pay attorney's fees in case the same is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor incurred any obligation to pay attorney's fees in connection with the said extra-judicial foreclosure under consideration.

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There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the trial court said:

The parcel of land, together with the buildings and improvements existing thereon covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was, however, no evidence how much was the expenses of the foreclosure sale although from the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.

There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded as expenses of the extra-judicial foreclosure sale. The court below committed error in applying the provisions of the Rules of Court for purposes of arriving at the amount awarded. It is to be borne in mind that the fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving processes of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to his expenses in connection with the foreclosure sale. Admittedly, the PNB failed to prove during the trial of the case, that it actually spent any amount in connection with the said foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the absence of evidence on record to support it. 1 It is true, as pointed out by the appellee bank, that courts should take judicial notice of the fees provided for by law which need not be proved; but in the absence of evidence to show at least the number of working days the sheriff concerned actually spent in connection with the extra-judicial foreclosure sale, the most that he may be entitled to, would be the amount of P10.00 as a reasonable allowance for two day's work — one for the preparation of the necessary notices of sale, and the other for conducting the auction sale and issuance of the corresponding certificate of sale in favor of the buyer. Obviously, therefore, the award of P298.54 as expenses of the sale should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case the same is extra-judicially foreclosed, cannot be

favorably considered, as would readily be revealed by an examination of the pertinent provision of the mortgage contract. The parties to the mortgage appear to have stipulated under paragraph (c) thereof, inter alia:

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as amended, to sign all documents and to perform all acts requisite and necessary to accomplish said purpose and to appoint its substitute as such attorney-in-fact with the same powers as above specified. In case of judicial foreclosure, the Mortgagor hereby consents to the appointment of the Mortgagee or any of its employees as receiver, without any bond, to take charge of the mortgaged property at once, and to hold possession of the same and the rents, benefits and profits derived from the mortgaged property before the sale, less the costs and expenses of the receivership; the Mortgagor hereby agrees further that in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be less than P100.00 exclusive of all fees allowed by law, and the expenses of collection shall be the obligation of the Mortgagor and shall with priority, be paid to the Mortgagee out of any sums realized as rents and profits derived from the mortgaged property or from the proceeds realized from the sale of the said property and this mortgage shall likewise stand as security therefor. . . .

We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears to be part of the second sentence, a reading of the whole context of the stipulation would readily show that it logically refers to extra-judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in the next sentence. And the ambiguity in the stipulation suggested and pointed out by the appellant by reason of the faulty sentence construction should not be made to defeat the otherwise clear intention of the parties in the agreement.

It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were applicable to the extra-judicial foreclosure sale of its real properties, still, the award of P5,821.35 for attorney's fees has no legal justification, considering the circumstance that the PNB did not actually spend anything by way of attorney's fees in connection with the sale. In support of this proposition, appellant cites authorities to the effect: (1) that

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when the mortgagee has neither paid nor incurred any obligation to pay an attorney in connection with the foreclosure sale, the claim for such fees should be denied; 2 and (2) that attorney's fees will not be allowed when the attorney conducting the foreclosure proceedings is an officer of the corporation (mortgagee) who receives a salary for all the legal services performed by him for the corporation. 3 These authorities are indeed enlightening; but they should not be applied in this case. The very same authority first cited suggests that said principle is not absolute, for there is authority to the contrary. As to the fact that the foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we are reluctant to exonerate herein appellant from the payment of the stipulated attorney's fees on this ground alone, considering the express agreement between the parties in the mortgage contract under which appellant became liable to pay the same. At any rate, we find merit in the contention of the appellant that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable, considering that all that the branch attorney of the said bank did in connection with the foreclosure sale of the real property was to file a petition with the provincial sheriff of Camarines Norte requesting the latter to sell the same in accordance with the provisions of Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to entertain any serious objection to it. Thus, this Court has explained:

But the principle that it may be lawfully stipulated that the legal expenses involved in the collection of a debt shall be defrayed by the debtor does not imply that such stipulations must be enforced in accordance with the terms, no matter how injurious or oppressive they may be. The lawful purpose to be accomplished by such a stipulation is to permit the creditor to receive the amount due him under his contract without a deduction of the expenses caused by the delinquency of the debtor. It should not be permitted for him to convert such a stipulation into a source of speculative profit at the expense of the debtor.

Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from contracts for the payment of compensation for any other services. By express provision of section 29 of the Code of Civil

Procedure, an attorney is not entitled in the absence of express contract to recover more than a reasonable compensation for his services; and even when an express contract is made the court can ignore it and limit the recovery to reasonable compensation if the amount of the stipulated fee is found by the court to be unreasonable. This is a very different rule from that announced in section 1091 of the Civil Code with reference to the obligation of contracts in general, where it is said that such obligation has the force of law between the contracting parties. Had the plaintiff herein made an express contract to pay his attorney an uncontingent fee of P2,115.25 for the services to be rendered in reducing the note here in suit to judgment, it would not have been enforced against him had he seen fit to oppose it, as such a fee is obviously far greater than is necessary to remunerate the attorney for the work involved and is therefore unreasonable. In order to enable the court to ignore an express contract for an attorney's fees, it is not necessary to show, as in other contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code). It is enough that it is unreasonable or unconscionable. 4

Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with the duty of assisting the court in administering impartial justice between the parties, and hence, the fees should be subject to judicial control. Nor should it be ignored that sound public policy demands that courts disregard stipulations for counsel fees, whenever they appear to be a source of speculative profit at the expense of the debtor or mortgagor. 5 And it is not material that the present action is between the debtor and the creditor, and not between attorney and client. As court have power to fix the fee as between attorney and client, it must necessarily have the right to say whether a stipulation like this, inserted in a mortgage contract, is valid. 6

In determining the compensation of an attorney, the following circumstances should be considered: the amount and character of the services rendered; the responsibility imposed; the amount of money or the value of the property affected by the controversy, or involved in the employment; the skill and experience called for in the performance of the service; the professional standing of the attorney; the results secured; and whether or not the fee is contingent or absolute, it being a recognized rule that an attorney may properly charge a much larger fee when it is to be contingent than when it is

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not. 7From the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total indebtedness, irrespective of the manner the foreclosure of the mortgage is to be effected. The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff concerned. It is to be assumed though, that the said branch attorney of the PNB made a study of the case before deciding to file the petition for foreclosure; but even with this in mind, we believe the amount of P5,821.35 is far too excessive a fee for such services. Considering the above circumstances mentioned, it is our considered opinion that the amount of P1,000.00 would be more than sufficient to compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real properties alone together with the amount it remitted to the PNB later was more than sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in this claim. From the foregoing discussion of the first two errors assigned, and for purposes of determining the total obligation of herein appellant to the PNB as of November 21, 1961 when the real estate mortgage was foreclosed, we have the following illustration in support of this conclusion:1äwphï1.ñët

A. -

I. Principal Loan

(a) Promissory note dated August 2, 1956 P27,500.00

(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961

8,751.78

(b) Promissory note dated October 19, 1956 P15,500.00

(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961

4,734.08

II. Sheriff's fees [for two (2) day's work] 10.00

III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961P57,495.86

B. -

I.Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961

P56,908.00

II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNBP57,495.86

Excess Payment to the PNBP 150.73========

From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the mortgage of herein appellant's chattels on

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December 21, 1961; and on this ground alone, we may declare the sale of appellant's chattels on the said date, illegal and void. But we take into consideration the fact that the PNB must have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real estate mortgage was legally maintainable, and in accordance with such belief, herein appellee bank insisted that the proceeds of the sale of appellant's real property was deficient to liquidate the latter's total indebtedness. Be that as it may, however, we still find the subsequent sale of herein appellant's chattels illegal and objectionable on other grounds.

That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as shown not only by its letter to the PNB on November 19, 1961, but also in its letter to the provincial sheriff of Camarines Norte on the same date. These letters were followed by another letter to the appellee bank on December 14, 1961, wherein herein appellant, in no uncertain terms, reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real estate and its subsequent remittance of the amount of P738.59; and (2) that the contemplated sale at Jose Panganiban would violate their agreement embodied under paragraph (i) in the Chattel Mortgage which provides as follows:

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties hereto agree that the corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the sheriff of the City of Manila, as the case may be; and that the Mortgagor shall pay attorney's fees hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in no case shall it be less than P100.00, exclusive of all costs and fees allowed by law and of other expenses incurred in connection with the said foreclosure. [Emphasis supplied]

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of the objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte and not in the City of Manila as agreed upon, the PNB proceeded with the foreclosure sale of said chattels. The trial court, however, justified said action of the PNB in the decision appealed from in the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a petition for the extra-judicial foreclosure thereof should be filed with the Sheriff of the City of Manila, nevertheless, the effect thereof was merely to provide another place where the mortgage chattel could be sold in addition to those specified in the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less impliedly repeal a specific provision of the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the choice where the foreclosure sale should be held, hence, in the case under consideration, the PNB had three places from which to select, namely: (1) the place of residence of the mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the place stipulated in the contract. The PNB selected the second and, accordingly, the foreclosure sale held in Jose Panganiban, Camarines Norte, was legal and valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell the mortgaged property at a public place in the municipality where the mortgagor resides or where the property is situated, 8 this Court has held that the sale of a mortgaged chattel may be made in a place other than that where it is found, provided that the owner thereof consents thereto; or that there is an agreement to this effect between the mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have the sale of the mortgaged chattels in the City of Manila, which, any way, is the residence of the mortgagor, it cannot be rightly said that mortgagee still retained the power and authority to select from among the places provided for in the law and the place designated in their agreement over the objection of the mortgagor. In providing that the mortgaged chattel may be sold at the place of residence of the mortgagor or the place where it is situated, at the option of the mortgagee, the law clearly contemplated benefits not only to the mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to them; they do not affect either public policy or the rights of third persons. They may validly be waived. So, when herein mortgagor and mortgagee agreed in the mortgage contract that in cases of both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of Manila, as the case may be, they waived their corresponding rights under the law. The correlative obligation arising from that agreement have the force of law between them and should be complied with in good faith. 10

