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G.R. No.

108670 September 21, 1994


LBC EXPRESS, INC., petitioner,
vs.
THE COURT OF APPEALS, ADOLFO M. CARLOTO, and RURAL BANK OF LABASON,
INC., respondents.
Emmanuel D. Agustin for petitioner.
Bernardo P. Concha for private respondents.

PUNO, J.:
In this Petition for Review on Certiorari, petitioner LBC questions the decision 1 of respondent
Court of Appeals affirming the judgment of the Regional Trial Court of Dipolog City, Branch 8, awarding
moral and exemplary damages, reimbursement of P32,000.00, and costs of suit; but deleting the amount
of attorney's fees.

Private respondent Adolfo Carloto, incumbent President-Manager of private respondent Rural


Bank of Labason, alleged that on November 12, 1984, he was in Cebu City transacting business
with the Central Bank Regional Office. He was instructed to proceed to Manila on or before
November 21, 1984 to follow-up the Rural Bank's plan of payment of rediscounting obligations
with Central Bank's main office in Manila. 2 He then purchased a round trip plane ticket to Manila. He
also phoned his sister Elsie Carloto-Concha to send him ONE THOUSAND PESOS (P1,000.00) for his
pocket money in going to Manila and some rediscounting papers thru petitioner's LBC Office at Dipolog
City. 3

On November 16, 1984, Mrs. Concha thru her clerk, Adelina Antigo consigned thru LBC Dipolog
Branch the pertinent documents and the sum of ONE THOUSAND PESOS (P1,000.00) to
respondent Carloto at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. This was
evidenced by LBC Air Cargo, Inc., Cashpack Delivery Receipt No. 34805.
On November 17, 1984, the documents arrived without the cashpack. Respondent Carloto
made personal follow-ups on that same day, and also on November 19 and 20, 1984 at LBC's
office in Cebu but petitioner failed to deliver to him the cashpack.
Consequently, respondent Carloto said he was compelled to go to Dipolog City on November
24, 1984 to claim the money at LBC's office. His effort was once more in vain. On November 27,
1984, he went back to Cebu City at LBC's office. He was, however, advised that the money has
been returned to LBC's office in Dipolog City upon shipper's request. Again, he demanded for
the ONE THOUSAND PESOS (P1,000.00) and refund of FORTY-NINE PESOS (P49.00) LBC
revenue charges. He received the money only on December 15, 1984 less the revenue
charges.

Respondent Carloto claimed that because of the delay in the transmittal of the cashpack, he
failed to submit the rediscounting documents to Central Bank on time. As a consequence, his
rural bank was made to pay the Central Bank THIRTY-TWO THOUSAND PESOS (P32,000.00)
as penalty interest. 4 He allegedly suffered embarrassment and humiliation.
Petitioner LBC, on the other hand, alleged that the cashpack was forwarded via PAL to LBC
Cebu City branch on November 22, 1984. 5 On the same day, it was delivered at respondent Carloto's
residence at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. However, he was not around
to receive it. The delivery man served instead a claim notice to insure he would personally receive the
money. This was annotated on Cashpack Delivery Receipt No. 342805. Notwithstanding the said notice,
respondent Carloto did not claim the cashpack at LBC Cebu. On November 23, 1984, it was returned to
the shipper, Elsie Carloto-Concha at Dipolog City.

Claiming that petitioner LBC wantonly and recklessly disregarded its obligation, respondent
Carloto instituted an action for Damages Arising from Non-performance of Obligation docketed
as Civil Case No. 3679 before the Regional Trial Court of Dipolog City on January 4, 1985. On
June 25, 1988, an amended complaint was filed where respondent rural bank joined as one of
the plaintiffs and prayed for the reimbursement of THIRTY-TWO THOUSAND PESOS
(P32,000.00).
After hearing, the trial court rendered its decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered:
1. Ordering the defendant LBC Air Cargo, Inc. to pay unto plaintiff Adolfo M.
Carloto and Rural Bank of Labason, Inc., moral damages in the amount of
P10,000.00; exemplary damages in the amount of P5,000.00; attorney's fees in
the amount of P3,000.00 and litigation expenses of P1,000.00;
2. Sentencing defendant LBC Air Cargo, Inc., to reimburse plaintiff Rural Bank of
Labason, Inc. the sum of P32,000.00 which the latter paid as penalty interest to
the Central Bank of the Philippines as penalty interest for failure to rediscount its
due bills on time arising from the defendant's failure to deliver the cashpack, with
legal interest computed from the date of filing of this case; and
3. Ordering defendant to pay the costs of these proceedings.
SO ORDERED. 6
On appeal, respondent court modified the judgment by deleting the award of attorney's fees.
Petitioner's Motion for Reconsideration was denied in a Resolution dated January 11, 1993.
Hence, this petition raising the following questions, to wit:

1. Whether or not respondent Rural Bank of Labason Inc., being an artificial person should be
awarded moral damages.
2. Whether or not the award of THIRTY-TWO THOUSAND PESOS (P32,000.00) was made with
grave abuse of discretion.
3. Whether or not the respondent Court of Appeals gravely abused its discretion in affirming the
trial court's decision ordering petitioner LBC to pay moral and exemplary damages despite
performance of its obligation.
We find merit in the petition.
The respondent court erred in awarding moral damages to the Rural Bank of Labason, Inc., an
artificial person.
Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. 7 A corporation, being an artificial person and having existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental
anguish. 8 Mental suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life 9 all of which cannot be suffered by respondent bank as an artificial
person.

We can neither sustain the award of moral damages in favor of the private respondents. The
right to recover moral damages is based on equity. Moral damages are recoverable only if the
case falls under Article 2219 of the Civil Code in relation to Article 21. 10 Part of conventional
wisdom is that he who comes to court to demand equity, must come with clean hands.

In the case at bench, respondent Carloto is not without fault. He was fully aware that his rural
bank's obligation would mature on November 21, 1984 and his bank has set aside cash for
these bills payable. 11 He was all set to go to Manila to settle this obligation. He has received the
documents necessary for the approval of their rediscounting application with the Central Bank. He has
also received the plane ticket to go to Manila. Nevertheless, he did not immediately proceed to Manila but
instead tarried for days allegedly claiming his ONE THOUSAND PESOS (P1,000.00) pocket money. Due
to his delayed trip, he failed to submit the rediscounting papers to the Central Bank on time and his bank
was penalized THIRTY-TWO THOUSAND PESOS (P32,000.00) for failure to pay its obligation on its due
date. The undue importance given by respondent Carloto to his ONE THOUSAND PESOS (P1,000.00)
pocket money is inexplicable for it was not indispensable for him to follow up his bank's rediscounting
application with Central Bank. According to said respondent, he needed the money to "invite people for a
snack or dinner." 12 The attitude of said respondent speaks ill of his ways of business dealings and cannot
be countenanced by this Court. Verily, it will be revolting to our sense of ethics to use it as basis for
awarding damages in favor of private respondent Carloto and the Rural Bank of Labason, Inc.

We also hold that respondents failed to show that petitioner LBC's late delivery of the cashpack
was motivated by personal malice or bad faith, whether intentional or thru gross negligence. In
fact, it was proved during the trial that the cashpack was consigned on November 16, 1984, a

Friday. It was sent to Cebu on November 19, 1984, the next business day. Considering this
circumstance, petitioner cannot be charged with gross neglect of duty. Bad faith under the law
can not be presumed; it must be established by clearer and convincing evidence. 13 Again, the
unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to have
acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences
of the branch of the obligation which the parties had foreseen or could reasonable have foreseen. The
damages, however, will not include liability for moral damages. 14

Prescinding from these premises, the award of exemplary damages made by the respondent
court would have no legal leg to support itself. Under Article 2232 of the Civil Code, in a
contractual or quasi-contractual relationship, exemplary damages may be awarded only if the
defendant had acted in "a wanton, fraudulent, reckless, oppressive, or malevolent manner." The
established facts of not so warrant the characterization of the action of petitioner LBC.
IN VIEW WHEREOF, the Decision of the respondent court dated September 30, 1992 is
REVERSED and SET ASIDE; and the Complaint in Civil Case No. 3679 is ordered DISMISSED.
No costs.
SO ORDERED.
G.R. No. 141994

January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,


vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF
MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000 Resolution
of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with
modification the 14 December 1992 Decision3 of the Regional Trial Court of Legazpi City,
Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas Broadcasting Network,
Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and ordered
them to solidarily pay Ago Medical and Educational Center-Bicol Christian College of Medicine
moral damages, attorneys fees and costs of suit.
The Antecedents
"Expos" is a radio documentary4 program hosted by Carmelo Mel Rima ("Rima") and
Hermogenes Jun Alegre ("Alegre").5 Expos is aired every morning over DZRC-AM which is

owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Expos" is heard over Legazpi City,
the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational CenterBicol Christian College of Medicine ("AMEC") and its administrators. Claiming that the
broadcasts were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of AMECs College of
Medicine, filed a complaint for damages7 against FBNI, Rima and Alegre on 27 February 1990.
Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at AMECBCCM, advise them to pass all subjects because if they fail in any subject they will repeat
their year level, taking up all subjects including those they have passed already. Several
students had approached me stating that they had consulted with the DECS which told them
that there is no such regulation. If [there] is no such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course is
not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject does not
have an instructor - such greed for money on the part of AMECs administration. Take the
subject Anatomy: students would pay for the subject upon enrolment because it is offered by the
school. However there would be no instructor for such subject. Students would be informed that
course would be moved to a later date because the school is still searching for the appropriate
instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and has
been surviving for the past few years since its inception because of funds support from foreign
foundations. If you will take a look at the AMEC premises youll find out that the names of the
buildings there are foreign soundings. There is a McDonald Hall. Why not Jose Rizal or
Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign
foundations for AMEC is substantial, isnt it? With the report which is the basis of the expose in
DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow
of support of foreign foundations who assist the medical school on the basis of the latters
purpose. But if the purpose of the institution (AMEC) is to deceive students at cross purpose
with its reason for being it is possible for these foreign foundations to lift or suspend their
donations temporarily.8
xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and
the AMEC-Institute of Mass Communication in their effort to minimize expenses in terms
of salary are absorbing or continues to accept "rejects". For example how many teachers in
AMEC are former teachers of Aquinas University but were removed because of immorality?
Does it mean that the present administration of AMEC have the total definite moral foundation
from catholic administrator of Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical misfits. Probably they only
qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family
name implies. She is too old to work, being an old woman. Is the AMEC administration
exploiting the very [e]nterprising or compromising and undemanding Lola? Could it be that
AMEC is just patiently making use of Dean Justita Lola were if she is very old. As in
atmospheric situation zero visibility the plane cannot land, meaning she is very old, low pay
follows. By the way, Dean Justita Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but AMEC has patiently made use
of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit
people. What does this mean? Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no
longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is not
fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly can get
by thats why she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the students
would be influenced by evil. When they become members of society outside of campus will
be liabilities rather than assets.What do you expect from a doctor who while studying at
AMEC is so much burdened with unreasonable imposition? What do you expect from a student
who aside from peculiar problems because not all students are rich in their struggle to
improve their social status are even more burdened with false regulations. xxx9(Emphasis
supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the supposed
exposs, FBNI, Rima and Alegre "transmitted malicious imputations, and as such, destroyed
plaintiffs (AMEC and Ago) reputation." AMEC and Ago included FBNI as defendant for allegedly

failing to exercise due diligence in the selection and supervision of its employees, particularly
Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer10 alleging
that the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they
were plainly impelled by a sense of public duty to report the "goings-on in AMEC, [which is] an
institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo
Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss11 on FBNIs behalf. The
trial court denied the motion to dismiss. Consequently, FBNI filed a separate Answer claiming
that it exercised due diligence in the selection and supervision of Rima and Alegre. FBNI
claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training program after passing the interview.
FBNI likewise claimed that it always reminds its broadcasters to "observe truth, fairness and
objectivity in their broadcasts and to refrain from using libelous and indecent language."
Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa
Pilipinas ("KBP") accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision12 finding FBNI and Alegre liable for
libel except Rima. The trial court held that the broadcasts are libelous per se. The trial court
rejected the broadcasters claim that their utterances were the result of straight reporting
because it had no factual basis. The broadcasters did not even verify their reports before airing
them to show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation was when
he agreed with Alegres expos. The trial court found Rimas statement within the "bounds of
freedom of speech, expression, and of the press." The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree
of damages caused by the controversial utterances, which are not found by this court to
be really very serious and damaging, and there being no showing that indeed the
enrollment of plaintiff school dropped,defendants Hermogenes "Jun" Alegre, Jr. and Filipinas
Broadcasting Network (owner of the radio station DZRC), are hereby jointly and severally
ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian College of Medicine
(AMEC-BCCM) the amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of
attorneys fees, and to pay the costs of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other,
appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial courts
judgment with modification. The appellate court made Rima solidarily liable with FBNI and
Alegre. The appellate court denied Agos claim for damages and attorneys fees because the

broadcasts were directed against AMEC, and not against her. The dispositive portion of the
Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification
that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.14
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in
its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption of
malice. The Court of Appeals found Rima and Alegres claim that they were actuated by their
moral and social duty to inform the public of the students gripes as insufficient to justify the
utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals
ruled that the broadcasts were made "with reckless disregard as to whether they were true or
false." The appellate court pointed out that FBNI, Rima and Alegre failed to present in court any
of the students who allegedly complained against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to the Court of Appeals, these
circumstances cast doubt on the veracity of the broadcasters claim that they were "impelled by
their moral and social duty to inform the public about the students gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMEC-BCCM
is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services
of Dean Justita Lola to minimize expenses on its employees salaries; and (3) AMEC burdened
the students with unreasonable imposition and false regulations."16
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and
supervision of its employees for allowing Rima and Alegre to make the radio broadcasts without
the proper KBP accreditation. The Court of Appeals denied Agos claim for damages and
attorneys fees because the libelous remarks were directed against AMEC, and not against her.
The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral
damages, attorneys fees and costs of suit.
1awphi1.nt

Issues
FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;


II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and
Alegre against AMEC.17 While AMEC did not point out clearly the legal basis for its complaint, a
reading of the complaint reveals that AMECs cause of action is based on Articles 30 and 33 of
the Civil Code. Article 3018 authorizes a separate civil action to recover civil liability arising from a
criminal offense. On the other hand, Article 3319 particularly provides that the injured party may
bring a separate civil action for damages in cases of defamation, fraud, and physical injuries.
AMEC also invokes Article 1920 of the Civil Code to justify its claim for damages. AMEC cites
Articles 217621 and 218022 of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary,
or any act or omission, condition, status, or circumstance tending to cause the dishonor,
discredit, or contempt of a natural or juridical person, or to blacken the memory of one who is
dead.24
There is no question that the broadcasts were made public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks
such as "greed for money on the part of AMECs administrators"; "AMEC is a dumping ground,
garbage of xxx moral and physical misfits"; and AMEC students who graduate "will be liabilities
rather than assets" of the society are libelous per se. Taken as a whole, the broadcasts suggest
that AMEC is a money-making institution where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and
Alegre were plainly impelled by their civic duty to air the students gripes. FBNI alleges that
there is no evidence that ill will or spite motivated Rima and Alegre in making the broadcasts.
FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs side and gave
Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since there is
no malice, there is no libel.

FBNIs contentions are untenable.


Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of the
students. As hosts of a documentary or public affairs program, Rima and Alegre should have
presented the public issues "free from inaccurate and misleading information."26 Hearing the
students alleged complaints a month before the expos,27 they had sufficient time to verify their
sources and information. However, Rima and Alegre hardly made a thorough investigation of the
students alleged gripes. Neither did they inquire about nor confirm the purported irregularities in
AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students "because they were many and not
because there is proof that what they are saying is true."28 This plainly shows Rima and Alegres
reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not "the result of straight reporting." Significantly,
some courts in the United States apply the privilege of "neutral reportage" in libel cases
involving matters of public interest or public figures. Under this privilege, a republisher
who accurately and disinterestedly reports certain defamatory statements made against public
figures is shielded from liability, regardless of the republishers subjective awareness of the truth
or falsity of the accusation.29 Rima and Alegre cannot invoke the privilege of neutral reportage
because unfounded comments abound in the broadcasts. Moreover, there is no existing
controversy involving AMEC when the broadcasts were made. The privilege of neutral reportage
applies where the defamed person is a public figure who is involved in an existing controversy,
and a party to that controversy makes the defamatory statement.30
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v.
Court of Appeals,31 FBNI contends that the broadcasts "fall within the coverage of qualifiedly
privileged communications" for being commentaries on matters of public interest. Such being
the case, AMEC should prove malice in fact or actual malice. Since AMEC allegedly failed to
prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of fair
comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid defense in
an action for libel or slander. The doctrine of fair comment means that while in general every
discreditable imputation publicly made is deemed false, because every man is presumed
innocent until his guilt is judicially proved, and every false imputation is deemed malicious,
nevertheless, when the discreditable imputation is directed against a public person in his public
capacity, it is not necessarily actionable. In order that such discreditable imputation to a
public official may be actionable, it must either be a false allegation of fact or a comment
based on a false supposition. If the comment is an expression of opinion, based on

established facts, then it is immaterial that the opinion happens to be mistaken, as long as it
might reasonably be inferred from the facts.32(Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is "genuinely
imbued with public interest." The welfare of the youth in general and AMECs students in
particular is a matter which the public has the right to know. Thus, similar to the newspaper
articles in Borjal, the subject broadcasts dealt with matters of public interest. However, unlike
in Borjal, the questioned broadcasts are not based on established facts. The record supports
the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students and
parents against plaintiff, yet, defendants have not presented in court, nor even gave name of a
single student who made the complaint to them, much less present written complaint or petition
to that effect. To accept this defense of defendants is too dangerous because it could easily give
license to the media to malign people and establishments based on flimsy excuses that there
were reports to them although they could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they aired it,
in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical
Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broadcast, accreditation to offer Physical
Therapy course had already been given the plaintiff, which certificate is signed by no less than
the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal).
Defendants could have easily known this were they careful enough to verify. And yet,
defendants were very categorical and sounded too positive when they made the erroneous
report that plaintiff had no permit to offer Physical Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald
Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing.
Although a big building of plaintiff school was given the name Mcdonald building, that was only
in order to honor the first missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago.
Contrary to the claim of defendants over the air, not a single centavo appears to be received by
plaintiff school from the aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when
medical students fail in one subject, they are made to repeat all the other subject[s], even those
they have already passed, nor their claim that the school charges laboratory fees even if there
are no laboratories in the school. No evidence was presented to prove the bases for these
claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility already.
Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older
people prove to be effective teachers like Supreme Court Justices who are still very much in
demand as law professors in their late years. Counsel for defendants is past 75 but is found by
this court to be still very sharp and effective. So is plaintiffs counsel.
l^vvphi1.net

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but
is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our society is a
mere conclusion. Being from the place himself, this court is aware that majority of the medical
graduates of plaintiffs pass the board examination easily and become prosperous and
responsible professionals.33
Had the comments been an expression of opinion based on established facts, it is immaterial
that the opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.34 However, the comments of Rima and Alegre were not backed up by facts. Therefore, the
broadcasts are not privileged and remain libelousper se.
The broadcasts also violate the Radio Code35 of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias,
prejudice andinaccurate and misleading information. x x x Furthermore, the station
shall strive to present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs, public
issues and commentary programs so that they conform to the provisions and standards
of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer to
protect public interest, general welfare and good order in the presentation of public
affairs and public issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the
code of ethical conduct governing practitioners in the radio broadcast industry. The Radio Code
is a voluntary code of conduct imposed by the radio broadcast industry on its own members.
The Radio Code is a public warranty by the radio broadcast industry that radio broadcast

practitioners are subject to a code by which their conduct are measured for lapses, liability and
sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the
code of conduct of their profession, just like other professionals. A professional code of conduct
provides the standards for determining whether a person has acted justly, honestly and with
good faith in the exercise of his rights and performance of his duties as required by Article
1937 of the Civil Code. A professional code of conduct also provides the standards for
determining whether a person who willfully causes loss or injury to another has acted in a
manner contrary to morals or good customs under Article 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation.39
A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.40 The Court of Appeals cites Mambulao Lumber Co. v. PNB, et
al.41 to justify the award of moral damages. However, the Courts statement in Mambulao that "a
corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages" is an obiter dictum.42
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 221943 of the Civil
Code. This provision expressly authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is
a natural or juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.44
Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes
only in mitigation of damages.46Neither in such a case is the plaintiff required to introduce
evidence of actual damages as a condition precedent to the recovery of some damages.47 In this
case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows that
even though the broadcasts were libelous per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the award of moral damages
from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the
award of attorneys fees. FBNI adds that the instant case does not fall under the enumeration in
Article 220848 of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim
for attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees.
Moreover, both the trial and appellate courts failed to explicitly state in their respective decisions
the rationale for the award of attorneys fees.49 In Inter-Asia Investment Industries, Inc. v.
Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather
than the rule, and counsels fees are not to be awarded every time a party wins a suit. The
power of the court to award attorneys fees under Article 2208 of the Civil Code demands
factual, legal and equitable justification, without which the award is a conclusion without
a premise, its basis being improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only in the decretal portion thereof,
the legal reason for the award of attorneys fees.51 (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it "lies within the discretion
of the court and depends upon the circumstances of each case," the Court of Appeals failed to
point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorneys fees and
costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages
and attorneys fees because it exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima
and Alegre, undergo a "very regimented process" before they are allowed to go on air. "Those
who apply for broadcaster are subjected to interviews, examinations and an apprenticeship
program."
FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a
broadcaster. FBNI points out that the "minor deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not exercise the diligence of a good father of a
family in selecting and supervising them." Rimas accreditation lapsed due to his non-payment
of the KBP annual fees while Alegres accreditation card was delayed allegedly for reasons
attributable to the KBP Manila Office. FBNI claims that membership in the KBP is merely
voluntary and not required by any law or government regulation.
FBNIs arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the
tort which they commit.52 Joint tort feasors are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit.53 Thus, AMEC correctly anchored its cause
of action against FBNI on Articles 2176 and 2180 of the Civil Code.
1a\^/phi1.net

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for
damages arising from the libelous broadcasts. As stated by the Court of Appeals, "recovery for
defamatory statements published by radio or television may be had from the owner of the
station, a licensee, the operator of the station, or a person who procures, or participates in,
the making of the defamatory statements."54 An employer and employee are solidarily liable for
a defamatory statement by the employee within the course and scope of his or her employment,
at least when the employer authorizes or ratifies the defamation.55 In this case, Rima and Alegre
were clearly performing their official duties as hosts of FBNIs radio program Expos when they
aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the
scope of their work at that time. There was likewise no showing that FBNI did not authorize and
ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection andsupervision of its employees, particularly Rima and Alegre. FBNI merely
showed that it exercised diligence in theselection of its broadcasters without introducing any
evidence to prove that it observed the same diligence in thesupervision of Rima and Alegre.
FBNI did not show how it exercised diligence in supervising its broadcasters. FBNIs alleged
constant reminder to its broadcasters to "observe truth, fairness and objectivity and to refrain
from using libelous and indecent language" is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of the broadcasters on the industrys code of
conduct, sufficient information on libel laws, and continuous evaluation of the broadcasters
performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as
broadcasters, bearing in mind their qualifications." However, no clear and convincing evidence
shows that Rima and Alegre underwent FBNIs "regimented process" of application.
Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,56 which is one of FBNIs requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcasters strong commitment to
observe the broadcast industrys rules and regulations. Clearly, these circumstances show
FBNIs lack of diligence in selecting andsupervising Rima and Alegre. Hence, FBNI is solidarily
liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and
Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the
MODIFICATION that the award of moral damages is reduced from P300,000 to P150,000 and
the award of attorneys fees is deleted. Costs against petitioner.

SO ORDERED.

ERMAN C. CRYSTAL, LAMBERTO G.R. No. 172428


C. CRYSTAL, ANN GEORGIA C.
SOLANTE, and DORIS C. Present:
MAGLASANG, as Heirs of
Deceased SPOUSES RAYMUNDO QUISUMBING, J.,
I. CRYSTAL and DESAMPARADOS Chairperson,
C. CRYSTAL, CARPIO MORALES,
Petitioners, TINGA,
VELASCO, JR., and
BRION, JJ.
- versus Promulgated:
November 28, 2008
BANK OF THE PHILIPPINE ISLANDS,
Respondent.
x----------------------------------------------------------------------------x

DECISION
TINGA, J.:
Before us is a Petition for Review[1] of the Decision[2] and Resolution[3] of the Court
of Appeals dated 24 October 2005 and 31 March 2006, respectively, in CA G.R.
CV No. 72886, which affirmed the 8 June 2001 decision of the Regional Trial
Court, Branch 5, of Cebu City.[4]
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained
a P300,000.00 loan in behalf of the Cebu Contractors Consortium Co. (CCCC)
from the Bank of the Philippine Islands-Butuan branch (BPI-Butuan). The loan

was secured by a chattel mortgage on heavy equipment and machinery of


CCCC. On the same date, the spouses executed in favor of BPI-Butuan a
Continuing Suretyship[5] where they bound themselves as surety of CCCC in the
aggregate principal sum of not exceeding P300,000.00.Thereafter, or on 29 March
1979, Raymundo Crystal executed a promissory note[6] for the amount
of P300,000.00, also in favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from
BPI, Cebu City branch (BPI-Cebu City). The renewal was evidenced by a
promissory note[7] dated 13 August 1979, signed by the spouses in their personal
capacities and as managing partners of CCCC. The promissory note states that the
spouses are jointly and severally liable with CCCC. It appears that before the
original loan could be granted, BPI-Cebu City required CCCC to put up a security.

However, CCCC had no real property to offer as security for the loan; hence, the
spouses executed a real estate mortgage[8] over their own real property on 22
September 1977.[9] On 3 October 1977, they executed another real estate
mortgage over the same lot in favor of BPI-Cebu City, to secure an additional loan
of P20,000.00 of CCCC.[10]
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they
became due. CCCC, as well as the spouses, failed to pay their obligations despite
demands. Thus, BPI resorted to the foreclosure of the chattel mortgage and the real
estate mortgage. The foreclosure sale on the chattel mortgage was initially stalled
with the issuance of a restraining order against BPI. [11] However,
following BPIs compliance with the necessary requisites of extrajudicial
foreclosure, the foreclosure sale on the chattel mortgage was consummated on 28
February 1988, with the proceeds amounting to P240,000.00 applied to the loan
from BPI-Butuan which had then reached P707,393.90.[12] Meanwhile, on 7 July
1981, Insular Bank of Asia and America (IBAA), through its Vice-President for
Legal and Corporate Affairs, offered to buy the lot subject of the two (2) real

estate mortgages and to pay directly the spouses indebtedness in exchange for the
release of the mortgages. BPI rejected IBAAs offer to pay.[13]
BPI filed a complaint for sum of money against CCCC and the spouses before
the Regional Trial Court of Butuan City (RTC Butuan), seeking to recover the
deficiency of the loan of CCCC and the spouses with BPI-Butuan. The trial court
ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial
foreclosure of the spouses mortgaged property.[14]
On 10 April 1985, the spouses filed an action for Injunction With Damages,
With A Prayer For A Restraining Order and/ or Writ of Preliminary Injunction.
[15]
The spouses claimed that the foreclosure of the real estate mortgages is illegal
because BPI should have exhausted CCCCs properties first, stressing that they are
mere guarantors of the renewed loans. They also prayed that they be
awarded moral and exemplary damages, attorneys fees, litigation expenses and
cost of suit. Subsequently, the spouses filed an amended complaint, [16] additionally
alleging that CCCC had opened and maintained a foreign currency savings account
(FCSA-197) with bpi, Makati branch (BPI-Makati), and that said FCSA was used
as security for a P450,000.00 loan also extended by BPI-Makati. The P450,000.00
loan was allegedly paid, and thereafter the spouses demanded the return of the
FCSA passbook. BPI rejected the demand; thus, the spouses were unable to
withdraw from the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses complaint and ordered them to pay moral and
exemplary damages and attorneys fees to BPI.[17] It ruled that since the spouses
agreed to bind themselves jointly and severally, they are solidarily liable for the
loans; hence, BPI can validly foreclose the two real estate mortgages. Moreover,
being guarantors-mortgagors, the spouses are not entitled to the benefit of
exhaustion. Anent the FCSA, the trial court found that CCCC originally had FCDU
SA No. 197 with BPI, Dewey Boulevard branch, which was transferred to BPIMakati as FCDU SA 76/0035, at the request of Desamparados Crystal. FCDU SA
76/0035 was thus closed, but Desamparados Crystal failed to surrender the
passbook because it was lost. The transferred FCSA in BPI-Makati was the one

used as security for CCCCs P450,000.00 loan from BPI-Makati. CCCC was no
longer allowed to withdraw from FCDU SA No. 197 because it was already closed.

The spouses appealed the decision of the trial court to the Court of Appeals, but
their appeal was dismissed.[18] The spouses moved for the reconsideration of the
decision, but the Court of Appeals also denied their motion for reconsideration.
[19]
Hence, the present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the failure
of the spouses to pay the BPI-Cebu City loan of P120,000.00 was due
to BPIs illegal refusal to accept payment for the loan unless the P300,000.00 loan
from BPI-Butuan would also be paid. Consequently, in view of BPIs unjust refusal
to accept payment of the BPI-Cebu City loan, the loan obligation of the spouses
was extinguished, petitioners contend.
The contention has no merit. Petitioners rely on IBAAs offer to purchase the
mortgaged lot from them and to directly pay BPI out of the proceeds thereof to
settle the loan.[20]BPIs refusal to agree to such payment scheme cannot extinguish
the spouses loan obligation. In the first place, IBAA is not privy to the loan
agreement or the promissory note between the spouses and BPI. Contracts, after
all, take effect only between the parties, their successors in interest, heirs

and assigns.[21] Besides, under Art. 1236 of the Civil Code, the creditor is not bound
to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary. We see no
stipulation in the promissory note which states that a third person may fulfill the
spouses obligation. Thus, it is clear that the spouses alone bear responsibility for
the same.
In any event, the promissory note is the controlling repository of the obligation of
the spouses. Under the promissory note, the spouses defined the parameters of their
obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu
Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00),
Philippine Currency, subject to periodic installments on the principal as follows: P30,000.00
quarterly amortization starting September 28, 1979. x x x [22]

A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. [23] A liability is solidary only when
the
obligation
expressly
so states, when the law so provides or when the nature of the

obligation so requires.[24] Thus, when the obligor undertakes to be jointly and


severally liable, it means that the obligation is solidary,[25] such as in this case. By
stating I/we promise to pay, jointly and severally, to the BANK OF THE
PHILIPPINE ISLANDS, the spouses agreed to be sought out and be demanded
payment from, by BPI. BPI did demand payment from them, but they failed to
comply with their obligation, prompting BPIs valid resort to the foreclosure of the
chattel mortgage and the real estate mortgages.
More importantly, the promissory note, wherein the spouses undertook to be
solidarily liable for the principal loan, partakes the nature of a suretyship and
therefore is an additional security for the loan. Thus we held in one case that if
solidary liability was instituted to guarantee a principal obligation, the law deems
the contract to be one of suretyship. [26] And while a contract of a surety is in
essence secondary only to a valid principal obligation, the suretys liability to the
creditor or promisee of the principal is said to be direct, primary, and absolute; in
other words, the surety is directly and equally bound with the principal. The surety
therefore becomes liable for the debt or duty of another even if he possesses no
direct or personal interest over the obligations nor does he receive any
benefit therefrom.[27]
Petitioners contend that the Court of Appeals erred in not granting their
counterclaims, considering that they suffered moral damages in view of the unjust
refusal of BPI to accept the payment scheme proposed by IBAA and the allegedly
unjust and illegal foreclosure of the real estate mortgages on their property.
[28]
Conversely, they argue that the Court of Appeals erred in awarding moral
damages to BPI, which is a corporation, as well as exemplary damages, attorneys
fees and expenses of litigation.[29]
We do not agree. Moral damages are meant to compensate the claimant for any
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings,moral shock, social humiliation and similar injuries unjustly
caused.[30] Such damages, to be recoverable, must be the proximate result of a
wrongful act or omission the factual basis for which is satisfactorily established by

the aggrieved party.[31] There being no wrongful or unjust act on the part of BPI in
demanding payment from them and in seeking the foreclosure of the chattel and
real estate mortgages, there is no lawful basis for award of damages in favor of
the spouses.