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By said agreement the parties waived the legal venue, and such waiver is valid and legally effective, because it, was merely a personal privilege they waived, which is not contrary, to public policy or to the prejudice of third persons. It is a general principle that a person may renounce any right which the law gives unless such renunciation is expressly prohibited or the right conferred is of such nature that its renunciation would be against public policy. 11

On the other hand, if a place of sale is specified in the mortgage and statutory requirements in regard thereto are complied with, a sale is properly conducted in that place. Indeed, in the absence of a statute to the contrary, a sale conducted at a place other than that stipulated for in the mortgage is invalid, unless the mortgagor consents to such sale. 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a return of his doings which shall particularly describe the articles sold and the amount received from each article. From this, it is clear that the law requires that sale be made article by article, otherwise, it would be impossible for him to state the amount received for each item. This requirement was totally disregarded by the Deputy Sheriff of Camarines Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said chattels consisted of no less than twenty different items as shown in the bill of sale. 13 This makes the sale of the chattels manifestly objectionable. And in the absence of any evidence to show that the mortgagor had agreed or consented to such sale in gross, the same should be set aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance with its terms, or where the proceedings as to the sale of foreclosure do not comply with the statute. 14 This rule applies squarely to the facts of this case where, as earlier shown, herein appellee bank insisted, and the appellee deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at Jose Panganiban, Camarines Norte, in utter disregard of the valid objection of the mortgagor thereto for the reason that it is not the place of sale agreed upon in the mortgage contract; and the said deputy sheriff sold all the chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation of the

requirement of the law to sell the same article by article. The PNB has resold the chattels to another buyer with whom it appears to have actively cooperated in subsequently taking possession of and removing the chattels from appellant compound by force, as shown by the circumstance that they had to take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief security officer of the premises in jail to deprive herein appellant of its possession thereof. To exonerate itself of any liability for the breach of peace thus committed, the PNB would want us to believe that it was the subsequent buyer alone, who is not a party to this case, that was responsible for the forcible taking of the property; but assuming this to be so, still the PNB cannot escape liability for the conversion of the mortgaged chattels by parting with its interest in the property. Neither would its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels, improve its position, for the mortgagor is not under obligation to take affirmative steps to repossess the chattels that were converted by the mortgagee. 15 As a consequence of the said wrongful acts of the PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is entitled to collect from them, jointly and severally, the full value of the chattels in question at the time they were illegally sold by them. To this effect was the holding of this Court in a similar situation. 16

The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the full value of the truck at the time the plaintiff thus carried it off to be sold; and of course, the burden is on the defendant to prove the damage to which he was thus subjected. . . .

This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale in 1961. The trial court did not make any finding on the value of the chattels in the decision appealed from and denied altogether the right of the appellant to recover the same. We find enough evidence of record, however, which may be used as a guide to ascertain their value. The record shows that at the time herein appellant applied for its loan with the PNB in 1956, for which the chattels in question were mortgaged as part of the security therefore, herein appellant submitted a list of the chattels together with its application for the loan with a stated value of P107,115.85. An official of the PNB made an inspection of the chattels in the same year giving it an appraised value of P42,850.00 and a market value of P85,700.00. 17 The same chattels with some additional equipment acquired by herein appellant with part of the proceeds of the loan were reappraised in

20

a re-inspection conducted by the same official in 1958, in the report of which he gave all the chattels an appraised value of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection report in 1959 gave the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said official of the PNB who made the foregoing reports of inspection and re-inspections testified in court that in giving the values appearing in the reports, he used a conservative method of appraisal which, of course, is to be expected of an official of the appellee bank. And it appears that the values were considerably reduced in all the re-inspection reports for the reason that when he went to herein appellant's premises at the time, he found the chattels no longer in use with some of the heavier equipments dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the value of the dismantled chattels in such condition, he did not give them anymore any value in his reports. Noteworthy is the fact, however, that in the last re-inspection report he made of the chattels in 1961, just a few months before the foreclosure sale, the same inspector of the PNB reported that the heavy equipment of herein appellant were "lying idle and rusty" but were "with a shed free from rains" 20showing that although they were no longer in use at the time, they were kept in a proper place and not exposed to the elements. The President of the appellant company, on the other hand, testified that its caterpillar (tractor) alone is worth P35,000.00 in the market, and that the value of its two trucks acquired by it with part of the proceeds of the loan and included as additional items in the mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth of its Murphy engine at P16,000.00 which, according to him, when taken together with the heavy equipments he mentioned, the sawmill itself and all other equipment forming part of the chattels under consideration, and bearing in mind the current cost of equipments these days which he alleged to have increased by about five (5) times, could safely be estimated at P120,000.00. This testimony, except for the appraised and market values appearing in the inspection and re-inspection reports of the PNB official earlier mentioned, stand uncontroverted in the record; but We are not inclined to accept such testimony at its par value, knowing that the equipments of herein appellant had been idle and unused since it stopped operating its sawmill in 1958 up to the time of the sale of the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those years of inoperation, although from the evidence aforementioned, We may also safely conclude that the amount of P4,200.00 for which the chattels were sold in the foreclosure sale in question was grossly unfair to

the mortgagor. Considering, however, the facts that the appraised value of P42,850.00 and the market value of P85,700.00 originally given by the PNB official were admittedly conservative; that two 6 x 6 trucks subsequently bought by the appellant company had thereafter been added to the chattels; and that the real value thereof, although depreciated after several years of inoperation, was in a way maintained because the depreciation is off-set by the marked increase in the cost of heavy equipment in the market, it is our opinion that the market value of the chattels at the time of the sale should be fixed at the original appraised value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. 21 A corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that herein appellant had already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract.

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

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to

21

the PNB, P42,850.00 the value of the chattels at the time of the sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees.

3

[G.R. No. 142435. April 30, 2003]

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD, respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision[1] dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners’ appeal from the Decision[2] dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners’ complaint for annulment of real estate mortgage and the extra-judicial foreclosure thereof. Likewise brought for our review is the Resolution[3] dated February 23, 2000 of the Court of Appeals which denied petitioners’ motion for reconsideration.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned “Bela’s Export Trading” (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and foreign consumption. The Lipats also owned the “Mystical Fashions” in the United States, which sells goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing “Mystical Fashions” in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed on December 14, 1978, a special power of attorney appointing

22

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Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from respondent Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as security for the obligations to be extended by Pacific Bank including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to “Mystical Fashions” in the United States. As security therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary, as appears in the accounts, books and records of the Mortgagee.”[4]

On September 5, 1979, BET was incorporated into a family corporation named Bela’s Export Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in the business of manufacturing and exportation of all kinds of garments of whatever kind and description[5] and utilized the same machineries and equipment previously used by BET. Its incorporators and directors included the Lipat spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives and friends of the Lipats.[6] Estelita Lipat was named president of BEC, while Teresita became the vice-president and general manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank for additional finances. These transactions were all secured by the real estate mortgage over the Lipats’ property.

The promissory notes, export bills, and trust receipt eventually became due and demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank’s demand letters, Estelita Lipat went to the office of

the bank’s liquidator and asked for additional time to enable her to personally settle BEC’s obligations. The bank acceded to her request but Estelita failed to fulfill her promise.

Consequently, the real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged property was sold at public auction. On January 31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint, which was docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory notes, trust receipt, and export bills were all ultra viresacts of Teresita as they were executed without the requisite board resolution of the Board of Directors of BEC. The Lipats also averred that assuming said acts were valid and binding on BEC, the same were the corporation’s sole obligation, it having a personality distinct and separate from spouses Lipat. It was likewise pointed out that Teresita’s authority to secure a loan from Pacific Bank was specifically limited to Mrs. Lipat’s sole use and benefit and that the real estate mortgage was executed to secure the Lipats’ and BET’s P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments of the value of the promissory notes, trust receipt, and export bills with their property because they and the BEC are one and the same, the latter being a family corporation. Respondent Trinidad further claimed that he was a buyer in good faith and for value and that petitioners are estopped from denying BEC’s existence after holding themselves out as a corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the record, the complaint filed in this case must be, as is hereby, dismissed. Plaintiffs however has five (5) months and seventeen (17) days reckoned from the finality of this decision within which to exercise their right of redemption. The writ of injunction issued is automatically dissolved if no redemption is effected within that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and factual basis.

No costs.

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IT IS SO ORDERED.[7]

The trial court ruled that there was convincing and conclusive evidence proving that BEC was a family corporation of the Lipats. As such, it was a mere extension of petitioners’ personality and business and a mere alter ego or business conduit of the Lipats established for their own benefit. Hence, to allow petitioners to invoke the theory of separate corporate personality would sanction its use as a shield to further an end subversive of justice.[8] Thus, the trial court pierced the veil of corporate fiction and held that Bela’s Export Corporation and petitioners (Lipats) are one and the same. Pacific Bank had transacted business with both BET and BEC on the supposition that both are one and the same. Hence, the Lipats were estopped from disclaiming any obligations on the theory of separate personality of corporations, which is contrary to principles of reason and good faith.

The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No. 41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The Court of Appeals found that there was ample evidence on record to support the application of the doctrine of piercing the veil of corporate fiction. In affirming the findings of the RTC, the appellate court noted that Mrs. Lipat had full control over the activities of the corporation and used the same to further her business interests.[9] In fact, she had benefited from the loans obtained by the corporation to finance her business. It also found unnecessary a board resolution authorizing Teresita Lipat to secure loans from Pacific Bank on behalf of BEC because the corporation’s by-laws allowed such conduct even without a board resolution. Finally, the Court of Appeals ruled that the mortgage property was not only liable for the original loan of P583,854.00 but likewise for the value of the promissory notes, trust receipt, and export bills as the mortgage contract equally applies to additional or new loans, discounting lines, overdrafts, and credit accommodations which petitioners subsequently obtained from Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by the appellate court in its Resolution of February 23, 2000.[10]

Hence, this petition, with petitioners submitting that the court a quo erred—

1) ….IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION APPLIES IN THIS CASE.

2) ….IN HOLDING THAT PETITIONERS’ PROPERTY CAN BE HELD LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT ALSO

FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS OF BELA’S EXPORT CORPORATION.

3) ….IN HOLDING THAT “THE IMPOSITION OF 15% ATTORNEY’S FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT’S JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS APPEAL.”

4) ….IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.

5) ….IN DENYING PETITIONERS’ MOTION FOR RECONSIDERATION AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS “AN UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE TO APPELLANTS.”[11]

In sum, the following are the relevant issues for our resolution:

1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case;

2. Whether or not petitioners' property under the real estate mortgage is liable not only for the amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and export bills subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney’s fees stipulated in the deed of real estate mortgage.

On the first issue, petitioners contend that both the appellate and trial courts erred in holding them liable for the obligations incurred by BEC through the application of the doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on their part.

Respondents counter that there is clear and convincing evidence to show fraud on part of petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that BEC was organized as a business conduit for the benefit of petitioners.

24






Petitioners’ contentions fail to persuade this Court. A careful reading of the judgment of the RTC and the resolution of the appellate court show that in finding petitioners’ mortgaged property liable for the obligations of BEC, both courts below relied upon the alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may be disregarded.[12] This is commonly referred to as the “instrumentality rule” or the alter ego doctrine, which the courts have applied in disregarding the separate juridical personality of corporations. As held in one case,

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. xxx[13]

We find that the evidence on record demolishes, rather than buttresses, petitioners’ contention that BET and BEC are separate business entities. Note that Estelita Lipat admitted that she and her husband, Alfredo, were the owners of BET[14] and were two of the incorporators and majority stockholders of BEC.[15] It is also undisputed that Estelita Lipat executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and credit lines from Pacific Bank on her behalf.[16] Incidentally, Teresita was designated as executive-vice president and general manager of both BET and BEC, respectively.[17] We note further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC, respectively;[18] (2) both firms were managed by their daughter, Teresita;[19] (3) both firms were engaged in the garment business, supplying products to “Mystical Fashion,” a U.S. firm established by Estelita Lipat; (4) both firms held office in the same building owned by the Lipats;[20] (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family members;[21] (9) Estelita had full control over the activities of and decided business matters of the corporation;[22] and that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to finance her business abroad[23] and from the export bills secured by BEC for the account of “Mystical Fashion.”[24] It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership, business purpose, and

management. Apparently, BET and BEC are one and the same and the latter is a conduit of and merely succeeded the former. Petitioners’ attempt to isolate themselves from and hide behind the corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In our view, BEC is a mere continuation and successor of BET, and petitioners cannot evade their obligations in the mortgage contract secured under the name of BEC on the pretext that it was signed for the benefit and under the name of BET. We are thus constrained to rule that the Court of Appeals did not err when it applied the instrumentality doctrine in piercing the corporate veil of BEC.

On the second issue, petitioners contend that their mortgaged property should not be made liable for the subsequent credit lines and loans incurred by BEC because, first, it was not covered by the mortgage contract of BET which only covered the loan of P583,854.00 and which allegedly had already been paid; and, second, it was secured by Teresita Lipat without any authorization or board resolution of BEC.

We find petitioners’ contention untenable. As found by the Court of Appeals, the mortgaged property is not limited to answer for the loan ofP583,854.00. Thus:

Finally, the extent to which the Lipats’ property can be held liable under the real estate mortgage is not limited to P583,854.00. It can be held liable for the value of the promissory notes, trust receipt and export bills as well. For the mortgage was executed not only for the purpose of securing the Bela’s Export Trading’s original loan of P583,854.00, but also for “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly principal or secondary, as appears in the accounts, books and records of the mortgagee.[25]

As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot be reviewed on appeal by the Supreme Court, provided they are borne out by the record or based on substantial evidence.[26] As noted earlier, BEC merely succeeded BET as petitioners’alter ego; hence, petitioners’ mortgaged property must be held liable for the subsequent loans and credit lines of BEC.

25
















Further, petitioners’ contention that the original loan had already been paid, hence, the mortgaged property should not be made liable to the loans of BEC, is unsupported by any substantial evidence other than Estelita Lipat’s self-serving testimony. Two disputable presumptions under the rules on evidence weigh against petitioners, namely: (a) that a person takes ordinary care of his concerns;[27] and (b) that things have happened according to the ordinary course of nature and the ordinary habits of life.[28] Here, if the original loan had indeed been paid, then logically, petitioners would have asked from Pacific Bank for the required documents evidencing receipt and payment of the loans and, as owners of the mortgaged property, would have immediately asked for the cancellation of the mortgage in the ordinary course of things. However, the records are bereft of any evidence contradicting or overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property should not bind the loans and credit lines obtained by BEC as they were secured without any proper authorization or board resolution. They also blame the bank for its laxity and complacency in not requiring a board resolution as a requisite for approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution since per admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners’ rebuttal witness, no business or stockholder’s meetings were conducted nor were there election of officers held since its incorporation. In fact, not a single board resolution was passed by the corporate board[29] and it was Estelita Lipat and/or Teresita Lipat who decided business matters.[30]

Secondly, the principle of estoppel precludes petitioners from denying the validity of the transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and BEC. While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees, or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business.[31] Apparent authority, is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in

other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.[32]

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding business matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of “Mystical Fashion” owned by Estelita Lipat.[33] Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.[34]

We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the real estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans obtained using the same mortgage contract since it is, by its very terms, a continuing mortgage contract.

On the third and final issue, petitioners assail the decision of the Court of Appeals for not taking cognizance of the issue on attorney’s fees on the ground that it was raised for the first time on appeal. We find the conclusion of the Court of Appeals to be in accord with settled jurisprudence. Basic is the rule that matters not raised in the complaint cannot be raised for the first time on appeal.[35] A close perusal of the complaint yields no allegations disputing the attorney’s fees imposed under the real estate mortgage and petitioners cannot now allege that they have impliedly disputed the same when they sought the annulment of the contract.

In sum, we find no reversible error of law committed by the Court of Appeals in rendering the decision and resolution herein assailed by petitioners.

WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs against petitioners.

SO ORDERED.

26










4 [G.R. No. 142936. April 17, 2002]

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

D E C I S I O N

PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL’s contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:

“WHEREFORE, the judgment appealed from is hereby AFFIRMED.”[2]

The Facts

The factual antecedents of the case are summarized by the Court of Appeals as follows:

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“In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and operating under the laws of the Philippines, with office and principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm of the PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to perform the following, to wit –

‘(a) Construction of one (1) power house building;

‘(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine generating set[s];

‘(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets;

‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s];

‘(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided those stated units are completely supplied with their accessories;

‘(f) Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and earth fillings – all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as Annex ‘A’ and made an integral part of this complaint;’

that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra work, and provide electrical equipment and spare parts, such as:

‘(a) Supply of electrical devices;

‘(b) Extra mechanical works;

‘(c) Extra fabrication works;

‘(d) Supply of materials and consumable items;

‘(e) Electrical shop repair;

‘(f) Supply of parts and related works for turbine generator;

‘(g) Supply of electrical equipment for machinery;

‘(h) Supply of diesel engine parts and other related works including fabrication of parts.’

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting toP527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is appended as Annex ‘C’ of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in

28

broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the plaintiff; that because of the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorney’s fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit:

‘(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the obligation falls due and demandable;

‘(2) Condemning the defendants to pay attorney’s fees amounting to 25% of the amount claim;

‘(3) Ordering the defendants to pay the costs of the suit.’

“The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.

“The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the defendants to file their answer to the complaint within 15 days.

“In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:

‘That the complaint does not state a sufficient cause of action against the defendant NASUDECO because: (a) NASUDECO is not x x x privy to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the problems concerning the same.’

“By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of attorney’s fees as well as exemplary damages.

“In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the defendant PASUMIL upon which plaintiff’s suit is erected, was rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNB’s management and operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank of the Philippines (DBP) entered into a ‘Redemption

29

Agreement’ whereby DBP sold, transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL, as shown in Annex ‘C’ which is made an integral part of the answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under the above ‘Redemption Agreement.’ This is shown in Annex ‘D’ which is also made an integral part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate obligations of PASUMIL, including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to ‘make a study of and submit recommendation on the problems concerning the claims of PASUMIL creditors,’ under sub-par. 5 LOI No. 311.