Neither is BPI entitled to moral damages. A juridical person is generally not


entitled to moral damages because, unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental
anguish or moral shock.[32] The Court of Appeals found BPI as being famous and
having gained its familiarity and respect not only in the Philippines but also in the
whole world because of its good will and good reputation must protect and defend
the same against any unwarranted suit such as the case at bench. [33] In holding that
BPI is entitled to moral damages, the Court of Appeals relied on the case of People
v. Manero,[34] wherein the Court ruled that [i]t is only when a juridical person has a
good reputation that is debased, resulting in social humiliation, that moral damages
may be awarded.[35]
We do not agree with the Court of Appeals. A statement similar to that made by the
Court in Manero can be found in the case of Mambulao Lumber Co. v. PNB, et al.,
[36]
thus:

x x x 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. A corporation may have good
reputation which, if besmirched may also be a ground for the award
of moral damages. x x x (Emphasis supplied)

Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et


al.,[37] and Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-BCCM),[38] the Court held that
the statements in Manero and Mambulao were mere obiter dicta, implying that the
award of moral damages to corporations is not a hard and fast rule. Indeed, while
the Court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis
of the damage and its causal relation to the defendants acts. This is so because
moral damages, though incapable of pecuniary estimation, are in the category of an
award designed to compensate the claimant for actual injury suffered and not to
impose a penalty on the wrongdoer.[39]
The spouses complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. Although the institution of a clearly
unfounded civil suit can at times be a legal

justification for an award of attorney's fees, such filing, however, has almost
invariably been held not to be a ground for an award of moral damages. The
rationale for the rule is that the law could not have meant to impose a penalty on
the right to litigate. Otherwise, moral damages must every time be awarded in
favor of the prevailing defendant against an unsuccessful plaintiff.[40] BPI may have
been inconvenienced by the suit, but we do not see how it could have possibly
suffered besmirched reputation on account of the single suit alone. Hence, the
award of moral damages should be deleted.
The awards of exemplary damages and attorneys fees, however, are
proper. Exemplary damages, on the other hand, are imposed by way of example or
correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while attorneys fees are allowed
when exemplary damages are awarded and when the party to a suit is compelled to
incur expenses to protect his interest.[41] The spouses instituted their complaint
against BPI notwithstanding the fact that they were the ones who failed to pay their
obligations. Consequently, BPI was forced to litigate and defend its interest. For
these reasons, BPI is entitled to the awards of exemplary damages and attorneys
fees.

WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court
of Appeals dated 24 October 2005 and 31 March 2006, respectively, are hereby
AFFIRMED, with the MODIFICATION that the award of moral damages to Bank
of the Philippine Islands is DELETED.
Costs against the petitioners.
SO ORDERED.
G.R. No. L-12719

May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,


vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the
Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de
Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise
penalty, allegedly due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a
civic corporation organized under the laws of the Philippines with an original authorized capital
stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it
"proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de
bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes
generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y
denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y
accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the
articles or by-laws is there a provision relative to dividends and their distribution, although it is
covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be
donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from
the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and
short orders to its members and their guests. The bar-restaurant was a necessary incident to
the operation of the club and its golf-course. The club is operated mainly with funds derived
from membership fees and dues. Whatever profits it had, were used to defray its overhead
expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from
the re-valuation of its real properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its
bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated December
22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the
following sums:
As percentage tax on its gross receipts
during the tax years 1946 to 1951

P9,599.07

Surcharge therein
As fixed tax for the years 1946 to 1952
Compromise penalty
The Club wrote the Collector, requesting for the cancellation of the assessment. The request
having been denied, the Club filed the instant petition for review.

2,399.77
70.00
500.00

The dominant issues involved in this case are twofold:


1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code,
under which the assessment was made, in connection with the operation of its bar and
restaurant, during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a
business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos
for each calendar year or fraction thereof in which such person shall engage in said business."
Section 183 provides in general that "the percentage taxes on business shall be payable at the
end of each calendar quarter in the amount lawfully due on the business transacted during each
quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of
restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and
keepers of bar and cafes where wines or liquors are served five per centum of their gross
receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by
these sections, does not ipso facto attach by mere reason of the operation of a bar and
restaurant. For the liability to attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to
activities or affairs where profit is the purpose or livelihood is the motive, and the term business
when used without qualification, should be construed in its plain and ordinary meaning,
restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the
BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full
definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo,
Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila
Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class
and denomination, for the healthful recreation and entertainment of its stockholders and
members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to
a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from
membership fees and dues; that the Club's bar and restaurant catered only to its members and
their guests; that there was in fact no cash dividend distribution to its stockholders and that
whatever was derived on retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the business of an operator of bar and restaurant (same
authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such
fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are
necessarily incidental to the primary object of developing and cultivating sports for the healthful
recreation and entertainment of the stockholders and members. That a Club makes some profit,
does not make it a profit-making Club. As has been remarked a club should always strive,
whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R.
No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276,
Oct. 23, 1956).
1wph1.t

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club
is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent
Club is divided into shares, does not detract from the finding of the trial court that it is not
engaged in the business of operator of bar and restaurant. What is determinative of whether or
not the Club is engaged in such business is its object or purpose, as stated in its articles and bylaws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the
commercial aspect of the business prosecuted, but may be shown by extrinsic evidence,
including the by-laws and the method of operation. From the extrinsic evidence adduced, the
Tax Court concluded that the Club is not engaged in the business as a barkeeper and
restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an authority to distribute to the holders of such shares,
dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No.
1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an
authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot,
therefore, be considered a stock corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, nonprofit, nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector
v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an
operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it
follows that it is not liable for any penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed without costs.
G.R. No. 79182 September 11, 1991
PNOC-ENERGY DEVELOPMENT CORPORATION, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION (Third Division) and DANILO
MERCADO, respondents.
Bacorro & Associates for petitioner.
Alberto L. Dalmacion for private respondent.

PARAS, J.:p
This is a petition for certiorari to set aside the Resolution * dated July 3, 1987 of respondent National Labor
Relations Commission (NLRC for brevity) which affirmed the decision dated April 30, 1986 of Labor Arbiter Vito J. Minoria of the NLRC,
Regional Arbitration Branch No. VII at Cebu City in Case No. RAB-VII-0556-85 entitled "Danilo Mercado, Complainant, vs. Philippine
National Oil Company-Energy Development Corporation, Respondent", ordering the reinstatement of complainant Danilo Mercado and the
award of various monetary claims.

The factual background of this case is as follows:


Private respondent Danilo Mercado was first employed by herein petitioner Philippine National
Oil Company-Energy Development Corporation (PNOC-EDC for brevity) on August 13, 1979.
He held various positions ranging from clerk, general clerk to shipping clerk during his
employment at its Cebu office until his transfer to its establishment at Palimpinon, Dumaguete,
Oriental Negros on September 5, 1984. On June 30, 1985, private respondent Mercado was
dismissed. His last salary was P1,585.00 a month basic pay plus P800.00 living allowance
(Labor Arbiter's Decision, Annex "E" of Petition, Rollo, p. 52).
The grounds for the dismissal of Mercado are allegedly serious acts of dishonesty committed as
follows:
1. On ApriI 12, 1985, Danilo Mercado was ordered to purchase 1,400 pieces of
nipa shingles from Mrs. Leonardo Nodado of Banilad, Dumaguete City, for the
total purchase price of Pl,680.00. Against company policy, regulations and
specific orders, Danilo Mercado withdrew the nipa shingles from the supplier but
paid the amount of P1,000.00 only. Danilo Mercado appropriated the balance of
P680.00 for his personal use;
2. In the same transaction stated above, the supplier agreed to give the company
a discount of P70.00 which Danilo Mercado did not report to the company;
3. On March 28, 1985, Danilo Mercado was instructed to contract the services of
Fred R. Melon of Dumaguete City, for the fabrication of rubber stamps, for the
total amount of P28.66. Danilo Mercado paid the amount of P20.00 to Fred R.
Melon and appropriated for his personal use the balance of P8.66.
In addition, private respondent, Danilo Mercado violated company rules and
regulations in the following instances:
1. On June 5, 1985, Danilo Mercado was absent from work without leave, without
proper turn-over of his work, causing disruption and delay of company work
activities;
2. On June 15, 1985, Danilo Mercado went on vacation leave without prior leave,
against company policy, rules and regulations. (Petitioner's Memorandum, Rollo,
p. 195).
On September 23, 1985, private respondent Mercado filed a complaint for illegal dismissal,
retirement benefits, separation pay, unpaid wages, etc. against petitioner PNOC-EDC before the
NLRC Regional Arbitration Branch No. VII docketed as Case No. RAB-VII-0556-85.
After private respondent Mercado filed his position paper on December 16, 1985 (Annex "B" of
the Petition, Rollo, pp. 28-40), petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss

on January 15, 1986, praying for the dismissal of the case on the ground that the Labor Arbiter
and/or the NLRC had no jurisdiction over the case (Annex "C" of the Petition, Rollo, pp. 41-45),
which was assailed by private respondent Mercado in his Opposition to the Position
Paper/Motion to Dismiss dated March 12, 1986 (Annex "D" of the Petition, Rollo, pp. 46-50).
The Labor Arbiter ruled in favor of private respondent Mercado. The dispositive onion of said
decision reads as follows:
WHEREFORE, in view of the foregoing, respondents are hereby ordered:
1) To reinstate complainant to his former position with full back wages from the
date of his dismissal up to the time of his actual reinstatement without loss of
seniority rights and other privileges;
2) To pay complainant the amount of P10,000.00 representing his personal share
of his savings account with the respondents;
3) To pay complainants the amount of P30,000.00 moral damages; P20,000.00
exemplary damages and P5,000.00 attorney's fees;
4) To pay complainant the amount of P792.50 as his proportionate 13th month
pay for 1985.
Respondents are hereby further ordered to deposit the aforementioned amounts
with this Office within ten days from receipt of a copy of this decision for further
disposition.
SO ORDERED.
(Labor Arbiter's Decision, Rollo, p. 56)
The appeal to the NLRC was dismissed for lack of merit on July 3, 1987 and the assailed
decision was affirmed.
Hence, this petition.
The issues raised by petitioner in this instant petition are:
1. Whether or not matters of employment affecting the PNOC-EDC, a
government-owned and controlled corporation, are within the jurisdiction of the
Labor Arbiter and the NLRC.
2. Assuming the affirmative, whether or not the Labor Arbiter and the NLRC are
justified in ordering the reinstatement of private respondent, payment of his
savings, and proportionate 13th month pay and payment of damages as well as
attorney's fee.

Petitioner PNOC-EDC alleges that it is a corporation wholly owned and controlled by the
government; that the Energy Development Corporation is a subsidiary of the Philippine National
Oil Company which is a government entity created under Presidential Decree No. 334, as
amended; that being a government-owned and controlled corporation, it is governed by the Civil
Service Law as provided for in Section 1, Article XII-B of the 1973 Constitution, Section 56 of
Presidential Decree No. 807 (Civil Service Decree) and Article 277 of Presidential Decree No.
442, as amended (Labor Code).
The 1973 Constitution provides:
The Civil Service embraces every branch, agency, subdivision and
instrumentality of the government including government-owned or controlled
corporations.
Petitioner PNOC-EDC argued that since Labor Arbiter Minoria rendered the decision at the time
when the 1973 Constitution was in force, said decision is null and void because under the 1973
Constitution, government-owned and controlled corporations were governed by the Civil Service
Law. Even assuming that PNOC-EDC has no original or special charter and Section 2(i), Article
IX-B of the 1987 Constitution provides that:
The Civil Service embraces all branches, subdivision, instrumentalities and
agencies of the Government, including government-owned or controlled
corporations with original charters.
such circumstances cannot give validity to the decision of the Labor Arbiter (Ibid., pp. 192-193).
This issue has already been laid to rest in the case of PNOC-EDC vs. Leogardo, 175 SCRA 26
(July 5, 1989), involving the same petitioner and the same issue, where this Court ruled that the
doctrine that employees of government-owned and/or con controlled corporations, whether
created by special law or formed as subsidiaries under the General Corporation law are
governed by the Civil Service Law and not by the Labor Code, has been supplanted by the
present Constitution. "Thus, under the present state of the law, the test in determining whether a
government-owned or controlled corporation is subject to the Civil Service Law are the manner
of its creation, such that government corporations created by special charter are subject to its
provisions while those incorporated under the General Corporation Law are not within its
coverage."
Specifically, the PNOC-EDC having been incorporated under the General Corporation Law was
held to be a government owned or controlled corporation whose employees are subject to the
provisions of the Labor Code (Ibid.).
The fact that the case arose at the time when the 1973 Constitution was still in effect, does not
deprive the NLRC of jurisdiction on the premise that it is the 1987 Constitution that governs
because it is the Constitution in place at the time of the decision (NASECO v. NLRC, G.R. No.
69870, 168 SCRA 122 [1988]).

In the case at bar, the decision of the NLRC was promulgated on July 3, 1987. Accordingly, this
case falls squarely under the rulings of the aforementioned cases.
As regards the second issue, the record shows that PNOC-EDC's accusations of dishonesty
and violations of company rules are not supported by evidence. Nonetheless, while
acknowledging the rule that administrative bodies are not governed by the strict rules of
evidence, petitioner PNOC-EDC alleges that the labor arbiter's propensity to decide the case
through the position papers submitted by the parties is violative of due process thereby
rendering the decision null and void (Ibid., p. 196).
On the other hand, private respondent contends that as can be seen from petitioner's Motion for
Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 5764), the latter never questioned the findings of facts of the Labor Arbiter but simply limited its
objection to the lack of legal basis in view of its stand that the NLRC had no jurisdiction over the
case (Private Respondent's Memorandum, Rollo, p. 104).
Petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss dated January 15, 1986 (Annex
"C" of the Petition Rollo, pp. 41-45) before the Regional Arbitration Branch No. VII of Cebu City
and its Motion for Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition,
Rollo, pp. 57-64) before the NLRC of Cebu City. Indisputably, the requirements of due process
are satisfied when the parties are given an opportunity to submit position papers. What the
fundamental law abhors is not the absence of previous notice but rather the absolute lack of
opportunity to ventilate a party's side. There is no denial of due process where the party
submitted its position paper and flied its motion for reconsideration (Odin Security Agency vs.
De la Serna, 182 SCRA 472 [February 21, 1990]). Petitioner's subsequent Motion for
Reconsideration and/or Appeal has the effect of curing whatever irregularity might have been
committed in the proceedings below (T.H. Valderama and Sons, Inc. vs. Drilon, 181 SCRA 308
[January 22, 1990]).
Furthermore, it has been consistently held that findings of administrative agencies which have
acquired expertise because their jurisdiction is confined to specific matters are accorded not
only respect but even finality (Asian Construction and Development Corporation vs. NLRC, 187
SCRA 784 [July 27, 1990]; Lopez Sugar Corporation vs. Federation of Free Workers, 189 SCRA
179 [August 30, 1990]). Judicial review by this Court does not go so far as to evaluate the
sufficiency of the evidence but is limited to issues of jurisdiction or grave abuse of discretion
(Filipinas Manufacturers Bank vs. NLRC, 182 SCRA 848 [February 28, 1990]). A careful study of
the records shows no substantive reason to depart from these established principles.
While it is true that loss of trust or breach of confidence is a valid ground for dismissing an
employee, such loss or breach of trust must have some basis (Gubac v. NLRC, 187 SCRA 412
[July 13, 1990]). As found by the Labor Arbiter, the accusations of petitioner PNOC-EDC against
private respondent Mercado have no basis. Mrs. Leonardo Nodado, from whom the nipa
shingles were purchased, sufficiently explained in her affidavit (Rollo, p. 36) that the total
purchase price of P1,680.00 was paid by respondent Mercado as agreed upon. The alleged

discount given by Mrs. Nodado is not supported by evidence as well as the alleged
appropriation of P8.66 from the cost of fabrication of rubber stamps. The Labor Arbiter, likewise,
found no evidence to support the alleged violation of company rules. On the contrary, he found
respondent Mercado's explanation in his affidavit (Rollo, pp. 38-40) as to the alleged violations
to be satisfactory. Moreover, these findings were never contradicted by petitioner petitioner
PNOC-EDC.
PREMISES CONSIDERED, the petition is DENIED and the resolution of respondent NLRC
dated July 3, 1987 is AFFIRMED with the modification that the moral damages are reduced to
Ten Thousand (P10,000.00) Pesos, and the exemplary damages reduced to Five Thousand
(P5,000.00) Pesos.
SO ORDERED.
Melencio-Herrera (Chairperson), Padilla and Regalado, JJ., concur.
Sarmiento, J., is on leave.

G.R. No. L-22619

December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,


vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.