“In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is entitled to claim attorney’s fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorney’s fees, aside from exemplary damages in such amount that the court may seem just and equitable in the premises.

“Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial Court.

“After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:

‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the following:

‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25, 1980 until fully paid;

‘2. The sum of P102,724.76 as attorney’s fees; and,

‘3. Costs.

‘SO ORDERED.

‘Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO

‘Judge’”[

3

]

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom.[4]

Hence, this Petition.[5]

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Issues

In their Memorandum, petitioners raise the following errors for the Court’s consideration:

“I

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has not been legally extinguished or terminated, simply because of petitioners[’] take-over of the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.

“II

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415.”[6]

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent.

This Court’s Ruling

The Petition is meritorious.

Main Issue:Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court. [7] To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals.[8] After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented.[9] Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision.[10]

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latter’s foreclosed assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly and severally held liable for PASUMIL’s unpaid obligation.

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts.[11]

Piercing the CorporateVeil Not Warranted

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. [12] It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related.[13] This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation.[14] For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled [15] only when it becomes a shield for fraud, illegality or inequity committed against third persons.[16]

Hence, any application of the doctrine of piercing the corporate veil should be done with caution.[17] A court should be mindful of the milieu where it is to be applied.[18] It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights.[19] The wrongdoing must be clearly and convincingly established; it cannot be presumed.[20]Otherwise, an injustice that was never unintended may result from an erroneous application.[21]

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This Court has pierced the corporate veil to ward off a judgment credit,[22] to avoid inclusion of corporate assets as part of the estate of the decedent,[23] to escape liability arising from a debt,[24] or to perpetuate fraud and/or confuse legitimate issues[25] either to promote or to shield unfair objectives[26] or to cover up an otherwise blatant violation of the prohibition against forum-shopping.[27] Only in these and similar instances may the veil be pierced and disregarded.[28]

The question of whether a corporation is a mere alter ego is one of fact.[29] Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control -- not mere stock control, but complete domination -- not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such 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 a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff’s legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.[30]

We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities.[31] Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person.[32] Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL.[33]

Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule.[34] However, it utterly failed to discharge this burden;[35] it failed to establish by competent evidence that petitioner’s separate corporate veil had been used to conceal fraud, illegality or inequity.[36]

While we agree with respondent’s claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced to PASUMIL,[37] we are not convinced that the transfer of the latter’s assets to petitioners was fraudulently entered into in order to escape liability for its debt to respondent.[38]

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder at the public auction conducted.[39] The bank was justified in

foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20 percent of the total outstanding obligation.[40] Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties.[41]

Pursuant to LOI No. 189-A[42] as amended by LOI No. 311,[43] PNB acquired PASUMIL’s assets that DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a subsidiary corporation.[44]

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135.[45] These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement.[46] PNB, as successor-in-interest, stepped into the shoes of DBP as PASUMIL’s creditor.[47] By way of a Deed of Assignment,[48] PNB then transferred to NASUDECO all its rights under the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals,[49] we had the occasion to resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Mining’s unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil.

In the instant case, the CA erred in affirming the trial court’s lifting of the corporate mask.[50] The CA did not point to any fact evidencing bad faith on the part of PNB and its transferee.[51] The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime.[52] None of the foregoing exceptions was shown to exist in the present case.[53] On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation.

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A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business.[54]

The merger, however, does not become effective upon the mere agreement of the constituent corporations.[55] Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them.[56] For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required.[57] These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations.[58]

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code[59] was not followed.

In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been legally extinguished or terminated.[60] Further, prior to PNB’s acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the former’s obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, anotherP14,000.

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent.[61] LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMIL’s creditors.[62] Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondent’s insistence to the contrary.[63]

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs.

5 [G.R. No. 141617. August 14, 2001]

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION, petitioners, vs. RITA C. MEJIA, as Executrix of Testate Estate of ANDREA CORDOVA VDA. DE GUTIERREZ, respondent.

D E C I S I O N

GONZAGA-REYES, J.:

In this petition for review by certiorari, petitioners pray for the setting aside of the Decision of the Court of Appeals promulgated on 13 April 1999 and its 15 December 1999 Resolution in CA-G.R. CV No. 19281.

As culled from the decisions of the lower courts and the pleadings of the parties, the factual background of this case is as set out herein:

Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land in Camarin, Caloocan City known as Lot 861 of the Tala Estate. The land had an aggregate area of twenty-five (25) hectares and was covered by Transfer Certificate of Title (TCT) No. 5779 of the Registry of Deeds of Caloocan City. The property was later subdivided into five lots with an area of five hectares each and pursuant thereto, TCT No. 5779 was cancelled and five new transfer certificates of title were issued in the name of Gutierrez, namely TCT No. 7123 covering Lot 861-A, TCT No. 7124 covering Lot 861-B, TCT No. 7125 covering Lot 861-C, TCT No. 7126 covering Lot 861-D and TCT No. 7127 covering Lot 861-E.

On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed of Sale with Mortgage relating to the lots covered by TCT Nos. 7124, 7125, 7126 and 7127, for the consideration of P800,000.00. Upon the execution of the deed, Cardale paid Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be paid in several installments within five years from the date of the deed, at an interest of nine percent per annum “based on the successive unpaid principal balances.” Thereafter, the titles of Gutierrez were cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale.

To secure payment of the balance of the purchase price, Cardale constituted a mortgage on three of the four parcels of land covered by TCT Nos. 7531, 7532 and 7533, encompassing fifteen hectares of land.[1] The encumbrance was annotated upon the certificates of title and the owner’s duplicate certificates. The owner’s duplicates were retained by Gutierrez.

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On 26 August 1968, owing to Cardale’s failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the contract with the Quezon City Regional Trial Court (RTC), which was docketed as Civil Case No. Q-12366.[2] On 20 October 1969, during the pendency of the rescission case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia (Mejia). In 1971, plaintiff’s presentation of evidence was terminated. However, Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of Cardale, lost interest in proceeding with the presentation of its evidence and the case lapsed into inactive status for a period of about fourteen years.

In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533 became delinquent in the payment of real estate taxes in the amount of P102,300.00, while the other mortgaged property covered by TCT No. 7531 became delinquent in the amount of P89,231.37, which culminated in their levy and auction sale on 1 and 12 September 1983, in satisfaction of the tax arrears. The highest bidder for the three parcels of land was petitioner Merryland Development Corporation (Merryland), whose President and majority stockholder is Francisco. A memorandum based upon the certificate of sale was then made upon the original copies of TCT Nos. 7531 to 7533.

On 13 August 1984, before the expiration of the one year redemption period, Mejia filed a Motion for Decision with the trial court. The hearing of said motion was deferred, however, due to a Motion for Postponement filed by Cardale through Francisco, who signed the motion in her capacity as “officer-in-charge,” claiming that Cardale needed time to hire new counsel. However, Francisco did not mention the tax delinquencies and sale in favor of Merryland. Subsequently, the redemption period expired and Merryland, acting through Francisco, filed petitions for consolidation of title,[3] which culminated in the issuance of certain orders[4]decreeing the cancellation of Cardales’ TCT Nos. 7531 to 7533 and the issuance of new transfer certificates of title “free from any encumbrance or third-party claim whatsoever” in favor of Merryland. Pursuant to such orders, the Register of Deeds of Caloocan City issued new transfer certificates of title in the name of Merryland which did not bear a memorandum of the mortgage liens in favor of Gutierrez.

Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an undated Manifestation to the effect that the properties subject of the mortgage and covered by TCT Nos. 7531 to 7533 had been levied upon by the local government of Caloocan City and sold at a tax delinquency sale. Francisco further claimed that the delinquency sale had rendered the issues in Civil Case No. Q-12366 moot and academic. Agreeing with Francisco, the trial court dismissed the case, explaining that since the properties mortgaged to Cardale had been transferred to Merryland which

was not a party to the case for rescission, it would be more appropriate for the parties to resolve their controversy in another action.

On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with the RTC of Quezon City a complaint for damages with prayer for preliminary attachment against Francisco, Merryland and the Register of Deeds of Caloocan City. The case was docketed as Civil Case No. Q-49766. On 15 April 1988, the trial court rendered a decision[5] in favor of the defendants, dismissing the complaint for damages filed by Mejia. It was held that plaintiff Mejia, as executrix of Gutierrez’s estate, failed to establish by clear and convincing evidence her allegations that Francisco controlled Cardale and Merryland and that she had employed fraud by intentionally causing Cardale to default in its payment of real property taxes on the mortgaged properties so that Merryland could purchase the same by means of a tax delinquency sale. Moreover, according to the trial court, the failure to recover the property subject of the Deed of Sale with Mortgage was due to Mejia’s failure to actively pursue the action for rescission (Civil Case No. 12366), allowing the case to drag on for eighteen years. Thus, it ruled that -

xxx xxx xxx

The act of not paying or failing to pay taxes due the government by the defendant Adalia B. Francisco, as treasurer of Cardale Financing and Realty Corporation do not, per se, constitute perpetration of fraud or an illegal act. It do [sic] not also constitute an act of evasion of an existing obligation (to plaintiff) if there is no clear showing that such an act of non-payment of taxes was deliberately made despite its (Cardale’s) solvency and capability to pay. There is no evidence showing that Cardale Financing and Realty Corporation was financially capable of paying said taxes at the time.