JOHNSON, J.:
This action was brought in the Court of First Instance of the City of Manila on the 17th day of
July, 1923, for the purpose of recovering the sum of P12,044.68, alleged to have been paid
under protest by the plaintiff company to the defendant, as specific tax on 24,089.3 tons of coal.
Said company is a corporation created by Act No. 2705 of the Philippine Legislature for the
purpose of developing the coal industry in the Philippine Islands and is actually engaged in coal
mining on reserved lands belonging to the Government. It claimed exemption from taxes under
the provision of sections 14 and 15 of Act No. 2719, and prayed for a judgment ordering the
defendant to refund to the plaintiff said sum of P12,044.68, with legal interest from the date of
the presentation of the complaint, and costs against the defendant.
The defendant answered denying generally and specifically all the material allegations of the
complaint, except the legal existence and personality of the plaintiff. As a special defense, the

defendant alleged (a) that the sum of P12,044.68 was paid by the plaintiff without protests, and
(b) that said sum was due and owing from the plaintiff to the Government of the Philippine
Islands under the provisions of section 1496 of the Administrative Code and prayed that the
complaint be dismissed, with costs against the plaintiff.
Upon the issue thus presented, the case was brought on for trial. After a consideration of the
evidence adduced by both parties, the Honorable Pedro Conception, judge, held that the words
"lands owned by any person, etc.," in section 15 of Act No. 2719 should be understood to mean
"lands held in lease or usufruct," in harmony with the other provision of said Act; that the coal
lands possessed by the plaintiff, belonging to the Government, fell within the provisions of
section 15 of Act No. 2719; and that a tax of P0.04 per ton of 1,016 kilos on each ton of coal
extracted therefrom, as provided in said section, was the only tax which should be collected
from the plaintiff; and sentenced the defendant to refund to the plaintiff the sum of P11,081.11
which is the difference between the amount collected under section 1496 of the Administrative
Code and the amount which should have been collected under the provisions of said section 15
of Act No. 2719. From that sentence the defendant appealed, and now makes the following
assignments of error:
I. The court below erred in holding that section 15 of Act No. 2719 does not refer to coal lands
owned by persons and corporations.
II. The court below erred in holding that the plaintiff was not subject to the tax prescribed in
section 1496 of the Administrative Code.
The question confronting us in this appeal is whether the plaintiff is subject to the taxes under
section 15 of Act No. 2719, or to the specific taxes under section 1496 of the Administrative
Code.
The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for the
purpose of developing the coal industry in the Philippine Island, in harmony with the general
plan of the Government to encourage the development of the natural resources of the country,
and to provided facilities therefor. By said Act, the company was granted the general powers of
a corporation "and such other powers as may be necessary to enable it to prosecute the
business of developing coal deposits in the Philippine Island and of mining, extracting,
transporting and selling the coal contained in said deposits." (Sec. 2, Act No. 2705.) By the
same law (Act No. 2705) the Government of the Philippine Islands is made the majority
stockholder, evidently in order to insure proper government supervision and control, and thus to
place the Government in a position to render all possible encouragement, assistance and help
in the prosecution and furtherance of the company's business.
On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal
Company, the Philippine Legislature passed Act No. 2719 "to provide for the leasing and
development of coal lands in the Philippine Islands." On October 18, 1917, upon petition of the
National Coal Company, the Governor-General, by Proclamation No. 39, withdrew "from
settlement, entry, sale or other disposition, all coal-bearing public lands within the Province of

Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of Tayabas."
Almost immediately after the issuance of said proclamation the National Coal Company took
possession of the coal lands within the said reservation, with an area of about 400 hectares,
without any further formality, contract or lease. Of the 30,000 shares of stock issued by the
company, the Government of the Philippine Islands is the owner of 29,809 shares, that is, of 99
1/3 per centum of the whole capital stock.
If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the
land from which it has mined the coal in question and is therefore subject to the provisions of
section 15 of Act No. 2719 and not to the provisions of the section 1496 of the Administrative
Code. That contention of the plaintiff leads us to an examination of the evidence upon the
question of the ownership of the land from which the coal in question was mined. Was the
plaintiff the owner of the land from which the coal in question was mined? If the evidence shows
the affirmative, then the judgment should be affirmed. If the evidence shows that the land does
not belong to the plaintiff, then the judgment should be reversed, unless the plaintiff's rights fall
under section 3 of said Act.
The only witness presented by the plaintiff upon the question of the ownership of the land in
question was Mr. Dalmacio Costas, who stated that he was a member of the board of directors
of the plaintiff corporation; that the plaintiff corporation took possession of the land in question
by virtue of the proclamation of the Governor-General, known as Proclamation No. 39 of the
year 1917; that no document had been issued in favor of the plaintiff corporation; that said
corporation had received no permission from the Secretary of Agriculture and Natural
Resources; that it took possession of said lands covering an area of about 400 hectares, from
which the coal in question was mined, solely, by virtue of said proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then Governor-General,
on the 18th day of October, 1917, and provided: "Pursuant to the provision of section 71 of Act
No. 926, I hereby withdraw from settlement, entry, sale, or other disposition, all coal-bearing
public lands within the Province of Zamboanga, Department of Mindanao and Sulu, and the
Island of Polillo, Province of Tayabas." It will be noted that said proclamation only provided that
all coal-bearing public lands within said province and island should be withdrawn from
settlement, entry, sale, or other disposition. There is nothing in said proclamation which
authorizes the plaintiff or any other person to enter upon said reversations and to mine coal, and
no provision of law has been called to our attention, by virtue of which the plaintiff was entitled
to enter upon any of the lands so reserved by said proclamation without first obtaining
permission therefor.
The plaintiff is a private corporation. The mere fact that the Government happens to the majority
stockholder does not make it a public corporation. Act No. 2705, as amended by Act No. 2822,
makes it subject to all of the provisions of the Corporation Law, in so far as they are not
inconsistent with said Act (No. 2705). No provisions of Act No. 2705 are found to be inconsistent
with the provisions of the Corporation Law. As a private corporation, it has no greater rights,
powers or privileges than any other corporation which might be organized for the same purpose

under the Corporation Law, and certainly it was not the intention of the Legislature to give it a
preference or right or privilege over other legitimate private corporations in the mining of coal.
While it is true that said proclamation No. 39 withdrew "from settlement, entry, sale, or other
disposition of coal-bearing public lands within the Province of Zamboanga . . . and the Island of
Polillo," it made no provision for the occupation and operation by the plaintiff, to the exclusion of
other persons or corporations who might, under proper permission, enter upon the operate coal
mines.
On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature of
the Philippine Island in "an Act for the leasing and development of coal lands in the Philippine
Islands" (Act No. 2719), made liberal provision. Section 1 of said Act provides: "Coal-bearing
lands of the public domain in the Philippine Island shall not be disposed of in any manner except
as provided in this Act," thereby giving a clear indication that no "coal-bearing lands of the public
domain" had been disposed of by virtue of said proclamation.
Neither is there any provision in Act No. 2705 creating the National Coal Company, nor in the
amendments thereof found in Act No. 2822, which authorizes the National Coal Company to
enter upon any of the reserved coal lands without first having obtained permission from the
Secretary of Agriculture and Natural Resources.
lawphi1.net

The following propositions are fully sustained by the facts and the law:
(1) The National Coal Company is an ordinary private corporation organized under Act No.
2705, and has no greater powers nor privileges than the ordinary private corporation, except
those mentioned, perhaps, in section 10 of Act No. 2719, and they do not change the situation
here.
(2) It mined on public lands between the month of July, 1920, and the months of March, 1922,
24,089.3 tons of coal.
(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as taxes
under the provisions of article 1946 of the Administrative Code on the 15th day of December,
1922.
(4) It is admitted that it is neither the owner nor the lessee of the lands upon which said coal was
mined.
(5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of October,
1917, by authority of section 1 of Act No. 926, withdrawing from settlement, entry, sale, or other
dispositon all coal-bearing public lands within the Province of Zamboanga and the Island of
Polillo, was not a reservation for the benefit of the National Coal Company, but for any person or
corporation of the Philippine Islands or of the United States.

(6) That the National Coal Company entered upon said land and mined said coal, so far as the
record shows, without any lease or other authority from either the Secretary of Agriculture and
Natural Resources or any person having the power to grant a leave or authority.
From all of the foregoing facts we find that the issue is well defined between the plaintiff and the
defendant. The plaintiff contends that it was liable only to pay the internal revenue and other
fees and taxes provided for under section 15 of Act No. 2719; while the defendant contends,
under the facts of record, the plaintiff is obliged to pay the internal revenue duty provided for in
section 1496 of the Administrative Code. That being the issue, an examination of the provisions
of Act No. 2719 becomes necessary.
An examination of said Act (No. 2719) discloses the following facts important for consideration
here:
First. All "coal-bearing lands of the public domain in the Philippine Islands shall not be disposed
of in any manner except as provided in this Act." Second. Provisions for leasing by the
Secretary of Agriculture and Natural Resources of "unreserved, unappropriated coal-bearing
public lands," and the obligation to the Government which shall be imposed by said Secretary
upon the lessee.
lawphi1.net

Third. The internal revenue duty and tax which must be paid upon coal-bearing lands owned by
any person, firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax
upon unreserved, unappropriated coal-bearing public lands which may be leased by the
Secretary of Agriculture and Natural Resources; and, second, that said Act (No. 2719) provides
an internal revenue duty and tax imposed upon any person, firm, association or corporation,
who may be the owner of "coal-bearing lands." A reading of said Act clearly shows that the tax
imposed thereby is imposed upon two classes of persons only lessees and owners.
The lower court had some trouble in determining what was the correct interpretation of section
15 of said Act, by reason of what he believed to be some difference in the interpretation of the
language used in Spanish and English. While there is some ground for confusion in the use of
the language in Spanish and English, we are persuaded, considering all the provisions of said
Act, that said section 15 has reference only to persons, firms, associations or corporations
which had already, prior to the existence of said Act, become the owners of coal lands. Section
15 cannot certainty refer to "holders or lessees of coal lands' for the reason that practically all of
the other provisions of said Act has reference to lessees or holders. If section 15 means that the
persons, firms, associations, or corporation mentioned therein are holders or lessees of coal
lands only, it is difficult to understand why the internal revenue duty and tax in said section was
made different from the obligations mentioned in section 3 of said Act, imposed upon lessees or
holders.

From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor an
owner of coal-bearing lands, and is, therefore, not subject to any other provisions of Act No.
2719. But, is the plaintiff subject to the provisions of section 1496 of the Administrative Code?
Section 1496 of the Administrative Code provides that "on all coal and coke there shall be
collected, per metric ton, fifty centavos." Said section (1496) is a part of article, 6 which provides
for specific taxes. Said article provides for a specific internal revenue tax upon all things
manufactured or produced in the Philippine Islands for domestic sale or consumption, and upon
things imported from the United States or foreign countries. It having been demonstrated that
the plaintiff has produced coal in the Philippine Islands and is not a lessee or owner of the land
from which the coal was produced, we are clearly of the opinion, and so hold, that it is subject to
pay the internal revenue tax under the provisions of section 1496 of the Administrative Code,
and is not subject to the payment of the internal revenue tax under section 15 of Act No. 2719,
nor to any other provisions of said Act.
Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby relieved
from all responsibility under the complaint. And, without any finding as to costs, it is so ordered.
Street, Malcolm, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.
G.R. No. L-34548 November 29, 1988
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
THE HONORABLE PACIFICO P. DE CASTRO and PHILIPPINE VIRGINIA TOBACCO
ADMINISTRATION,respondents
Meer, Meer & Meer for petitioner.
The Solicitor General for respondents.

CORTES, J.:
The crux of the instant controversy dwells on the liability of a bank for releasing its depositor's
funds upon orders of the court, pursuant to a writ of garnishment. If in compliance with the court
order, the bank delivered the garnished amount to the sheriff, who in turn delivered it to the
judgment creditor, but subsequently, the order of the court directing payment was set aside by
the same judge, should the bank be held solidarily liable with the judgment creditor to its
depositor for reimbursement of the garnished funds? The Court does not think so.
In Civil Case No. Q-12785 of the Court of First Instance of Rizal, Quezon City Branch IX entitled
"Badoc Planters, Inc. versus Philippine Virginia Tobacco Administration, et al.," which was an
action for recovery of unpaid tobacco deliveries, an Order (Partial Judgment) was issued on

January 15, 1970 by the Hon. Lourdes P. San Diego, then Presiding Judge, ordering the
defendants therein to pay jointly and severally, the plaintiff Badoc Planters, Inc. (hereinafter
referred to as "BADOC") within 48 hours the aggregate amount of P206,916.76, with legal
interests thereon.
On January 26,1970, BADOC filed an Urgent Ex-Parte Motion for a Writ of Execution of the said
Partial Judgment which was granted on the same day by the herein respondent judge who
acted in place of the Hon. Judge San Diego who had just been elevated as a Justice of the
Court of Appeals. Accordingly, the Branch Clerk of Court on the very same day, issued a Writ of
Execution addressed to Special Sheriff Faustino Rigor, who then issued a Notice of
Garnishment addressed to the General Manager and/or Cashier of Rizal Commercial Banking
Corporation (hereinafter referred to as RCBC), the petitioner in this case, requesting a reply
within five (5) days to said garnishment as to any property which the Philippine Virginia Tobacco
Administration (hereinafter referred to as "PVTA") might have in the possession or control of
petitioner or of any debts owing by the petitioner to said defendant. Upon receipt of such Notice,
RCBC notified PVTA thereof to enable the PVTA to take the necessary steps for the protection
of its own interest [Record on Appeal, p. 36]
Upon an Urgent Ex-Parte Motion dated January 27, 1970 filed by BADOC, the respondent
Judge issued an Order granting the Ex-Parte Motion and directing the herein petitioner "to
deliver in check the amount garnished to Sheriff Faustino Rigor and Sheriff Rigor in turn is
ordered to cash the check and deliver the amount to the plaintiff's representative and/or counsel
on record." [Record on Appeal, p. 20; Rollo, p. 5.] In compliance with said Order, petitioner
delivered to Sheriff Rigor a certified check in the sum of P 206,916.76.
Respondent PVTA filed a Motion for Reconsideration dated February 26,1970 which was
granted in an Order dated April 6,1970, setting aside the Orders of Execution and of Payment
and the Writ of Execution and ordering petitioner and BADOC "to restore, jointly and severally,
the account of PVTA with the said bank in the same condition and state it was before the
issuance of the aforesaid Orders by reimbursing the PVTA of the amount of P 206, 916.76 with
interests at the legal rate from January 27, 1970 until fully paid to the account of the PVTA This
is without prejudice to the right of plaintiff to move for the execution of the partial judgment
pending appeal in case the motion for reconsideration is denied and appeal is taken from the
said partial judgment." [Record on Appeal, p. 58]
The Motion for Reconsideration of the said Order of April 6, 1970 filed by herein petitioner was
denied in the Order of respondent judge dated June 10, 1970 and on June 19, 1970, which was
within the period for perfecting an appeal, the herein petitioner filed a Notice of Appeal to the
Court of Appeals from the said Orders.
This case was then certified by the Court of Appeals to this Honorable Court, involving as it
does purely questions of law.
The petitioner raises two principal queries in the instant case: 1) Whether or not PVTA funds are
public funds not subject to garnishment; and 2) Whether or not the respondent Judge correctly

ordered the herein petitioner to reimburse the amount paid to the Special Sheriff by virtue of the
execution issued pursuant to the Order/Partial Judgment dated January 15, 1970.
The record reveals that on February 2, 1970, private respondent PVTA filed a Motion for
Reconsideration of the Order/ Partial Judgment of January 15, 1970. This was granted and the
aforementioned Partial Judgment was set aside. The case was set for hearings on November 4,
9 and 11, 1970 [Rollo, pp. 205-207.] However, in view of the failure of plaintiff BADOC to appear
on the said dates, the lower court ordered the dismissal of the case against PVTA for failure to
prosecute [Rollo, p. 208.]
It must be noted that the Order of respondent Judge dated April 6, 1970 directing the plaintiff to
reimburse PVTA t e amount of P206,916.76 with interests became final as to said plaintiff who
failed to even file a motion for reconsideration, much less to appeal from the said Order.
Consequently, the order to restore the account of PVTA with RCBC in the same condition and
state it was before the issuance of the questioned orders must be upheld as to the plaintiff,
BADOC.
However, the questioned Order of April 6, 1970 must be set aside insofar as it ordered the
petitioner RCBC, jointly and severally with BADOC, to reimburse PVTA.
The petitioner merely obeyed a mandatory directive from the respondent Judge dated January
27, 1970, ordering petitioner 94 "to deliver in check the amount garnished to Sheriff Faustino
Rigor and Sheriff Rigor is in turn ordered to cash the check and deliver the amount to the
plaintiffs representative and/or counsel on record." [Record on Appeal, p. 20.]
PVTA however claims that the manner in which the bank complied with the Sheriffs Notice of
Garnishment indicated breach of trust and dereliction of duty on the part of the bank as
custodian of government funds. It insistently urges that the premature delivery of the garnished
amount by RCBC to the special sheriff even in the absence of a demand to deliver made by the
latter, before the expiration of the five-day period given to reply to the Notice of Garnishment,
without any reply having been given thereto nor any prior authorization from its depositor, PVTA
and even if the court's order of January 27, 1970 did not require the bank to immediately deliver
the garnished amount constitutes such lack of prudence as to make it answerable jointly and
severally with the plaintiff for the wrongful release of the money from the deposit of the PVTA.
The respondent Judge in his controverted Order sustained such contention and blamed RCBC
for the supposed "hasty release of the amount from the deposit of the PVTA without giving PVTA
a chance to take proper steps by informing it of the action being taken against its deposit,
thereby observing with prudence the five-day period given to it by the sheriff." [Rollo, p. 81.]
Such allegations must be rejected for lack of merit. In the first place, it should be pointed out
that RCBC did not deliver the amount on the strength solely of a Notice of Garnishment; rather,
the release of the funds was made pursuant to the aforesaid Order of January 27, 1970. While
the Notice of Garnishment dated January 26, 1970 contained no demand of payment as it was a
mere request for petitioner to withold any funds of the PVTA then in its possession, the Order of

January 27, 1970 categorically required the delivery in check of the amount garnished to the
special sheriff, Faustino Rigor.
In the second place, the bank had already filed a reply to the Notice of Garnishment stating that
it had in its custody funds belonging to the PVTA, which, in fact was the basis of the plaintiff in
filing a motion to secure delivery of the garnished amount to the sheriff. [See Rollo, p. 93.]
Lastly, the bank, upon the receipt of the Notice of Garnishment, duly informed PVTA thereof to
enable the latter to take the necessary steps for the protection of its own interest [Record on
Appeal, p. 36]
It is important to stress, at this juncture, that there was nothing irregular in the delivery of the
funds of PVTA by check to the sheriff, whose custody is equivalent to the custody of the court,
he being a court officer. The order of the court dated January 27, 1970 was composed of two
parts, requiring: 1) RCBC to deliver in check the amount garnished to the designated sheriff and
2) the sheriff in turn to cash the check and deliver the amount to the plaintiffs representative
and/or counsel on record. It must be noted that in delivering the garnished amount in check to
the sheriff, the RCBC did not thereby make any payment, for the law mandates that delivery of a
check does not produce the effect of payment until it has been cashed. [Article 1249, Civil
Code.]
Moreover, by virtue of the order of garnishment, the same was placed in custodia legis and
therefore, from that time on, RCBC was holding the funds subject to the orders of the court a
quo. That the sheriff, upon delivery of the check to him by RCBC encashed it and turned over
the proceeds thereof to the plaintiff was no longer the concern of RCBC as the responsibility
over the garnished funds passed to the court. Thus, no breach of trust or dereliction of duty can
be attributed to RCBC in delivering its depositor's funds pursuant to a court order which was
merely in the exercise of its power of control over such funds.
... The garnishment of property to satisfy a writ of execution operates as an
attachment and fastens upon the property a lien by which the property is brought
under the jurisdiction of the court issuing the writ. It is brought into custodia legis,
under the sole control of such court [De Leon v. Salvador, G.R. Nos. L-30871 and
L-31603, December 28,1970, 36 SCRA 567, 574.]
The respondent judge however, censured the petitioner for having released the funds "simply on
the strength of the Order of the court which. far from ordering an immediate release of the
amount involved, merely serves as a standing authority to make the release at the proper time
as prescribed by the rules." [Rollo, p. 81.]
This argument deserves no serious consideration. As stated earlier, the order directing the bank
to deliver the amount to the sheriff was distinct and separate from the order directing the sheriff
to encash the said check. The bank had no choice but to comply with the order demanding
delivery of the garnished amount in check. The very tenor of the order called for immediate
compliance therewith. On the other hand, the bank cannot be held liable for the subsequent

encashment of the check as this was upon order of the court in the exercise of its power of
control over the funds placed in custodia legis by virtue of the garnishment.
In a recent decision [Engineering Construction Inc., v. National Power Corporation, G.R. No. L34589, June 29, 1988] penned by the now Chief Justice Marcelo Fernan, this Court absolved a
garnishee from any liability for prompt compliance with its order for the delivery of the garnished
funds. The rationale behind such ruling deserves emphasis in the present case:
But while partial restitution is warranted in favor of NPC, we find that the
Appellate Court erred in not absolving MERALCO, the garnishee, from its
obligations to NPC with respect to the payment of ECI of P 1,114,543.23, thus in
effect subjecting MERALCO to double liability. MERALCO should not have been
faulted for its prompt obedience to a writ of garnishment. Unless there are
compelling reasons such as: a defect on the face of the writ or actual knowledge
on the part of the garnishee of lack of entitlement on the part of the garnisher, it
is not incumbent upon the garnishee to inquire or to judge for itself whether or
not the order for the advance execution of a judgment is valid.
Section 8, Rule 57 of the Rules of Court provides:
Effect of attachment of debts and credits.All persons having in
their possession or under their control any credits or other similar
personal property belonging to the party against whom attachment
is issued, or owing any debts to the same, all the time of service
upon them of a copy of the order of attachment and notice as
provided in the last preceding section, shall be liable to the
applicant for the amount of such credits, debts or other property,
until the attachment be discharged, or any judgment recovered by
him be satisfied, unless such property be delivered or transferred,
or such debts be paid, to the clerk, sheriff or other proper officer of
the court issuing the attachment.
Garnishment is considered as a specie of attachment for reaching credits
belonging to the judgment debtor and owing to him from a stranger to the
litigation. Under the above-cited rule, the garnishee [the third person] is obliged
to deliver the credits, etc. to the proper officer issuing the writ and "the law
exempts from liability the person having in his possession or under his control
any credits or other personal property belonging to the defendant, ..., if such
property be delivered or transferred, ..., to the clerk, sheriff, or other officer of the
court in which the action is pending. [3 Moran, Comments on the Rules of Court
34 (1970 ed.)]
Applying the foregoing to the case at bar, MERALCO, as garnishee, after having been judicially
compelled to pay the amount of the judgment represented by funds in its possession belonging
to the judgment debtor or NPC, should be released from all responsibilities over such amount

after delivery thereof to the sheriff. The reason for the rule is self-evident. To expose garnishees
to risks for obeying court orders and processes would only undermine the administration of
justice. [Emphasis supplied.]
The aforequoted ruling thus bolsters RCBC's stand that its immediate compliance with the lower
court's order should not have been met with the harsh penalty of joint and several liability. Nor
can its liability to reimburse PVTA of the amount delivered in check be premised upon the
subsequent declaration of nullity of the order of delivery. As correctly pointed out by the
petitioner:
xxx xxx xxx
That the respondent Judge, after his Order was enforced, saw fit to recall said
Order and decree its nullity, should not prejudice one who dutifully abided by it,
the presumption being that judicial orders are valid and issued in the regular
performance of the duties of the Court" [Section 5(m) Rule 131, Revised Rules of
Court]. This should operate with greater force in relation to the herein petitioner
which, not being a party in the case, was just called upon to perform an act in
accordance with a judicial flat. A contrary view will invite disrespect for the
majesty of the law and induce reluctance in complying with judicial orders out of
fear that said orders might be subsequently invalidated and thereby expose one
to suffer some penalty or prejudice for obeying the same. And this is what will
happen were the controversial orders to be sustained. We need not underscore
the danger of this as a precedent.
xxx xxx xxx
[ Brief for the Petitioner, Rollo, p. 212; Emphasis supplied.]
From the foregoing, it may be concluded that the charge of breach of trust and/or dereliction of
duty as well as lack of prudence in effecting the immediate payment of the garnished amount is
totally unfounded. Upon receipt of the Notice of Garnishment, RCBC duly informed PVTA
thereof to enable the latter to take the necessary steps for its protection. However, right on the
very next day after its receipt of such notice, RCBC was already served with the Order requiring
delivery of the garnished amount. Confronted as it was with a mandatory directive, disobedience
to which exposed it to a contempt order, it had no choice but to comply.
The respondent Judge nevertheless held that the liability of RCBC for the reimbursement of the
garnished amount is predicated on the ruling of the Supreme Court in the case
of Commissioner of Public Highways v. Hon. San Diego [G.R. No. L-30098, February 18, 1970,
31 SCRA 616] which he found practically on all fours with the case at bar.
The Court disagrees.

The said case which reiterated the rule in Republic v. Palacio [G.R. No. L-20322, May 29, 1968,
23 SCRA 899] that government funds and properties may not be seized under writs of execution
or garnishment to satisfy such judgment is definitely distinguishable from the case at bar.
In the Commissioner of Public Highways case [supra], the bank which precipitately allowed the
garnishment and delivery of the funds failed to inform its depositor thereof, charged as it was
with knowledge of the nullity of the writ of execution and notice of garnishment against
government funds. In the aforementioned case, the funds involved belonged to the Bureau of
Public Highways, which being an arm of the executive branch of the government, has no
personality of its own separate from the National Government. The funds involved
were government fundscovered by the rule on exemption from execution.
This brings us to the first issue raised by the petitioner: Are the PVTA funds public funds exempt
from garnishment? The Court holds that they are not.
Republic Act No. 2265 created the PVTA as an ordinary corporation with all the attributes of a
corporate entity subject to the provisions of the Corporation Law. Hence, it possesses the power
"to sue and be sued" and "to acquire and hold such assets and incur such liabilities resulting
directly from operations authorized by the provisions of this Act or as essential to the proper
conduct of such operations." [Section 3, Republic Act No. 2265.]
Among the specific powers vested in the PVTA are: 1) to buy Virginia tobacco grown in the
Philippines for resale to local bona fide tobacco manufacturers and leaf tobacco dealers
[Section 4(b), R.A. No. 2265]; 2) to contracts of any kind as may be necessary or incidental to
the attainment of its purpose with any person, firm or corporation, with the Government of the
Philippines or with any foreign government, subject to existing laws [Section 4(h), R.A. No.
22651; and 3) generally, to exercise all the powers of a corporation under the Corporation Law,
insofar as they are not inconsistent with the provisions of this Act [Section 4(k), R.A. No. 2265.]
From the foregoing, it is clear that PVTA has been endowed with a personality distinct and
separate from the government which owns and controls it. Accordingly, this Court has heretofore
declared that the funds of the PVTA can be garnished since "funds of public corporation which
can sue and be sued were not exempt from garnishment" [Philippine National Bank v. Pabalan,
G.R. No. L-33112, June 15, 1978, 83 SCRA 595, 598.]
In National Shipyards and Steel Corp. v. CIR [G.R. No. L-17874, August 31, 1964, 8 SCRA 781],
this Court held that the allegation to the effect that the funds of the NASSCO are public funds of
the government and that as such, the same may not be garnished, attached or levied upon is
untenable for, as a government-owned or controlled corporation, it has a personality of its own,
distinct and separate from that of the government. This court has likewise ruled that other
govemment-owned and controlled corporations like National Coal Company, the National
Waterworks and Sewerage Authority (NAWASA), the National Coconut Corporation (NACOCO)
the National Rice and Corn Corporation (NARIC) and the Price Stabilization Council (PRISCO)
which possess attributes similar to those of the PVTA are clothed with personalities of their own,
separate and distinct from that of the government [National Coal Company v. Collector of

Internal Revenue, 46 Phil. 583 (1924); Bacani and Matoto v. National Coconut Corporation et
al., 100 Phil. 471 (1956); Reotan v. National Rice & Corn Corporation, G.R. No. L-16223,
February 27, 1962, 4 SCRA 418.] The rationale in vesting it with a separate personality is not
difficult to find. It is well-settled that when the government enters into commercial business, it
abandons its sovereign capacity and is to be treated like any other corporation [Manila Hotel
Employees' Association v. Manila Hotel Co. and CIR, 73 Phil. 734 (1941).]
Accordingly, as emphatically expressed by this Court in a 1978 decision, "garnishment was the
appropriate remedy for the prevailing party which could proceed against the funds of a
corporate entity even if owned or controlled by the government" inasmuch as "by engaging in a
particular business thru the instrumentality of a corporation, the government divests itself pro
hac vice of its sovereign character, so as to render the corporation subject to the rules of law
governing private corporations" [Philippine National Bank v. CIR, G.R No. L-32667, January 31,
1978, 81 SCRA 314, 319.]
Furthermore, in the case of PVTA, the law has expressly allowed it funds to answer for various
obligations, including the one sought to be enforced by plaintiff BADOC in this case (i.e. for
unpaid deliveries of tobacco). Republic Act No. 4155, which discounted the erstwhile support
given by the Central Bank to PVTA, established in lieu thereof a "Tobacco Fund" to be collected
from the proceeds of fifty per centum of the tariff or taxes of imported leaf tobacco and also fifty
per centum of the specific taxes on locally manufactured Virginia type cigarettes.
Section 5 of Republic Act No. 4155 provides that this fund shall be expended for the support or
payment of:
1. Indebtedness of the Philippine Virginia Tobacco Administration and the former
Agricultural Credit and Cooperative Financing Administration to FACOMAS and
farmers and planters regarding Virginia tobacco transactions in previous years;
2. Indebtedness of the Philippine Virginia Tobacco Administration and the former
Agricultural Credit and Cooperative Financing Administration to the Central Bank
in gradual amounts regarding Virginia tobacco transactions in previous years;
3. Continuation of the Philippine Virginia Tobacco Administration support and
subsidy operationsincluding the purchase of locally grown and produced Virginia
leaf tobacco, at the present support and subsidy prices, its procurement,
redrying, handling, warehousing and disposal thereof, and the redrying plants
trading within the purview of their contracts;
4. Operational, office and field expenses, and the establishment of the Tobacco
Research and Grading Institute. [Emphasis supplied.]
Inasmuch as the Tobacco Fund, a special fund, was by law, earmarked specifically to answer
obligations incurred by PVTA in connection with its proprietary and commercial operations
authorized under the law, it follows that said funds may be proceeded against by ordinary

judicial processes such as execution and garnishment. If such funds cannot be executed upon
or garnished pursuant to a judgment sustaining the liability of the PVTA to answer for its
obligations, then the purpose of the law in creating the PVTA would be defeated. For it was
declared to be a national policy, with respect to the local Virginia tobacco industry, to encourage
the production of local Virginia tobacco of the qualities needed and in quantities marketable in
both domestic and foreign markets, to establish this industry on an efficient and economic basis,
and to create a climate conducive to local cigarette manufacture of the qualities desired by the
consuming public, blending imported and native Virginia leaf tobacco to improve the quality of
locally manufactured cigarettes [Section 1, Republic Act No. 4155.]
The Commissioner of Public Highways case is thus distinguishable from the case at bar. In said
case, the Philippine National Bank (PNB) as custodian of funds belonging to the Bureau of
Public Highways, an agency of the government, was chargeable with knowledge of the
exemption of such government funds from execution and garnishment pursuant to the
elementary precept that public funds cannot be disbursed without the appropriation required by
law. On the other hand, the same cannot hold true for RCBC as the funds entrusted to its
custody, which belong to a public corporation, are in the nature of private funds insofar as their
susceptibility to garnishment is concerned. Hence, RCBC cannot be charged with lack of
prudence for immediately complying with the order to deliver the garnished amount. Since the
funds in its custody are precisely meant for the payment of lawfully-incurred obligations, RCBC
cannot rightfully resist a court order to enforce payment of such obligations. That such court
order subsequently turned out to have been erroneously issued should not operate to the
detriment of one who complied with its clear order.
Finally, it is contended that RCBC was bound to inquire into the legality and propriety of the Writ
of Execution and Notice of Garnishment issued against the funds of the PVTA deposited with
said bank. But the bank was in no position to question the legality of the garnishment since it
was not even a party to the case. As correctly pointed out by the petitioner, it had neither the
personality nor the interest to assail or controvert the orders of respondent Judge. It had no
choice but to obey the same inasmuch as it had no standing at all to impugn the validity of the
partial judgment rendered in favor of the plaintiff or of the processes issued in execution of such
judgment.
RCBC cannot therefore be compelled to make restitution solidarily with the plaintiff BADOC.
Plaintiff BADOC alone was responsible for the issuance of the Writ of Execution and Order of
Payment and so, the plaintiff alone should bear the consequences of a subsequent annulment
of such court orders; hence, only the plaintiff can be ordered to restore the account of the PVTA.
WHEREFORE, the petition is hereby granted and the petitioner is ABSOLVED from any liability
to respondent PVTA for reimbursement of the funds garnished. The questioned Order of the
respondent Judge ordering the petitioner, jointly and severally with BADOC, to restore the
account of PVTA are modified accordingly.
SO ORDERED.