“There are times when the corporate fiction will be disregarded: (1) where all the members or stockholders commit illegal act; (2) where the corporation is used as dummy to commit fraud or wrong; (3) where the corporation is an agency for a parent corporation; and (4) where the stock of a corporation is owned by one person.” (I, Fletcher, 58, 59, 61 and 63). None of the foregoing reasons can be applied to the incidents in this case: (1) there appears no illegal act committed by the stockholders of defendant Merryland Development Corporation and Cardale Financing and Realty Corporation; (2) the incidents proven by evidence of the plaintiff as well as that of the defendants do not show that either or both corporations were used as dummies by defendant Adalia B. Francisco to commit fraud or wrong. To be used as [a] dummy, there has to be a showing that the dummy corporation is controlled by the person using it. The evidence of plaintiff failed to prove that defendant Adalia B. Francisco has controlling

34





interest in either or both corporations. On the other hand, the evidence of defendants clearly show that defendant Francisco has no control over either of the two corporations; (3) none of the two corporations appears to be an agency for a parent (the other) corporation; and (4) the stock of either of the two corporation [sic] is not owned by one person (defendant Adalia B. Francisco). Except for defendant Adalia B. Francisco, the incorporators and stockholders of one corporation are different from the other.

xxx xxx xxx

The said case (Civil Case No. 12366) remained pending for almost 18 years before the then Court of First Instance, now the Regional Trial Court. Even if the trial of the said case became protracted on account of the retirement and/or promotion of the presiding judge, as well as the transfer of the case from one sala to another, and as claimed by the plaintiff “that the defendant lost interest”, (which allegation is unusual, so to speak), the court believe [sic] that it would not have taken that long to dispose [of] said case had plaintiff not slept on her rights, and her duty and obligation to see to it that the case is always set for hearing so that it may be adjudicated [at] the earliest possible time. This duty pertains to both parties, but plaintiff should have been more assertive, as it was her obligation, similar to the obligation of plaintiff relative to the service of summons in other cases. The fact that Cardale Financing and Realty Corporation did not perform its obligation as provided in the said “Deed of Sale with Mortgage” (Exhibit “A”) is very clear. Likewise, the fact that Andrea Cordova, the contracting party, represented by the plaintiff in this case did not also perform her duties and/or obligation provided in the said contract is also clear. This could have been the reason why the plaintiff in said case (Exhibit “E”) slept on her rights and allowed the same to remain pending for almost 18 years. However, and irrespective of any other reason behind the same, the court believes that plaintiff, indeed, is the one to blame for the failure of the testate estate of the late Andrea Cordova Vda. de Gutierrez to recover the money or property due it on the basis of Exhibit “A”.

xxx xxx xxx

xxx Had the plaintiff not slept on her rights and had it not been for her failure to perform her commensurate duty to pursue vigorously her case against Cardale Financing and Realty Corporation in said Civil Case No. 12366, she could have easily known said non-payment of realty taxes on the said properties by said Cardale Financing and Realty Corporation, or, at least the auction sales that followed, and from which she could have redeemed said properties within the one year period provided by law, or, have availed of

remedies at the time to protect the interest of the testate estate of the late Andrea Cordova Vda. de Gutierrez.

xxx xxx xxx

The dispositive portion of the trial court’s decision states -

WHEREFORE, in view of all the foregoing consideration, the court hereby renders judgment in favor of the defendants Register of Deeds of Caloocan City, Merryland Development Corporation and Adalia B. Francisco, and against plaintiff Rita C. Mejia, as Executrix of the Testate Estate of Andrea Cordova Vda. De Gutierrez, and hereby orders:

1. That this case for damages be dismissed, at the same time, plaintiff’s motion for reconsideration dated September 23, 1987 is denied;

2. Plaintiff pay the defendants Merryland Development Corporation and the Register of Deeds the sum of P20,000.00, and another sum of P20,000.00 to the defendant Adalia B. Francisco, as and for attorney’s fees and litigation expenses, and pay the costs of the proceedings.

SO ORDERED.

The Court of Appeals,[6] in its decision[7] promulgated on 13 April 1999, reversed the trial court, holding that the corporate veil of Cardale and Merryland must be pierced in order to hold Francisco and Merryland solidarily liable since these two corporations were used as dummies by Francisco, who employed fraud in allowing Cardale to default on the realty taxes for the properties mortgaged to Gutierrez so that Merryland could acquire the same free from all liens and encumbrances in the tax delinquency sale and, as a consequence thereof, frustrating Gutierrez’s rights as a mortgagee over the subject properties. Thus, the Court of Appeals premised its findings of fraud on the following circumstances –

xxx xxx xxx

xxx Appellee Francisco knew that Cardale of which she was vice-president and treasurer had an outstanding obligation to Gutierrez for the unpaid balance of the real properties covered by TCT Nos. 7531 to 7533, which Cardale purchased from Gutierrez which account, as of December 1988, already amounted to P4,414,271.43 (Exh. K, pp. 39-44, record); she also knew that Gutierrez had a mortgage lien on the said properties to secure

35



payment of the aforesaid obligation; she likewise knew that the said mortgaged properties were under litigation in Civil Case No. Q-12366 which was an action filed by Gutierrez against Cardale for rescission of the sale and/or recovery of said properties (Exh. E). Despite such knowledge, appellee Francisco did not inform Gutierrez’s Estate or the Executrix (herein appellant) as well as the trial court that the mortgaged properties had incurred tax delinquencies, and that Final Notices dated July 9, 1982 had been sent by the City Treasurer of Caloocan demanding payment of such tax arrears within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 37-38, record). Both notices which were addressed to –

Cardale Financing & Realty Corporation c/o Merryland Development Corporation

and sent to appellee Francisco’s address at 83 Katipunan Road, White Plains, Quezon City, gave warning that if the taxes were not paid within the aforesaid period, the properties would be sold at public auction to satisfy the tax delinquencies.

To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not inform the Estate of Gutierrez or her executrix about the tax delinquencies and of the impending auction sale of the said properties. Even a modicum of good faith and fair play should have encouraged appellee Francisco to at least advise Gutierrez’s Estate through her executrix (herein appellant) and the trial court which was hearing the complaint for rescission and recovery of said properties of such fact, so that the Estate of Gutierrez, which had a real interest on the properties as mortgagee and as plaintiff in the rescission and recovery suit, could at least take steps to forestall the auction sale and thereby preserve the properties and protect its interests thereon. And not only did appellee Francisco allow the auction sale to take place, but she used her other corporation (Merryland) in participating in the auction sale and in acquiring the very properties which her first corporation (Cardale) had mortgaged to Gutierrez. Again, appellee Francisco did not thereafter inform the Estate of Gutierrez or its executrix (herein appellant) about the auction sale, thus precluding the Estate from exercising its right of redemption. And it was only after the expiration of the redemption period that appellee Francisco filed a Manifestation in Civil Case No. Q-12366 (Exh. I, p. 36, record), in which she disclosed for the first time to the trial court and appellant that the properties subject of the case and on which Gutierrez or her Estate had a mortgage lien, had been sold in a tax delinquency sale. And in order to further conceal her deceptive maneuver, appellee Francisco did not divulge in her aforesaid Manifestation that it was her other corporation (Merryland) that acquired the properties in the auction sale.

We are not impressed by appellee’s submission that no evidence was adduced to prove that Cardale had the capacity to pay the tax arrears and therefore she or Cardale may not be faulted for the tax delinquency sale of the properties in question. Appellee Francisco’s bad faith or deception did not necessarily lie in Cardale’s or her failure to settle the tax deliquencies in question, but in not disclosing to Gutierrez’s estate or its executrix (herein appellant) which had a mortgage lien on said properties the tax delinquencies and the impending auction sale of the encumbered properties.

Appellee Francisco’s deception is further shown by her concealment of the tax delinquency sale of the properties from the estate or its executrix, thus preventing the latter from availing of the right of redemption of said properties. That appellee Francisco divulged the auction sale of the properties only after such redemption period had lapsed clearly betrays her intention to keep Gutierrez’s Estate or its Executrix from availing of such right. And as the evidence would further show, appellee Francisco had a hand in securing for Merryland consolidation of its ownership of the properties and in seeing to it that Merryland’s torrens certificates for the properties were free from liens and encumbrances. All these appellee Francisco did even as she was fully aware that Gutierrez or her estate had a valid and subsisting mortgage lien on the said properties.

It is likewise worthy of note that early on appellee Francisco had testified in the action for rescission of sale and recovery of possession and ownership of the properties which Gutierrez filed against Cardale (Civil Case No. Q-12366) in her capacity as defendant Cardale’s vice-president and treasurer. But then, for no plausible reason whatsoever, she lost interest in continuing with the presentation of evidence for defendant Cardale. And then, when appellant Mejia as executrix of Gutierrez’s Estate filed on August 13, 1984 a Motion for Decision in the aforesaid case, appellee Francisco moved to defer consideration of appellant’s Motion on the pretext that defendant Cardale needed time to employ another counsel. Significantly, in her aforesaid Motion for Postponement dated August 16, 1984 which appellee Francisco personally signed as Officer-in-Charge of Cardale, she also did not disclose the fact that the properties subject matter of the case had long been sold at a tax delinquency sale and acquired by her other corporation Merryland.

And as if what she had already accomplished were not enough fraudulence, appellee Francisco, acting in behalf of Merryland, caused the issuance of new transfer certificates of title in the name of Merryland, which did not anymore bear the mortgage lien in favor of Gutierrez. In the meantime, to further avoid payment of the mortgage indebtedness owing to Gutierrez’s estate, Cardale corporation was dissolved. Finally, to put the properties

36

beyond the reach of the mortgagee, Gutierrez’s estate, Merryland caused the subdivision of such properties, which were subsequently sold on installment basis.

In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to inform the mortgagee of the tax delinquencies, if any, of the mortgaged properties. Moreover, petitioners claim that Cardale’s failure to pay the realty taxes, per se, does not constitute fraud since it was not proven that Cardale was capable of paying the taxes. Petitioners also contend that if Mejia, as executrix of Gutierrez’s estate, was not remiss in her duty to pursue Civil Case No. 12366, she could have easily learned of the non-payment of realty taxes on the subject properties and of the auction sale that followed and thus, have redeemed the properties or availed of some other remedy to conserve the estate of Gutierrez. In addition, Mejia could have annotated a notice of lis pendens on the titles of the mortgaged properties, but she failed to do so. It is the stand of petitioners that respondent has not adduced any proof that Francisco controlled both Cardale and Merryland and that she used these two corporations to perpetuate a fraud upon Gutierrez or her estate. Petitioners maintain that the “evidence shows that, apart form the meager share of petitioner Francisco, the stockholdings of both corporations comprise other shareholders, and the stockholders of either of them, aside from petitioner Francisco, are composed of different persons.” As to Civil Case No. 12366, petitioners insist that the decision of the trial court in that case constitutes res judicata to the instant case.[8]

It is dicta in corporation law that a corporation is a juridical person with a separate and distinct personality from that of the stockholders or members who compose it.[9] However, when the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. One of the earliest formulations of this doctrine of piercing the corporate veil was made in the American case of United States v. Milwaukee Refrigerator Transit Co.[10] -

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

Since then a good number of cases have firmly implanted this doctrine in Philippine jurisprudence.[11] One such case is Umali v. Court of Appeals[12] wherein the Court declared that –

Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. 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.

With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good faith. In such cases, the officer’s acts are properly attributed to the corporation.[13] However, if it is proven that the officer has used the corporate fiction to defraud a third party,[14] or that he has acted negligently, maliciously or in bad faith,[15] then the corporate veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved.

The Court, after an assiduous study of this case, is convinced that the totality of the circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage security attest to this. It has been established that Cardale failed to comply with its obligation to pay the balance of the purchase price for the four parcels of land it bought from Gutierrez covered by TCT Nos. 7531 to 7534, which obligation was secured by a mortgage upon the lands covered by TCT Nos. 7531, 7532 and 7533. This prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage (Civil Case No. Q-12366), but the case dragged on for about fourteen years when Cardale, as represented by Francisco, who was Vice-President and Treasurer of the same,[16] lost interest in completing its presentation of evidence.

Even before 1984 when Mejia, in her capacity as executrix of Gutierrez’s estate, filed a Motion for Decision with the trial court, there is no question that Francisco knew that the properties subject of the mortgage had

37










become tax delinquent. In fact, as treasurer of Cardale, Francisco herself was the officer charged with the responsibility of paying the realty taxes on the corporation’s properties. This was admitted by the trial court in its decision.[17] In addition, notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment of the tax arrears on the subject properties and giving warning that if the realty taxes were not paid within the given period then such properties would be sold at public auction to satisfy the tax delinquencies were sent directly to Francisco’s address in White Plains, Quezon City.[18] Thus, as early as 1982, Francisco could have informed the Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax arrears and of the notice from the City Treasurer so that the estate could have taken the necessary steps to prevent the auction sale and to protect its interests in the mortgaged properties, but she did no such thing. Finally, in 1983, the properties were levied upon and sold at public auction wherein Merryland - a corporation where Francisco is a stockholder[19] and concurrently acts as President and director[20] - was the highest bidder.

When Mejia filed the Motion for Decision in Civil Case No. Q-12366,[21] the period for redeeming the properties subject of the tax sale had not yet expired.[22]Under the Realty Property Tax Code,[23] pursuant to which the tax levy and sale were prosecuted,[24] both the delinquent taxpayer and in his absence, any person holding a lien or claim over the property shall have the right to redeem the property within one year from the date of registration of the sale.[25] However, if these persons fail to redeem the property within the time provided, then the purchaser acquires the property “free from any encumbrance or third party claim whatsoever.”[26] Cardale made no attempts to redeem the mortgaged property during this time. Moreover, instead of informing Mejia or the trial court in Q-12366 about the tax sale, the records show that Francisco filed a Motion for Postponement[27] in behalf of Cardale - even signing the motion in her capacity as “officer-in-charge” - which worked to defer the hearing of Mejia’s Motion for Decision. No mention was made by Francisco of the tax sale in the motion for postponement. Only after the redemption period had expired did Francisco decide to reveal what had transpired by filing a Manifestation stating that the properties subject of the mortgage in favor of Gutierrez had been sold at a tax delinquency sale; however, Francisco failed to mention that it was Merryland that acquired the properties since she was probably afraid that if she did so the court would see behind her fraudulent scheme. In this regard, it is also significant to note that it was Francisco herself who filed the petitions for consolidation of title and who helped secure for Merryland titles over the subject properties “free from any encumbrance or third-party claim whatsoever.”

It is exceedingly apparent to the Court that the totality of Franciso’s actions clearly betray an intention to conceal the tax delinquencies, levy and public auction of the subject properties from the estate of Gutierrez and the

trial court in Civil Case No. Q-12366 until after the expiration of the redemption period when the remotest possibility for the recovery of the properties would be extinguished.[28] Consequently, Francisco had effectively deprived the estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold to Cardale. If Francisco was acting in good faith, then she should have disclosed the status of the mortgaged properties to the trial court in Civil Case No. Q-12366 - especially after Mejia had filed a Motion for Decision, in response to which she filed a motion for postponement wherein she could easily have mentioned the tax sale - since this action directly affected such properties which were the subject of both the sale and mortgage.

That Merryland acquired the property at the public auction only serves to shed more light upon Francisco’s fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is the controlling stockholder and President of Merryland.[29] Thus, aside from the instrumental role she played as an officer of Cardale, in evading that corporation’s legitimate obligations to Gutierrez, it appears that Francisco’s actions were also oriented towards securing advantages for another corporation in which she had a substantial interest. We cannot agree, however, with the Court of Appeals’ decision to hold Merryland solidarily liable with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a mere alter ego or business conduit of Francisco. Time and again it has been reiterated that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.[30] Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of Cardale.[31] Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights.[32] Thus, Merryland’s separate juridical personality must be upheld.

Based on a statement of account submitted by Mejia, the Court of Appeals awarded P4,314,271.43 in favor of the estate of Gutierrez which represents the unpaid balance of the purchase price in the amount of P629,000.00 with an interest rate of nine percent (9%) per annum, in accordance with the agreement of the parties under the Deed of Sale with Mortgage,[33] as of December 1988.[34] Therefore, in addition to the amount awarded by the appellate court, Francisco should pay the estate of Gutierrez interest on the unpaid balance of the purchase price (in the amount of

38



















P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully satisfied.

Finally, contrary to petitioner’s assertions, we agree with the Court of Appeals that the decision of the trial court in Civil Case No. Q-12366 does not constituteres judicata insofar as the present case is concerned because the decision in the first case was not a judgment on the merits. Rather, it was merely based upon the premise that since Cardale had been dissolved and the property acquired by another corporation, the action for rescission would not prosper. As a matter of fact, it was even expressly stated by the trial court that the parties should ventilate their issues in another action.

WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly MODIFIED so as to hold ADALIA FRANCISCO solely liable to the estate of Gutierrez for the amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in the amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully satisfied. MERRYLAND is hereby absolved from all liability.

SO ORDERED.

6

RUPERTO SULDAO, G.R. No. 171392 Petitioner, Present:

Panganiban, C.J. (Chairperson), - versus - Ynares-Santiago,

Austria-Martinez,

Callejo, Sr., and

Chico-Nazario, JJ.

CIMECH SYSTEM CONSTRUCTION,

INC. and ENGR. RODOLFO S. Promulgated:

LABUCAY,

Respondents. October 30, 2006

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the Decision [1] dated

June 23, 2005 of the Court of Appeals in CA-G.R. SP No. 83963, which

reversed and set aside the February 27, 2004 Resolution [2] of the National

Labor Relations Commission (NLRC) in NLRC CA No. 036963-03 and the

39

http://sc.judiciary.gov.ph/jurisprudence/2006/october2006/171392.htm#_ftn2


August 5, 2003 Decision of the Labor Arbiter finding petitioner to have been

constructively dismissed. Also assailed is the January 10,

2006 Resolution[3] denying petitioner’s motion for reconsideration.

The facts are as follows:

Respondent Cimech Systems Construction, Inc. employed the

services of petitioner Ruperto Suldao on August 31, 2001 as a machinist

with a daily wage of P300.00 on a contractual status for a period of five

months. After January 31, 2002, respondent continued to engage the

services of petitioner as a machinist until he became a permanent employee.

Petitioner alleged that owing to a dearth in projects being handled

by the respondent, he was ordered by Ms. Elsa Labocay to take a leave of

absence from November 1 to 6, 2002. He reported for work on November 7,

2002 but was again ordered to take a leave of absence from November 7 to

14, 2002. On November 15, 2002, he was purportedly ordered to make a

letter-request for field work transfer which he complied. The following day,

he failed to report back for work because he was sick. On November 17,

2002, he reported for work but was allegedly barred from entering by the

security guard on duty. On November 21, 2002, he was again barred from

entering the premises, hence he filed the instant complaint [4] for constructive

dismissal.[5]

Respondent alleged that due to lack of available work in the

machine shop, petitioner was temporarily transferred to its fabrication

department sometime in November 2002. Petitioner refused to accept the

transfer and insisted to work as a machinist. Because of petitioner’s arrogant

and unruly behavior, he was led away by a guard. When petitioner returned

for work, he purportedly demanded a salary increase and wages for the days

that he did not work. Respondent considered the actuations of petitioner

tantamount to insubordination, hence, it suspended[6] the petitioner for six

days.

After his suspension on November 28, 2002, petitioner accepted

his transfer to the fabrication department but worked for only one

day. During the company’s Christmas party on December 21, 2002,

petitioner came and asked for his 13th month pay. OnJanuary 13, 2003,

petitioner demanded to get his one day salary deposit but was told to secure

a clearance which he failed to comply. Thereafter, petitioner filed the instant

complaint for illegal dismissal.

40





On August 5, 2003, Labor Arbiter Melquiades Sol D. Del Rosario

rendered a decision, the dispositive portion of which reads:

CONFORMABLY WITH THE FOREGOING,

judgment is hereby rendered finding complainant to have been illegally dismissed constructively. Consequently, he should be reinstated to his former position and paid his backwages which has accumulated as of July 17, 2003 in the sum of P62,400.00 plus his one month separation pay of P7,800.00.

SO ORDERED.[7]

The NLRC concurred with the findings of the Labor Arbiter that

petitioner was constructively dismissed.

Hence, respondent filed a petition for certiorari[8] which was granted by

the Court of Appeals. In its assailed June 23, 2005decision, the Court of

Appeals reversed the NLRC by declaring:

WHEREFORE, premises considered, the Petition

is hereby given DUE COURSE, and the February 27, 2004 Decision of the NLRC is hereby REVERSED and SET ASIDE. The December 20, 2002 Complaint is hereby DISMISSED.

SO ORDERED.[9]

Hence, this petition raising the sole issue of:

WHETHER THE COURT OF APPEALS COMMITED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING THE DECISION OF THE LABOR ARBITER AND THE NLRC THAT THE PETITIONER WAS CONSTRUCTIVELY DISMISSED.

As a general rule, a petition for review on certiorari under Rule 45

of the Rules of Court is limited to questions of law. However, this rule admits

of exceptions,[10] such as in this case where the findings of the Labor Arbiter

and the NLRC vary from the findings of the Court of Appeals.

The petition is impressed with merit.

After a painstaking review of the records, we uphold the findings of

the Labor Arbiter and of the NLRC that petitioner was constructively

dismissed. Constructive dismissal or a constructive discharge has been

defined as quitting because continued employment is rendered impossible,

unreasonable or unlikely, as an offer involving a demotion in rank and a

diminution in pay.[11] In the instant case, there is constructive dismissal

because the continued employment of petitioner is rendered impossible so

as to foreclose any choice on his part except to resign from such

employment.[12]

41







In cases of constructive dismissal, the burden of proof is on the

employer to show that the employee was dismissed for a valid and a just

cause.[13] In the instant case, respondent failed to discharge this burden. As

aptly observed by the NLRC: In essence, respondents would have it that they

have not dismissed complainant, rather it was he who did not return to his job after 13 January 2003.

To begin with, the issues raised undoubtedly was

factual, the determination of which lies within the competence of the Labor Arbiter’s jurisdiction, over which this Commission will interfere only when grave abuse or serious errors were committed by him in the interpretation of the evidence on records.

In this case however, respondents failed to show

by substantial proof the veracity of their assertion. For one, while claiming that complainant was placed on a six (6) days suspension for an alleged infraction, they failed nonetheless to adduce evidence showing that indeed complainant committed the offense and was placed as such as disciplinary measure.

Relevant on this score is the observation and

findings of the Labor Arbiter, to wit:

Respondents’ averment that complainant was arrogant, and did not want to be transferred to another position or department is belied by complainant’s letter dated November 28, 2002.

Excerpts from complainant’s

letter reads: “Na tinatanggap ko na utos ng

kumpanyang ito na umako ng ibang gawain para sa kabutihan ng lahat. Na ang pagtanggap ko ng ibang trabaho ay

pansamantala lang habang walang gawain sa dati ko puwesto or gawain trabaho sa kompanya.

Nang ang sulat salaysay kong

ito ay aking isinagawa bilang pagtalima sa kautusan ng atin kumpanya.

x x x x Complainant’s claim that he

was required to go on a leave of absence due to a dearth of work is consistent with respondent’s claim that there was scarcity of work because of the economic crisis.

By all appearances,

complainant does not have a high educational attainment and his skill is limited to being a machinist. As such, all he can do is to obey the biddings of his superior. So when required to go on leave, he meekly obeys.

Even his claim that he failed to

report for work due to indisposition is supported by a medical certificate. As between the conflicting claims of the parties, this Arbitration Branch has to accord more weight to complainant’s claim that he was no longer allowed to work because he was barred by the security guard of the company to enter the premises for reasons only known to respondents.

Had there been truth to

respondents’ claim that complainant abandoned his work because he did not want the job in the fabrication department, complainant would not have made a letter of conformity to do the bidding of the company. Moreover, complainant would not have taken steps

42


to protect his rights like the institution of the present labor suit if he had abandoned his work because rather than spend time, effort and a little money in attending to the hearings of this case, he would have concentrated in his new job or in finding one in order to feed his family.[14]

While the decision to transfer employees to other areas of its

operations forms part of the well recognized prerogatives of management, it

must be stressed, however, that the managerial prerogative to transfer

personnel must not be exercised with grave abuse of discretion, bearing in

mind the basic elements of justice and fair play. Having the right should not

be confused with the manner in which that right is exercised. Thus it cannot

be used as a subterfuge by the employer to rid himself of an undesirable

worker.[15]

In the instant case, while petitioner’s transfer was valid, the manner

by which respondent unjustifiably prevented him from returning to work on

several occasions runs counter to the claim of good faith on the part of

respondent corporation. By reporting for work, petitioner manifested his

willingness to comply with the regulations of the corporation and his desire to

continue working for the latter. However, he was barred from entering the

premises without any explanation. This is a clear manifestation of disdain

and insensibility on the part of an employer towards a particular employee

and a veritable hallmark of constructive dismissal.

We cannot sustain the theory of respondent that since petitioner was

allowed to join its 2002 Christmas Party, there can be no constructive

dismissal. Petitioner’s joining the Christmas party does not negate his illegal

dismissal. Neither does it detract us from the fact that petitioner was

prevented from entering the premises of the respondent corporation on

previous occasions.

While the liability of the respondent corporation for the constructive

dismissal of the petitioner has been clearly established, the same does not

hold true with the other respondent, Engr. Rodolfo S. Labucay, President

and General Manager of the respondent corporation.[16] In finding Labucay

also liable, the Labor Arbiter declared that:

The foregoing circumstances support the view

that complainant was constructively dismissed in an illegal manner. Consequently, respondents, in solidum, are ordered to reinstate the complainant to his former position and pay complainant his backwages x x x.

A corporation is invested by law with a personality separate from

that of its stockholders or members. It has a personality separate and

distinct from those of the persons composing it as well as from that of any

43




other entity to which it may be related. Mere ownership by a single

stockholder or by another corporation of all or nearly all of the capital stock

of a corporation is not in itself sufficient ground for disregarding the separate

corporate personality. A corporation’s authority to act and its liability for its

actions are separate and apart from the individuals who own it.

The veil of corporate fiction treats as separate and distinct the

affairs of a corporation and its officers and stockholders. As a general rule,

a corporation will be looked upon as a legal entity, unless and until sufficient

reason to the contrary appears. When the notion of legal entity is used to

defeat public convenience, justify wrong, protect fraud, or defend crime, the

law will regard the corporation as an association of persons. Also, the

corporate entity may be disregarded in the interest of justice in such cases

as fraud that may work inequities among members of the corporation

internally, involving no rights of the public or third persons. In both

instances, there must have been fraud and proof of it. For the separate

juridical personality of a corporation to be disregarded, the wrongdoing must

be clearly and convincingly established. It cannot be presumed.[17]

7 G.R. No. L-25894 January 30, 1971QUIRINO BOLAÑOS, EDILBERTO ALEJANDRINO and DIOSDADO DE LOS REYES, petitioners-appellees, vs.J. M. TUASON & CO., INC. and PEOPLE'S HOMESITE and HOUSING CORPORATION, respondents-appellants.

Pablo G. Macapagal for petitioner-appellee Edilberto Alejandrino.Diosdado de los Reyes for himself and A. M. Dizon for petitioner-appellee Quirino Bolaños.Sison and San Juan for respondent-appellant J. M. Tuason and Co., Inc. BARREDO, J.:Appeal by J. M. Tuason & Co., Inc. and the People's Homesite and Housing Corporation from the order dated September 9, 1965 of the Court of First Instance of Rizal, Branch X, issued in LRC Rec. No. 7581, Quirino Bolaños, et als., petitioners, versus J. M. Tuason & Co., Inc., et al., respondents, reading in full as follows:

In their urgent petition dated March 17, 1965, the petitioner prayed that an order be published at the expense of the petitioners and addressed to all to whom it may concern enjoining all and sundry "pending the promulgation of the decision of the Supreme Court on any appeal which may be taken from the decision of this Honorable Court dated January 12, 1965" to desist from disturbing the physical possession of petitioner Quirino Bolaños of the parcel of land object of this case comprising 13.2619 hectares and included in the area covered by said TCT Nos. 37677 and 37686 of the Registry of Deeds of Rizal.

It appears that in a case filed before the Court of First Instance of Rizal, Quezon City Branch, entitled "J. M. Tuason & Co., Inc., represented by its managing partner, Gregorio Araneta, Inc. versus Quirino Bolaños," the plaintiffs sought to recover possession of the parcel of land object of the present action from the defendant

44


therein, and who is now one of the petitioners; that decision having been rendered in favor of the plaintiff in said case and against the defendant, defendant Quirino Bolaños appealed the case to the Supreme Court (Exhibits "B," "B-1," to "B-7") which rendered a decision (No. L-4935, May 28, 1954), affirming the decision of the lower court.

In Civil Cases Nos. 3621, 3622, and 3623 of this Court, Branch II, a decision was rendered on January 18, 1965, declaring Original Certificate of Title No. 735 of the Registry of Deeds of Rizal as null and void. The petitioners made this decision as the basis of their action, alleging that the certificate of title covering the parcel of land now in litigation having been derived from Original Certificate of Title No. 735, it follows that these titles which were issued later should also be declared null and void in the event the aforementioned decision becomes final and executory, or the same is affirmed by the Supreme Court.

The petition merely prays for an Order to be published at the expense of the herein petitioners to enjoin all and sundry from disturbing the physical possession of petitioner Quirino Bolaños of the parcel of land object of the petition and which is included in the property covered by TCT Nos. 37677 and 37686. It is not disputed that the petitioners were in possession of the parcel of land object of this petition at the time that the civil action before the Court of First Instance of Rizal, Quezon City, was instituted and up to the present time (Exhibits "B-2" to "B-5").lâwphî1.ñèt The records show that the petition was published at the expense of the petitioners in the Daily Mirror in its issues of May 22, 29, and June 5, 1965 (Exhibit "A"). The decision of the Supreme Court in the aforementioned case was promulgated on May 28, 1954. Notwithstanding the lapse of more than ten years, it appears that said decision has not been executed and the defendant in said

case, Quirino Bolaños, who is one of the petitioners in the present case, is still in possession of the parcel of land in question. In view of the decisions in Civil Cases Nos. 3621, 3622, and 3623 of this Court, Branch II, as already stated above, it would appear that the position of the petitioner that their possession should not be disturbed until said decision is reversed by the appellate court, is tenable.

WHEREFORE, finding the petition to be well-taken, the same is granted, and it is hereby ordered that the respondents, their agents, and all persons acting for and in their behalf as well as all others are hereby enjoined from disturbing the physical possession of petitioner Quirino Bolaños of the parcel of land comprising 13.2619 hectares and included in the area covered by said TCT Nos. 37677 and 37686, said notice having been published in a newspaper of general circulation as already stated above.SO ORDERED.

In their brief, appellants have assigned the following alleged errors of the lower court:

1. THE LOWER COURT ERRED IN NOT HOLDING THAT PETITION IS ALREADY BARRED BY THE JUDGMENT IN G.R. NO. L-4935 ENTITLED J. M. TUASON & CO. INC., ET AL. VS. QUIRINO BOLAÑOS, PROMULGATED ON 28 MAY 1954 (95 Phil. 106)

2. THE LOWER COURT ERRED IN PROCEEDING TO HEAR THE PETITION NOTWITHSTANDING THE FACT THAT IT HAS NO JURISDICTION OVER THE SUBJECT MATTER OF THE PETITION.

3. THE LOWER COURT ERRED IN ASSUMING THAT THE DECISION IN G.R. NO. L-4935 HAS NOT YET BEEN EXECUTED AND THAT

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PETITIONER BOLAÑOS IS STILL IN POSSESSION OF THE LAND IN QUESTION.

4. THE LOWER COURT ERRED IN ISSUING THE ORDER DATED 5 AUGUST 1965.

As can be gleaned from the above-quoted order, the relief sought by appellees in their petition filed with the courta quo was virtually a general preliminary injunction against the whole world not to disturb their alleged possession of the parcels of land covered by Transfer Certificates of Title Nos. 37677 and 37686 of the Office of the Register of Deeds of Rizal issued to appellant J. M. Tuason & Co., Inc. upon the ground that in the three other civil cases Nos. 3621, 3622 and 3623 of the same Court of First Instance of Rizal, the said court has rendered a decision, still pending appeal, declaring Original Certificate of Title No. 735 from which the two above-mentioned titles have been derived null and void, principally for want of jurisdiction of the court that issued said original title on account of defects in the publication of the notices of the proceedings for their registration, the injunction to last, per their prayer, until the decision of this Court in the said three civil cases, albeit the impugned order itself does not specify the period of its duration. Petitioners sought such relief notwithstanding the admitted fact that in a previous case filed by appellant Tuason against appellees for the recovery of the possession of said land, that of Tuason vs. Bolaños, 93 Phil. 106, wherein appellees had alleged among their defenses that appellant Tuason's titles were obtained "thru fraud or error and without knowledge (of) or notice, either personal or thru publication to" said appellees, this Court upheld the validity of the questioned titles and affirmed the decision of the trial court "declaring defendant (now appellee Bolaños) to be without any right to the land in question and ordering him to restore possession thereof to plaintiff (now appellant) Tuason." In the said decision of this Court, it was held:

As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the decree of registration can no

longer be impugned on the ground of fraud, error or lack of notice to defendant, as more than one year has already elapsed from the issuance and entry of the decree. Neither could the decree be collaterally attached by any person claiming title to, or interest in, the land prior to the registration proceedings. (Soroñgon vs. Makalintal, [90 Phil. 259] 45 Off. Gaz. 3819.) Nor could title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac, [80 Phil. 415.] etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure possession under a decree of registration does not prescribe. (Francisco vs. Cruz, 43 Off. Gaz., 5105, 5109-5110). A recent decision of this Court on this point is that rendered in the case of Jose Alcantara, et al. vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.

In these circumstances, the appealed order is entirely propless. Leaving aside all the other issues raised in appellants' brief about res adjudicata, conclusiveness of judgment and conclusiveness of the respondents-appellants' Torrens Titles, it is obvious that the subject matter of appellee's petition was clearly beyond the competence and jurisdiction of the trial court sitting as it did in this case as a land registration court, this, even on the assumption, which is most doubtful, that such a general against-the-whole world preliminary injunction could be sought in any court, it being axiomatic that an auxiliary remedy cannot be secured unless there is a principal remedy to which it pertains. Once a land registration proceeding is terminated and a corresponding decree has been issued, the only matter of possession of the land involved that remains within the jurisdiction of the Land Registration Court is in regard to the issuance of the writ of possession, if one should be needed. No provision of the Land Registration Act (Act 496) or any other law has been cited by appellees and We know of

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none which authorizes the land registration court to resolve issues of possession, in any of its aspects, after the original registration proceedings have come to an end and a writ of possession has already been issued and implemented. Section 112 of Act 496 which is the only provision in the said law empowering the land registration court to issue post or after-registration orders refers exclusively to amendments and alterations of the title issued and has nothing to do with possession of the land at all.

The theory of appellees is not clear in their brief. Seemingly, they are of the belief that since the above-mentioned Original Certificate of Title No. 735 which was annulled was issued in the same LRC No. 7581 in which the present petition was filed, it should follow that the court a quo may act on their petition. Appellees' position is not correct. The mere fact that Original Certificate of Title No. 735 has been voided in so far as the titles involved in Civil Cases Nos. 3621, 3622 and 3623, derived from said original certificate of title, are concerned, does not mean that such declaration of nullity affects also the other titles, also derived from it but issued in the names of other persons who have neither been heard nor notified. This is elementary under the due process principle. Although incidents regarding any title derived from an original one are supposed to be filed in the same expediente or record of the original proceeding, the incidents regarding each title so derived constitute separate and distinct proceedings from those affecting the other titles derived from the same original title, and are, accordingly, always treated as such. Indeed, the very fact that ordinary civil actions had to be filed by the plaintiffs in those three civil cases relied upon by appellees proves that the relief sought by them in their petition in the court below may not be obtained in the form of a mere incident in the original registration proceedings or expediente. Besides, as already noted earlier, there is no showing that there is now pending in the lower court either an action or any kind of proceeding in which appellees are asking that Transfer Certificates of Title Nos. 37677 and 37686 of appellant Tuason should be annulled, assuming without deciding that such a relief could still be available to appellees inspite of Tuason vs. Bolaños, supra. Such being the case, the

trial court placed the cart before the horse in issuing its questioned order, for how could anyone be enjoined from disturbing the possession of somebody whose right to such possession has not even been alleged, much less established in an appropriate proceeding?

Having come to this conclusion, We consider it unnecessary to resolve the other issues raised by appellants.

WHEREFORE, the appealed order is declared to have been issued beyond the jurisdiction of the court a quo and it is hereby declared null and void and set aside, with costs against appellees.

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