G.R. No. 195580

April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND


DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision and the
February 15, 2011 Resolution of the Court of Appeals (CA).
1

The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a
domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares
in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which
includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and
EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur.
2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the
said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in
barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA application in
favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSAAMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa
Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred
and assigned its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners applications for MPSA designated as AMA-IVB153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it
was the driving force behind petitioners filing of the MPSAs over the areas covered by
applications since it knows that it can only participate in mining activities through corporations
which are deemed Filipino citizens. Redmont argued that given that petitioners capital stocks
were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether
in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the
capital of which is owned by citizens of the Philippines: Provided, That a legally organized
foreign-owned corporation shall be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also
applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09
for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreignowned corporations. Nevertheless, they claimed that the issue on nationality should not be
raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital
is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the
shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns
5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of
Tesoro), the shares of MBMI will not make it the owner of at least 60% of the capital stock of
each of petitioners. They added that the best tool used in determining the nationality of a
corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act
of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in
Redmonts petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed
that Redmont has no personality to sue them because it has no pending claim or application
over the areas applied for by petitioners.
3

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining
MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining
activities. On the other hand, [Redmont] having filed its own applications for an EPA over the

areas earlier covered by the MPSA application of respondents may be considered if and when
they are qualified under the law. The violation of the requirements for the issuance and/or grant
of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and
open the areas covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing
Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.
6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI,
a 100% Canadian company and declared their MPSAs null and void. In the same Resolution, it
gave due course to Redmonts EPAs. Thereafter, on February 7, 2008, the POA issued an
Order denying the Motion for Reconsideration filed by petitioners.
7

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal and Memorandum of Appeal with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal and Memorandum of Appeal.
8

10

11

In their respective memorandum, petitioners emphasized that they are qualified persons under
the law. Also, through a letter, they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthurs FTAA was denominated as AFTA-IVB-09 on May
2007, while Tesoros MPSA application was converted to AFTA-IVB-08 on May 28, 2007, and
Narras FTAA was converted to AFTA-IVB-07 on March 30, 2006.
12

13

14

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint with the Securities and Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they are foreign-owned or controlled
corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying
for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
15

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon
City, Branch 92 (RTC) a Complaint for injunction with application for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 0863379. Redmont prayed for the deferral of the MAB proceedings pending the resolution of the
Complaint before the SEC.
16

But before the RTC can resolve Redmonts Complaint and applications for injunctive reliefs, the
MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and
SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by
Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.
17

Belatedly, on September 16, 2008, the RTC issued an Order granting Redmonts application
for a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary
injunction on September 19, 2008.
18

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration on September 29, 2008.
19

20

Before the MAB could resolve Redmonts Motion for Reconsideration and Supplemental Motion
for Reconsideration, Redmont filed before the RTC a Supplemental Complaint in Civil Case
No. 08-63379.
21

On October 6, 2008, the RTC issued an Order granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from
resolving Redmonts Motion for Reconsideration and Supplement Motion for Reconsideration of
the MABs September 10, 2008 Resolution.
22

On July 1, 2009, however, the MAB issued a second Order denying Redmonts Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed
by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by
the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September
10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of Environment and Natural Resources
that respondents McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore,
the rejection of their applications for Mineral Product Sharing Agreement should be
recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.
SO ORDERED.

23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the exploitation of
natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners.
It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital
stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital
of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares
shall be recorded as belonging to aliens. (emphasis supplied)
24

In determining the nationality of petitioners, the CA looked into their corporate structures and
their corresponding common shareholders. Using the grandfather rule, the CA discovered that
MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60%
equity interest of other majority shareholders of petitioners through joint venture agreements.
The CA found that through a "web of corporate layering, it is clear that one common controlling
investor in all mining corporations involved x x x is MBMI." Thus, it concluded that petitioners
McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.
25

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of
petitioners MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the
POA has jurisdiction over them and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production,
joint venture or production-sharing agreements" of the state to mining rights. However, it also
stated that the POAs jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested
with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the
CA determined that the POAs declaration that the MPSAs of McArthur, Tesoro and Narra are
void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP)
a petition dated May 7, 2010 seeking the cancellation of petitioners FTAAs. The OP rendered a
Decision on April 6, 2011, wherein it canceled and revoked petitioners FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584." The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating
that petitioners committed violations against the abovementioned laws and failed to submit
evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA
focusing on the alleged misrepresentation and claims made by petitioners of being domestic or
Filipino corporations and the admitted continued mining operation of PMDC using their locally
secured Small Scale Mining Permit inside the area earlier applied for an MPSA application
which was eventually transferred to Narra. It also agreed with the POAs estimation that the filing
of the FTAA applications by petitioners is a clear admission that they are "not capable of
conducting a large scale mining operation and that they need the financial and technical
26

27

assistance of a foreign entity in their operation, that is why they sought the participation of MBMI
Resources, Inc." The Decision further quoted:
28

The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.
29

The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the
OPs Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA
Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP.
Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a
different division.
30

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners
put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the
fact that the subject matter of the controversy, the MPSA Applications, have already
been converted into FTAA applications and that the same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction
considering that the Panel of Arbitrators has no jurisdiction to determine the nationality of
Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of Redmonts
willful forum shopping.
IV.
The Court of Appeals ruling that Narra, Tesoro and McArthur are foreign corporations
based on the "Grandfather Rule" is contrary to law, particularly the express mandate of
the Foreign Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA
Applications into FTAA Applications were of "suspicious nature" as the same is based on
mere conjectures and surmises without any shred of evidence to show the same.
31

We find the petition to be without merit.


This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without
merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no
practical use or value." Thus, the courts "generally decline jurisdiction over the case or dismiss
it on the ground of mootness."
32

33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an
issue of "mootness" will not deter the courts from trying a case when there is a valid reason to
do so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts
can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide
the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.

34

All of the exceptions stated above are present in the instant case. We of this Court note that a
grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a
foreign corporation right under our countrys nose through a myriad of corporate layering under
different, allegedly, Filipino corporations. The intricate corporate layering utilized by the
Canadian company, MBMI, is of exceptional character and involves paramount public interest
since it undeniably affects the exploitation of our Countrys natural resources. The
corresponding actions of petitioners during the lifetime and existence of the instant case raise
questions as what principle is to be applied to cases with similar issues. No definite ruling on
such principle has been pronounced by the Court; hence, the disposition of the issues or errors
in the instant case will serve as a guide "to the bench, the bar and the public." Finally, the
instant case is capable of repetition yet evading review, since the Canadian company, MBMI,
can keep on utilizing dummy Filipino corporations through various schemes of corporate
layering and conversion of applications to skirt the constitutional prohibition against foreign
mining in Philippine soil.
35

Conversion of MPSA applications to FTAA applications


We shall discuss the first error in conjunction with the sixth error presented by petitioners since
both involve the conversion of MPSA applications to FTAA applications. Petitioners propound

that the CA erred in ruling against them since the questioned MPSA applications were already
converted into FTAA applications; thus, the issue on the prohibition relating to MPSA
applications of foreign mining corporations is academic. Also, petitioners would want us to
correct the CAs finding which deemed the aforementioned conversions of applications as
suspicious in nature, since it is based on mere conjectures and surmises and not supported with
evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case was filed against them by
respondent is on point. The changing of applications by petitioners from one type to another just
because a case was filed against them, in truth, would raise not a few sceptics eyebrows. What
is the reason for such conversion? Did the said conversion not stem from the case challenging
their citizenship and to have the case dismissed against them for being "moot"? It is quite
obvious that it is petitioners strategy to have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the
court or appropriate government agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007,
petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December
14, 2007 Resolution, observed this suspect change of applications while the case was pending
before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission
that the respondents are not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation that is why they
sought the participation of MBMI Resources, Inc. The participation of MBMI in the corporation
only proves the fact that it is the Canadian company that will provide the finances and the
resources to operate the mining areas for the greater benefit and interest of the same and not
the Filipino stockholders who only have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.
36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing
and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said
Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in
fact foreign corporations thus a recommendation of the rejection of their MPSA applications
were recommended to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination
of the Secretary of the DENR and the President of the Republic of the Philippines.
37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal
of the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed
and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and
academic. However, the CA, in a Resolution dated February 15, 2011 denied their motion for
being a mere "rehash of their claims and defenses." Standing firm on its Decision, the CA
affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners
elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning the
Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after
this petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of the
POA and stating that petitioners are foreign corporations since they needed the financial
strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also
based the cancellation on the misrepresentation of facts and the violation of the "Small Scale
Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the
Foreign Investment Act and E.O. 584." On July 6, 2011, the OP issued a Resolution, denying
the Motion for Reconsideration filed by the petitioners.
38

39

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the
fact of the OPs Decision and Resolution. In their Reply, petitioners chose to ignore the OP
Decision and continued to reuse their old arguments claiming that they were granted FTAAs
and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated October
19, 2012, wherein they asserted that the present petition is moot since, in a remarkable turn of
events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI
Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.
40

Again, it is quite evident that petitioners have been trying to have this case dismissed for being
"moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest
in the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the suspicious change in their
corporate structures. The new documents filed by petitioners are factual evidence that this Court
has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood in
their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that
petitioners are not beyond going against or around the law using shifty actions and strategies.
Thus, in this instance, we can say that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,

adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other
laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital
stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital
of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to
aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality," pertains to the control test or the liberal rule. On the
other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality," pertains to the
stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of
the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision
under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%)
of the capital stock outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the members of the
Board of Directors, in order that the corporation shall be considered a Philippine national.
(emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable
rule." They also opined that the last portion of Sec. 3 of the FIA admits the application of a
"corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous
wordings of the statute preclude the court from construing it and prevent the courts use of
41

discretion in applying the law. They said that the plain, literal meaning of the statute meant the
application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned must be
discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of the
country. In such agreements, the State shall promote the development and use of local scientific
and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities
who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since
the issues are centered on the utilization of our countrys natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution
so provides, such agreements are only allowed corporations or associations "at least 60 percent
of such capital is owned by such citizens." The deliberations in the Records of the 1986
Constitutional Commission shed light on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty
and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased,
it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not
total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP
Law Center who provided us with a draft. The phrase that is contained here which we adopted
from the UP draft is 60 percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes. (emphasis supplied)
42

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather
rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions

under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will
have no place of application. As decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the Investee Corporation). Such manner of computation is necessary since the
shares in the Investee Corporation may be owned both by individual stockholders (Investing
Individuals) and by corporations and partnerships (Investing Corporation). The said rules thus
provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the liberal rule, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967
SEC Rules which states, (s)hares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.
Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or
more) Filipino stockholdings of the Investing Corporation since a corporation which is at least
60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict
Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of
Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in
doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders
with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation
which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 6040 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply.
(emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt
is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro,
since their common investor, the 100% Canadian corporationMBMI, funded them. However,

petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than
60%.
43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60%
fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the ownership of the corporation exists. It
would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate schemes
and layerings are utilized to circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Courts mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners
corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000)
divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed
to by the following:
44

Name

Nationality

Number of
Shares

Amount
Subscribed

Amount Paid

Madridejos Mining
Corporation

Filipino

5,997

PhP 5,997,000.00

PhP 825,000.00

MBMI
Resources, Inc.

Canadian

3,998

PhP 3,998,000.0

PhP 1,878,174.60

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.
Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,708,174.60
(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar
structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor

and "controls" MBMI and also, similar nominal shareholders were present, i.e. Fernando B.
Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth
Cawkell (Cawkell):
45

Madridejos Mining Corporation


Name
Olympic Mines
&

Nationality

Number of
Shares

Amount
Subscribed

Filipino

6,663

PhP 6,663,000.00

Amount Paid

PhP 0

Development
Corp.
MBMI
Resources,

Canadian

3,331

PhP 3,331,000.00

PhP 2,803,900.00

Amanti Limson

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T.
Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth
Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,809,900.00

Inc.

Esguerra

Hernando

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with
respect to the number of shares they subscribed to in the corporation, which is quite absurd
since Olympic is the major stockholder in MMC. MBMIs 2006 Annual Report sheds light on why
Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states

that Olympic entered into joint venture agreements with several Philippine companies, wherein it
holds directly and indirectly a 60% effective equity interest in the Olympic Properties. Quoting
the said Annual report:
46

On September 9, 2004, the Company and Olympic Mines & Development Corporation
("Olympic") entered into a series of agreements including a Property Purchase and
Development Agreement (the Transaction Documents) with respect to three nickel laterite
properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents
effectively establish a joint venture between the Company and Olympic for purposes of
developing the Olympic Properties. The Company holds directly and indirectly an initial 60%
interest in the joint venture. Under certain circumstances and upon achieving certain milestones,
the Company may earn up to a 100% interest, subject to a 2.5% net revenue
royalty. (emphasis supplied)
47

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company


layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more
than 60% or more equity interest in McArthur, making the latter a foreign corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos
(PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share,
as demonstrated below:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/april2014/195580.pdf]]

Name

Number of

Amount

Shares

Subscribed

Filipino

5,997

PhP
5,997,000.00

PhP 825,000.00

Canadian

3,998

PhP
3,998,000.00

PhP 1,878,174.60

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Sara Marie

Nationality

Amount Paid

Mining, Inc.
MBMI
Resources, Inc.

Esguerra

Manuel A.

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,708,174.60

Agcaoili

(emphasis
supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures
as the corporate structure of petitioner McArthur, down to the last centavo. All the other
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures
under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly
the same. Delving deeper, we scrutinize SMMIs corporate structure:
Sara Marie Mining, Inc.
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/april2014/195580.pdf]]

Name

Number of

Amount

Shares

Subscribed

Filipino

6,663

PhP
6,663,000.00

PhP 0

Canadian

3,331

PhP
3,331,000.00

PhP 2,794,000.00

Amanti Limson

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Olympic Mines &

Nationality

Amount Paid

Development
Corp.
MBMI Resources,
Inc.

Esguerra
Lauro Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,809,900.00

Hernando

(emphasis
supplied)

After subsequently studying SMMIs corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMCs corporate structure. Again, the presence of
identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar,
Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of
Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount
paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand
pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred
nine thousand nine hundred pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympics participation in
SMMIs corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more
equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus,
disqualifies it to participate in the exploitation, utilization and development of our natural
resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDCs MPSA
application, whose corporate structures arrangement is similar to that of the first two petitioners
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided
into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share,
shown as follows:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/april2014/195580.pdf]]

Name

Nationality

Number of

Amount

Amount Paid

Patricia Louise

Shares

Subscribed

Filipino

5,997

PhP
5,997,000.00

PhP 1,677,000.00

Canadian

3,998

PhP
3,996,000.00

PhP 1,116,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

American

PhP 1,000.00

PhP 1,000.00

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,800,000.00
(emphasis
supplied)

Mining &
Development
Corp.
MBMI
Resources, Inc.
Higinio C.
Mendoza, Jr.
Henry E.
Fernandez
Manuel A.
Agcaoili
Ma. Elena A.
Bocalan
Bayani H. Agabin
Robert L.
McCurdy
Kenneth Cawkell

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is
present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs corporate structure:
Name

Palawan Alpha South


Resources Development
Corporation

Nationalit
y

Number of
Shares

Amount
Subscribed

Amount Paid

Filipino

6,596

PhP
6,596,000.00

PhP 0

Canadian

3,396

PhP
3,396,000.00

PhP
2,796,000.00

Higinio C. Mendoza, Jr.

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Henry E. Fernandez

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP
2,708,174.60
(emphasis
supplied)

MBMI Resources,
Inc.

Yet again, the usual players in petitioners corporate structures are present. Similarly, the
amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South
Resources and Development Corp. (PASRDC), is zero.
Studying MBMIs Summary of Significant Accounting Policies dated October 31, 2005 explains
the reason behind the intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in various mining ventures engaged in
the acquisition, exploration and development of mineral properties in the Philippines is
described as follows:

(a) Olympic Group


The Philippine companies holding the Olympic Property, and the ownership and interests
therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders
agreement, the Company exercises joint control over the companies in the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests therein, are
as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders agreement, the Company
exercises joint control over the companies in the Alpha Group. (emphasis supplied)
48

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro
and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of
their equity interests. Such conclusion is derived from grandfathering petitioners corporate
owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMIs
Summary of Significant Accounting Policies statement regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groupsinvolves SMMI, Tesoro,
PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI,
Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements
with, practically exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60%
or more of their capital stocks or equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res inter alios acta or the "admission by
co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant case,
by pointing out that statements made by MBMI should not be admitted in this case since it is not
a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the
party within the scope of his authority and during the existence of the partnership or agency,
may be given in evidence against such party after the partnership or agency is shown by
evidence other than such act or declaration itself. The same rule applies to the act or
declaration of a joint owner, joint debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is
evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the
partnership relation must be shown, and that proof of the fact must be made by evidence other
than the admission itself." Thus, petitioners assert that the CA erred in finding that a
partnership relationship exists between them and MBMI because, in fact, no such partnership
exists.
49

Partnerships vs. joint venture agreements


Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of
written agreement to form a partnership between petitioners and MBMI, no partnership was
created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves. On the other hand, joint ventures have been deemed to be "akin" to partnerships
since it is difficult to distinguish between joint ventures and partnerships. Thus:
50

[T]he relations of the parties to a joint venture and the nature of their association are so similar
and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities
are to be tested by rules which are closely analogous to and substantially the same, if not
exactly the same, as those which govern partnership. In fact, it has been said that the trend in
the law has been to blur the distinctions between a partnership and a joint venture, very little law
being found applicable to one that does not apply to the other.
51

Though some claim that partnerships and joint ventures are totally different animals, there are
very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing
partnerships are applied.
52

Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI
was executed to circumvent the legal prohibition against corporations entering into partnerships,
then the relationship created should be deemed as "partnerships," and the laws on partnership
should be applied. Thus, a joint venture agreement between and among corporations may be
seen as similar to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that
"by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case.
The POA has jurisdiction to settle disputes over rights to mining areas which definitely involve
the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by
filing its petition against petitioners, is asserting the right of Filipinos over mining areas in the
Philippines against alleged foreign-owned mining corporations. Such claim constitutes a
"dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:

53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending application for a mineral
agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and
41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements,
the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any

concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these
implementing rules and regulations. Upon final resolution of any adverse claim, protest or
opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five (5)
working days from the date of finality of resolution thereof. Where there is no adverse claim,
protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect
within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall
thereafter endorse his/her findings to the Bureau for further evaluation by the Director within
fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall
endorse the same to the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for
in Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary
for consideration/approval within fifteen days from receipt of such endorsement. (emphasis
supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods for
filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made
and that no adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed within fortyfive (45) days from the last date of publication/posting, with the Regional Offices concerned, or
through the Departments Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods for
filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made
and that no adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed within fortyfive (45) days from the last date of publication/posting, with the Regional offices concerned, or
through the Departments Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However, previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.
POAs jurisdiction is confined only to resolutions of such adverse claims, conflicts and
oppositions and it has no authority to approve or reject said applications. Such power is vested
in the DENR Secretary upon recommendation of the MGB Director. Clearly, POAs jurisdiction
over "disputes involving rights to mining areas" has nothing to do with the cancellation of
existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve
disputes over MPSA applications subject of Redmonts petitions. However, said jurisdiction does
not include either the approval or rejection of the MPSA applications, which is vested only upon
the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the
POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.
54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization


Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall exercise exclusive original
jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the case by the parties for the
decision, the panel shall have exclusive and original jurisdiction to hear and decide the
following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving
rights to mining areas. One such dispute is an MPSA application to which an adverse claim,
protest or opposition is filed by another interested applicant. In the case at bar, the dispute
arose or originated from MPSA applications where petitioners are asserting their rights to mining
areas subject of their respective MPSA applications. Since respondent filed 3 separate petitions
for the denial of said applications, then a controversy has developed between the parties and it
is POAs jurisdiction to resolve said disputes.
1wphi1

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA
has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas elucidates:
55

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the courts is had even if the matter
may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort to
the CA and to this Court as a last recourse.
Selling of MBMIs shares to DMCI
As stated before, petitioners Manifestation and Submission dated October 19, 2012 would want
us to declare the instant petition moot and academic due to the transfer and conveyance of all
the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing
under Philippine laws and is at least 60% Philippine-owned. Petitioners reasoned that they now
cannot be considered as foreign-owned; the transfer of their shares supposedly cured the
"defect" of their previous nationality. They claimed that their current FTAA contract with the State
should stand since "even wholly-owned foreign corporations can enter into an FTAA with the
State." Petitioners stress that there should no longer be any issue left as regards their
qualification to enter into FTAA contracts since they are qualified to engage in mining activities
in the Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the
nationalities of petitioners cannot be doubted since it would pass both tests.
56

57

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and
said fact should be disregarded. The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this Court. Thus, the question of whether
petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to
DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.
1wphi1

In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of
Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby
AFFIRMED.
SO ORDERED.
G.R. No. 41570

September 6, 1934

RED LINE TRANSPORTATION CO., petitioner-appellant,


vs.
RURAL TRANSIT CO., LTD., respondent-appellee.
L. D. Lockwood for appellant.
Ohnick and Opisso for appellee.
BUTTE, J.:
This case is before us on a petition for review of an order of the Public Service Commission
entered December 21, 1932, granting to the Rural Transit Company, Ltd., a certificate of public
convenience to operate a transportation service between Ilagan in the Province of Isabela and
Tuguegarao in the Province of Cagayan, and additional trips in its existing express service
between Manila Tuguegarao.
On June 4, 1932, the Rural Transit Company, Ltd., a Philippine corporation, filed with the Public
Company Service Commission an application in which it is stated in substance that it is the
holder of a certificate or public convenience to operate a passenger bus service between Manila
and Tuguegarao; that it is the only operator of direct service between said points and the
present authorized schedule of only one trip daily is not sufficient; that it will be also to the public
convenience to grant the applicant a certificate for a new service between Tuguegarao and
Ilagan.
On July 22, 1932, the appellant, Red Line Transportation Company, filed an opposition to the
said application alleging in substance that as to the service between Tuguegarao and Ilagan,
the oppositor already holds a certificate of public convenience and is rendering adequate and
satisfactory service; that the granting of the application of the Rural Transit Company, Ltd.,
would not serve public convenience but would constitute a ruinous competition for the oppositor
over said route.
After testimony was taken, the commission, on December 21, 1932, approved the application of
the Rural Transit Company, Ltd., and ordered that the certificate of public convenience applied
for be "issued to the applicant Rural Transit Company, Ltd.," with the condition, among others,
that "all the other terms and conditions of the various certificates of public convenience of the
herein applicant and herein incorporated are made a part hereof."

On January 14, 1933, the oppositor Red Line Transportation Company filed a motion for
rehearing and reconsideration in which it called the commission's attention to the fact that there
was pending in the Court of First Instance of Manila case N. 42343, an application for the
voluntary dissolution of the corporation, Rural Transit Company, Ltd. Said motion for
reconsideration was set down for hearing on March 24, 1933. On March 23, 1933, the Rural
Transit Company, Ltd., the applicant, filed a motion for postponement. This motion was verified
by M. Olsen who swears "that he was the secretary of the Rural Transit Company, Ltd., in the
above entitled case." Upon the hearing of the motion for reconsideration, the commission
admitted without objection the following documents filed in said case No. 42343 in the Court of
First Instance of Manila for the dissolution of the Rural Transit Company, Ltd. the petition for
dissolution dated July 6, 1932, the decision of the said Court of First Instance of Manila, dated
February 28, 1933, decreeing the dissolution of the Rural Transit Company, Ltd.
At the trial of this case before the Public Service Commission an issue was raised as to who
was the real party in interest making the application, whether the Rural Transit Company, Ltd.,
as appeared on the face of the application, or the Bachrach Motor Company, Inc., using name
of the Rural Transit Company, Ltd., as a trade name. The evidence given by the applicant's
secretary, Olsen, is certainly very dubious and confusing, as may be seen from the following:
Q.
Will you please answer the question whether it is the Bachrach Motor
Company operating under the trade name of the Rural Transit Company, Limited, or
whether it is the Rural Transit Company, Limited in its own name this application was
filed?
A.

The Bachrach Motor Company is the principal stockholder.

Q.

Please answer the question.

ESPELETA. Objecion porque la pregunta ya ha sido contestada.


JUEZ. Puede contestar.
A.
two.

I do not know what the legal construction or relationship existing between the

JUDGE. I do not know what is in your mind by not telling the real applicant in this case?
A.

It is the Rural Transit Company, Ltd.

JUDGE. As an entity by itself and not by the Bachrach Motor Company?


A.
I do not know. I have not given that phase of the matter much thought, as in
previous occassion had not necessitated.
JUDGE. In filing this application, you filed it for the operator on that line? Is it not!

A.

Yes, sir.

JUDGE. Who is that operator?


A.

The Rural Transit Company, Ltd.

JUDGE. By itself, or as a commercial name of the Bachrach Motor Company?


A.

I cannot say.

ESPELETA. The Rural Transit Company, Ltd., is a corporation duly established in


accordance with the laws of the Philippine Islands.
JUDGE. According to the records of this commission the Bachrach Motor Company is
the owner of the certificates and the Rural Transit Company, Ltd., is operating without
any certificate.
JUDGE. If you filed this application for the Rural Transit Company, Ltd., and afterwards
it is found out that the Rural Transit Company, Ltd., is not an operator, everything will be
turned down.
JUDGE. My question was, when you filed this application you evidently made it for the
operator?
A.

Yes, sir.

JUDGE. Who was that operator you had in mind?


A.
According to the status of the ownership of the certificates of the former Rural
Transit Company, the operator was the operator authorized in case No. 23217 to whom
all of the assets of the former Rural Transit Company were sold.
JUDGE. Bachrach Motor Company?
A.
Ltd.

All actions have been prosecuted in the name of the Rural Transit Company,

JUDGE. You mean the Bachrach Motor Company, Inc., doing business under the name
of the Rural Transit Company, Ltd.?
A.

Yes, sir.

LOCKWOOD. I move that this case be dismissed, your Honor, on the ground that this
application was made in the name of one party but the real owner is another party.

ESPELETA. We object to that petition.


JUDGE. I will have that in mind when I decide the case. If I agree with you everything
would be finished.
The Bachrach Motor Company, Inc., entered no appearance and ostensibly took no part in the
hearing of the application of the Rural Transit Company, Ltd. It may be a matter of some
surprise that the commission did not on its own motion order the amendment of the application
by substituting the Bachrach Motor Company, Inc., as the applicant. However, the hearing
proceeded on the application as filed and the decision of December 2, 1932, was rendered in
favor of the Rural Transit Company, Ltd., and the certificate ordered to be issued in its name, in
the face of the evidence that the said corporation was not the real party in interest. In its said
decision, the commission undertook to meet the objection by referring to its resolution of
November 26, 1932, entered in another case. This resolution in case No. 23217 concludes as
follows:
Premises considered we hereby authorize the Bachrach Motor Co., Inc., to continue
using the name of "Rural Transit Co., Ltd.," as its trade name in all the applications,
motions or other petitions to be filed in this commission in connection with said business
and that this authority is given retroactive effect as of the date, of filing of the application
in this case, to wit, April 29, 1930.
We know of no law that empowers the Public Service Commission or any court in this
jurisdiction to authorize one corporation to assume the name of another corporation as a trade
name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine
corporations and the very law of their creation and continued existence requires each to adopt
and certify a distinctive name. The incorporators "constitute a body politic and corporate under
the name stated in the certificate." (Section 11, Act No. 1459, as amended.) A corporation has
the power "of succession by its corporate name." (Section 13, ibid.) The name of a corporation
is therefore essential to its existence. It cannot change its name except in the manner provided
by the statute. By that name alone is it authorized to transact business. The law gives a
corporation no express or implied authority to assume another name that is unappropriated: still
less that of another corporation, which is expressly set apart for it and protected by the law. If
any corporation could assume at pleasure as an unregistered trade name the name of another
corporation, this practice would result in confusion and open the door to frauds and evasions
and difficulties of administration and supervision. The policy of the law expressed in our
corporation statute and the Code of Commerce is clearly against such a practice. (Cf. Scarsdale
Pub. Co. Colonial Press vs. Carter, 116 New York Supplement, 731; Svenska Nat. F. i.
C. vs. Swedish Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.)
The order of the commission of November 26, 1932, authorizing the Bachrach Motor Co.,
Incorporated, to assume the name of the Rural Transit Co., Ltd. likewise in corporated, as its
trade name being void, and accepting the order of December 21, 1932, at its face as granting a
certificate of public convenience to the applicant Rural Transit Co., Ltd., the said order last

mentioned is set aside and vacated on the ground that the Rural Transit Company, Ltd., is not
the real party in interest and its application was fictitious.
In view of the dissolution of the Rural Transit Company, Ltd. by judicial decree of February 28,
1933, we do not see how we can assess costs against said respondent, Rural Transit Company,
Ltd.
Malcolm, Villa-Real, Imperial and Goddard, JJ., concur.
G.R. No. L-28351 July 28, 1977
UNIVERSAL MILLS CORPORATION, petitioner,
vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.
Emigdio G. Tanjuatco for petitioner.
Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.

BARREDO, J.:
Appeal from the order of the Securities and Exchange Commission in S.E.C. Case No. 1079,
entitled In the Matter of the Universal Textile Mills, Inc. vs. Universal Mills Corporation, a petition
to have appellant change its corporate name on the ground that such name is "confusingly and
deceptively similar" to that of appellee, which petition the Commission granted.
According to the order, "the Universal Textile Mills, Inc. was organ on December 29, 1953, as a
textile manufacturing firm for which it was issued a certificate of registration on January 8, 1954.
The Universal Mills Corporation, on the other hand, was registered in this Commission on
October 27, 1954, under its original name, Universal Hosiery Mills Corporation, having as its
primary purpose the "manufacture and production of hosieries and wearing apparel of all kinds."
On May 24, 1963, it filed an amendment to its articles of incorporation changing its name to
Universal Mills Corporation, its present name, for which this Commission issued the certificate
of approval on June 10, 1963.
The immediate cause of this present complaint, however, was the occurrence of a fire which
gutted respondent's spinning mills in Pasig, Rizal. Petitioner alleged that as a result of this fire
and because of the similarity of respondent's name to that of herein complainant, the news
items appearing in the various metropolitan newspapers carrying reports on the fire created
uncertainty and confusion among its bankers, friends, stockholders and customers prompting
petitioner to make announcements, clarifying the real Identity of the corporation whose property
was burned. Petitioner presented documentary and testimonial evidence in support of this
allegation.

On the other hand, respondent's position is that the names of the two
corporations are not similar and even if there be some similarity, it is not
confusing or deceptive; that the only reason that respondent changed its name
was because it expanded its business to include the manufacture of fabrics of all
kinds; and that the word 'textile' in petitioner's name is dominant and prominent
enough to distinguish the two. It further argues that petitioner failed to present
evidence of confusion or deception in the ordinary course of business; that the
only supposed confusion proved by complainant arose out of an extraordinary
occurrence a disastrous fire. (pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the jurisprudence on the matter, it appears necessary
under the circumstances to enjoin the respondent Universal Mills Corporation
from further using its present corporate name. Judging from what has already
happened, confusion is not only apparent, but possible. It does not matter that
the instance of confusion between the two corporate names was occasioned only
by a fire or an extraordinary occurrence. It is precisely the duty of this
Commission to prevent such confusion at all times and under all circumstances
not only for the purpose of protecting the corporations involved but more so for
the protection of the public.
In today's modern business life where people go by tradenames and corporate
images, the corporate name becomes the more important. This Commission
cannot close its eyes to the fact that usually it is the sound of all the other words
composing the names of business corporations that sticks to the mind of those
who deal with them. The word "textile" in Universal Textile Mills, Inc.' can not
possibly assure the exclusion of all other entities with similar names from the
mind of the public especially so, if the business they are engaged in are the
same, like in the instant case.
This Commission further takes cognizance of the fact that when respondent filed
the amendment changing its name to Universal Mills Corporation, it
correspondingly filed a written undertaking dated June 5, 1963 and signed by its
President, Mr. Mariano Cokiat, promising to change its name in the event that
there is another person, firm or entity who has obtained a prior right to the use of
such name or one similar to it. That promise is still binding upon the corporation
and its responsible officers. (pp. 17-18, Record.)
It is obvious that the matter at issue is within the competence of the Securities and Exchange
Commission to resolve in the first instance in the exercise of the jurisdiction it used to possess
under Commonwealth Act 287 as amended by Republic Act 1055 to administer the application
and enforcement of all laws affecting domestic corporations and associations, reserving to the
courts only conflicts of judicial nature, and, of course, the Supreme Court's authority to review

the Commissions actuations in appropriate instances involving possible denial of due process
and grave abuse of discretion. Thus, in the case at bar, there being no claim of denial of any
constitutional right, all that We are called upon to determine is whether or not the order of the
Commission enjoining petitioner to its corporate name constitutes, in the light of the
circumstances found by the Commission, a grave abuse of discretion.
We believe it is not. Indeed, it cannot be said that the impugned order is arbitrary and
capricious. Clearly, it has rational basis. The corporate names in question are not Identical, but
they are indisputably so similar that even under the test of "reasonable care and observation as
the public generally are capable of using and may be expected to exercise" invoked by
appellant, We are apprehensive confusion will usually arise, considering that under the second
amendment of its articles of incorporation on August 14, 1964, appellant included among its
primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in
which respondent had been engaged for more than a decade ahead of petitioner. Factually, the
Commission found existence of such confusion, and there is evidence to support its conclusion.
Since respondent is not claiming damages in this proceeding, it is, of course, immaterial
whether or not appellant has acted in good faith, but We cannot perceive why of all names, it
had to choose a name already being used by another firm engaged in practically the same
business for more than a decade enjoying well earned patronage and goodwill, when there are
so many other appropriate names it could possibly adopt without arousing any suspicion as to
its motive and, more importantly, any degree of confusion in the mind of the public which could
mislead even its own customers, existing or prospective. Premises considered, there is no
warrant for our interference.
As this is purely a case of injunction, and considering the time that has elapsed since the facts
complained of took place, this decision should not be deemed as foreclosing any further remedy
which appellee may have for the protection of its interests.
WHEREFORE, with the reservation already mentioned, the appealed decision is affirmed. Costs
against petitioners.
Fernando (Chairman), Antonio, Aquino, Concepcion Jr. and Santos, JJ., concur.
G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF
APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO,
INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES,
LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and
WESTERN PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.

Froilan Siobal for Western Pangasinan Lyceum.


SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME
WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING
CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED
BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". The Articles
of Incorporation of a corporation must, among other things, set out the name of the corporation.
Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are
concerned: "Section 18. Corporate name. No corporate name may be allowed by the
Securities an Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already protected by
law or is patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name." The policy underlying the prohibition in Section 18
against the registration of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing"
or "contrary to existing laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over corporations. We do not consider
that the corporate names of private respondent institutions are "identical with, or deceptively or
confusingly similar" to that of the petitioner institution. True enough, the corporate names of
private respondent entities all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do
not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of
the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of
the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT
ATTENDED WITH EXCLUSIVITY. It is claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word,
although originally a generic, has become appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however, been extended to corporate names sine the
right to use a corporate name to the exclusion of others is based upon the same principle which
underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc. v.
Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following
terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to an
article on the market, because geographically or otherwise descriptive, might nevertheless have
been used so long and so exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase has come to mean that the
article was his product." The question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such length of time and with such

exclusivity as to have become associated or identified with the petitioner institution in the mind
of the general public (or at least that portion of the general public which has to do with schools).
The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine
of secondary meaning, a word or phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one producer with reference to this
article that, in that trade and to that group of the purchasing public, the word or phrase has
come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into which the name or phrase has
evolved through the substantial and exclusive use of the same for a considerable period of time.
. . . No evidence was ever presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant.
If there was any of this kind, the same tend to prove only that the appellant had been using the
disputed word for a long period of time. . . . In other words, while the appellant may have proved
that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount
to mean that the said word had acquired secondary meaning in its favor because the appellant
failed to prove that it had been using the same word all by itself to the exclusion of others. More
so, there was no evidence presented to prove that confusion will surely arise if the same word
were to be used by other educational institutions. Consequently, the allegations of the appellant
in its first two assigned errors must necessarily fail." We agree with the Court of Appeals. The
number alone of the private respondents in the case at bar suggests strongly that petitioner's
use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of
the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but
was in truth shared with the Western Pangasinan Lyceum and a little later with other private
respondent institutions which registered with the SEC using "Lyceum" as part of their
corporation names. There may well be other schools using Lyceum or Liceo in their names, but
not registered with the SEC because they have not adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY
ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. petitioner institution is not entitled to a legally enforceable exclusive right to use the
word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of
their corporate names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate name, it is not enough to
ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate
names in their entirety and when the name of petitioner is juxtaposed with the names of private
respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively
similar" with each other.
DECISION
FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their
respective names.
Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972
The following private respondents were declared in default for failure to file an answer despite
service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the
Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against
the Liceum of Araullo was dismissed when that school motu proprio change its corporate name
to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc.
to require it to change its corporate name and to adopt another name not "similar [to] or
identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio
Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were
substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name
of the geographical location of the campus being the only word which distinguished one from
the other corporate name. The SEC also noted that petitioner had registered as a corporation
ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name
to another name "not similar or identical [with]" the names of previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case
docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court
denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the
educational institutions it could find using the word "Lyceum" as part of their corporate name,
and advised them to discontinue such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No.
2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the
word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc.
case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and
that petitioner had acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing
officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to
have become so identified with petitioner as to render use thereof by other institutions as
productive of confusion about the identity of the schools concerned in the mind of the general
public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical
names to the word "Lyceum" served sufficiently to distinguish the schools from one another,
especially in view of the fact that the campuses of petitioner and those of the private
respondents were physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991,
however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner
filed a motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L46595 did not constitute stare decisis as to apply to this case and in not holding that said
Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated
by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by
noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare
decisis pertinent, if only because the SEC En Banc itself has re-examined Associate
Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in
G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned:
"SECTION 18. Corporate name. No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical
with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred
to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo
and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the philosopher Aristotle and his followers for
teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions
providing public lectures and concerts and public discussions. Thus today, the word "Lyceum"
generally refers to a school or an institution of learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also found in Spanish (liceo) and in French
(lycee). As the Court of Appeals noted in its Decision, Roman Catholic schools frequently use
the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate,"
"Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the
name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It
may be (though this is a question of fact which we need not resolve) that the use of the word
"Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not
inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of
their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is
not unnatural to use this word to designate an entity which is organized and operating as an
educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning
in relation to petitioner with the result that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the
doctrine of secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or phrase has come to mean that the
article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools). The Court of Appeals
recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise

descriptive might nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into which the name or
phrase has evolved through the substantial and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or principle cannot be made to apply where the
evidence did not prove that the business (of the plaintiff) has continued for so long a time that it
has become of consequence and acquired a good will of considerable value such that its
articles and produce have acquired a well-known reputation, and confusion will result by the use
of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92
Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend to prove only that the appellant had
been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive
use of the word (Lyceum) was never established or proven as in fact the evidence tend to
convey that the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior
to the date the appellant started using the same word in its corporate name. Furthermore,
educational institutions of the Roman Catholic Church had been using the same or similar word
like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de
Albay' long before appellant started using the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with its educational institution that confusion
will surely arise in the minds of the public if the same word were to be used by other educational
institutions.
In other words, while the appellant may have proved that it had been using the word 'Lyceum'
for a long period of time, this fact alone did not amount to mean that the said word had acquired
secondary meaning in its favor because the appellant failed to prove that it had been using the
same word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private respondents in the case at
bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used
the term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name
with the SEC and began using the word "Lyceum." It follows that if any institution had acquired
an exclusive right to the word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed
to reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62,
which records had been destroyed during World War II, Western Pangasinan Lyceum should be
deemed to have lost all rights it may have acquired by virtue of its past registration. It might be
noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner
had filed its own registration on 21 September 1950. Whether or not Western Pangasinan
Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears
to us to be quite secondary in importance; we refer to this earlier registration simply to
underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that
term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with
other private respondent institutions which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools using Lyceum or Liceo in their names,
but not registered with the SEC because they have not adopted the corporate form of
organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other institutions may
use "Lyceum" as part of their corporate names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not
enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the
Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement
as to costs.
SO ORDERED.
G.R. No. 96161 February 21, 1992
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC.,petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD
PHILIPS CORPORATION,respondents.
Emeterio V. Soliven & Associates for petitioners.
Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:
Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp.
No. 20067, upholding the Order of the Securities and Exchange Commission, dated 2 January
1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the
word "PHILIPS" from private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the
Netherlands, although not engaged in business here, is the registered owner of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R1674, respectively issued by the Philippine Patents Office (presently known as the Bureau of
Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc.
(Philips Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for
short), authorized users of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were
incorporated on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations
belong to the PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a
Certificate of Registration by respondent Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange
Commission (SEC) asking for the cancellation of the word "PHILIPS" from Private Respondent's
corporate name in view of the prior registration with the Bureau of Patents of the trademark
"PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the
previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners
filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the
issuance of a Writ of Preliminary Injunction, alleging, among others, that Private Respondent's
use of the word PHILIPS amounts to an infringement and clear violation of Petitioners' exclusive
right to use the same considering that both parties engage in the same business.
In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no
legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners'
trademark PHILIPS when considered in its entirety; and that its products consisting of chain
rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical products.
After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on
27 September 1985, ruled against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so
ruling, the latter declared that inasmuch as the SEC found no sufficient ground for the granting
of injunctive relief on the basis of the testimonial and documentary evidence presented, it
cannot order the removal or cancellation of the word "PHILIPS" from Private Respondent's
corporate name on the basis of the same evidence adopted in toto during trial on the merits.

Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate
names in question are identical. Here, there is no confusing similarity between Petitioners' and
Private Respondent's corporate names as those of the Petitioners contain at least two words
different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise
denied on 17 June 1987.
On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of
Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at least
two different words and, therefore, rules out any possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review
on Certiorari before this Court, which Petition was later referred to the Court of Appeals in a
Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of
Appeals 1 swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v.
Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147 SCRA 154),
the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same
constitutes a dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed
that the Converse case is not four-square with the present case inasmuch as the contending parties
in Converse are engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the
SEC, the Appellate Court concluded that "private respondents' products consisting of chain rollers, belts,
bearings and cutting saw are unrelated and non-competing with petitioners' products i.e. electrical lamps
such that consumers would not in any probability mistake one as the source or origin of the product of the
other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990,
hence, this Petition which was given due course on 22 April 1991, after which the parties were
required to submit their memoranda, the latest of which was received on 2 July 1991. In
December 1991, the SEC was also required to elevate its records for the perusal of this Court,
the same not having been apparently before respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court
declared that a corporation's right to use its corporate and trade name is a property right, a
right in rem, which it may assert and protect against the world in the same manner as it may
protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a
certain extent, as a property right and one which cannot be impaired or defeated by subsequent
appropriation by another corporation in the same field (Red Line Transportation Co. vs. Rural
Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of a corporation (American
Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon
Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE

792). Its name is one of its attributes, an element of its existence, and essential to its identity (6
Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must
have a name by which it is to sue and be sued and do all legal acts. The name of a corporation
in this respect designates the corporation in the same manner as the name of an individual
designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport
Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as
much a part of the corporate franchise as any other privilege granted (Federal Secur. Co. vs.
Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name identical with or similar
to one already appropriated by a senior corporation while an individual's name is thrust upon
him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973,
977). A corporation can no more use a corporate name in violation of the rights of others than an
individual can use his name legally acquired so as to mislead the public and injure another
(Armington vs. Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly provides that:
No corporate name may be allowed by the Securities and Exchange Commission
if the proposed name is identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing law.Where a change in a
corporate name is approved, the commission shall issue an amended certificate
of incorporation under the amended name. (Emphasis supplied)
The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be
proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate name;
and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from infringement by similarity
is determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N.
Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this

regard, there is no doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as
part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated
on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was
issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo, p. 16).
Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and
their accessories since 30 September 1922, as evidenced by Certificate of Registration No.
1651.
The second requisite no less exists in this case. In determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such as to mislead a person,
using ordinary care and discrimination. In so doing, the Court must look to the record as well as
the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the
corporate names of Petitioners and Private Respondent are not identical, a reading of
Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS,
INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that
"PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with
the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group
of Companies.
Respondents maintain, however, that Petitioners did not present an iota of proof of actual
confusion or deception of the public much less a single purchaser of their product who has been
deceived or confused or showed any likelihood of confusion. It is settled, however, that proof of
actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6
Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).
It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the
like, while petitioners deal principally with electrical products. It is significant to note, however,
that even the Director of Patents had denied Private Respondent's application for registration of
the trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw.
That office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment,
machines and their parts which fall under international class where "chains, rollers, belts,
bearings and cutting saw," the goods in connection with which Respondent is seeking to register
'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No. 2010, June 17, 1988,
SEC Rollo).
Furthermore, the records show that among Private Respondent's primary purposes in its
Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:
To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire,
dispose of, and deal in and deal with any kind of goods, wares, and merchandise
such as but not limited to plastics, carbon products, office stationery and
supplies, hardware parts, electrical wiring devices, electrical component parts,
and/or complement of industrial, agricultural or commercial machineries,
constructive supplies, electrical supplies and other merchandise which are or

may become articles of commerce except food, drugs and cosmetics and to carry
on such business as manufacturer, distributor, dealer, indentor, factor,
manufacturer's representative capacity for domestic or foreign companies.
(emphasis ours)
For its part, Philips Electrical also includes, among its primary purposes, the following:
To develop manufacture and deal in electrical products, including electronic,
mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743)
Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from
dealing in the same line of business of electrical devices, products or supplies which fall under
its primary purposes. Besides, there is showing that Private Respondent not only manufactured
and sold ballasts for fluorescent lamps with their corporate name printed thereon but also
advertised the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25,
26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate
respondent's choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS
CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and
established goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The
subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair
advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold
Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the SEC maintains that
the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the
corporate name of respondent STANDARD PHILIPS CORPORATION, which words will readily
identify Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by
the SEC, the proposed name "should not be similar to one already used by another corporation
or partnership. If the proposed name contains a word already used as part of the firm name or
style of a registered company; the proposed name must contain two other words different from
the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips
Electrical and Philips Industrial have two words different from that of Private Respondent's
name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name which was
registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which
must be free from any infringement by similarity. A corporation has an exclusive right to the use
of its name, which may be protected by injunction upon a principle similar to that upon which
persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle
proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that
name and perhaps carried on its business thereunder, that another should attempt to use the
same name, or the same name with a slight variation in such a way as to induce persons to deal

with it in the belief that they are dealing with the corporation which has given a reputation to the
name (6 Fletcher [Perm Ed], pp. 39-40, citingBorden Ice Cream Co. v. Borden's Condensed Milk
Co., 210 F 510). Notably, too, Private Respondent's name actually contains only a single word,
that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term
"Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from
partnerships and other business organizations.
The fact that there are other companies engaged in other lines of business using the word
"PHILIPS" as part of their corporate names is no defense and does not warrant the use by
Private Respondent of such word which constitutes an essential feature of Petitioners' corporate
name previously adopted and registered and-having acquired the status of a well-known mark in
the Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17,
1988, SEC Records).
In support of its application for the registration of its Articles of Incorporation with the SEC,
Private Respondent had submitted an undertaking "manifesting its willingness to change its
corporate name in the event another person, firm or entity has acquired a prior right to the use
of the said firm name or one deceptively or confusingly similar to it." Private respondent must
now be held to its undertaking.
As a general rule, parties organizing a corporation must choose a name at their
peril; and the use of a name similar to one adopted by another corporation,
whether a business or a nonbusiness or non-profit organization if misleading and
likely to injure it in the exercise in its corporate functions, regardless of intent,
may be prevented by the corporation having the prior right, by a suit for injunction
against the new corporation to prevent the use of the name (American Gold Star
Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488,
27 ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution
dated 20 November 1990, are SET ASIDE and a new one entered ENJOINING private
respondent from using "PHILIPS" as a feature of its corporate name, and ORDERING the
Securities and Exchange Commission to amend private respondent's Articles of Incorporation
by deleting the word PHILIPS from the corporate name of private respondent.
No costs.
SO ORDERED.
G.R. No. 137592

December 12, 2001

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC.,petitioner,
vs.

IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG


KATOTOHANAN, respondent.
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7, 19971 and the Resolution
dated February 16, 19992 of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed the
Decision of the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.3
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God
in Christ Jesus, the Pillar and Ground of Truth),4 is a non-stock religious society or corporation
registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members of
respondent corporation disassociated themselves from the latter and succeeded in registering
on March 30, 1977 a new non-stock religious society or corporation, namedIglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which
petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name to another name that is not similar or identical to any
name already used by a corporation, partnership or association registered with the
Commission.5No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay
Kristo Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan
ng Katotohanan.6
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC
Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be
barred from using the same or similar name on the ground that the same causes confusion
among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default
and respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate
name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner
(respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the Petitioner,
any corporation, association, and/or partnership presently registered with the
Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and
Legal Department [CLD] of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their end.
SO ORDERED.7
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539.
In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a
finding that petitioner's corporate name was identical or confusingly or deceptively similar to that
of respondent's corporate name.8
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court of
Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioner's
motion for reconsideration was denied by the Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER HAS
NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE
HONORABLE COURT OF APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE
TO THE CASE AT BAR AND INSTEAD RELIED ON TOTALLY INAPPLICABLE
JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE CIVIL
CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS
FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC
CASE HAS SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY APPLY
THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE APPLICATION OF
SECTION 18 OF THE CORPORATION CODE TO THE INSTANT CASE.
IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE SCOPE


OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING
TO APPLY THE SAME TO PROTECT PETITIONER'S RIGHTS.9
Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that the decision of the
Court of Appeals and the SEC should be set aside because the negligence of its former counsel
of record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss was
denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds the client.
This is based on the rule that any act performed by a lawyer within the scope of his general or
implied authority is regarded as an act of his client.11 An exception to the foregoing is where the
reckless or gross negligence of the counsel deprives the client of due process of law. 12 Said
exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his client's cause consisted
in filing a motion for extension of time to file answer before the trial court. When his client was
declared in default, the counsel did nothing and allowed the judgment by default to become final
and executory. Upon the insistence of his client, the counsel filed a petition to annul the
judgment with the Court of Appeals, which denied the petition, and again the counsel allowed
the denial to become final and executory. This Court found the counsel grossly negligent and
consequently declared as null and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a
motion to dismiss on the ground of lack of cause of action. When his client was declared in
default for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the
order of default.13 After judgment by default was rendered against petitioner corporation, Atty.
Garaygay filed a motion for extension of time to appeal/motion for reconsideration, and
thereafter a motion to set aside the decision.14
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an
answer that led to the rendition of a judgment by default against petitioner, his efforts were
palpably real, albeit bereft of zeal.15
Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the
Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be
construed as a waiver of that defense.16 At any rate, the SEC has the authority to de-register at
all times and under all circumstances corporate names which in its estimation are likely to
spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate names
not only for the protection of the corporations involved but more so for the protection of the
public.17
Section 18 of the Corporation Code provides:

Corporate Name. No corporate name may be allowed by the Securities and


Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or is contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.18
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but
eight words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas,
Inc.," which, petitioner argues, effectively distinguished it from respondent corporation.
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name
are, as correctly observed by the SEC, merely descriptive of and also referring to the members,
or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly
serve as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym H.S.K.;19 not to mention the fact that
both are espousing religious beliefs and operating in the same place. Parenthetically, it is well to
mention that the acronym H.S.K. used by petitioner stands for "Haligi at Saligan ng
Katotohanan."20
Then, too, the records reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN
NG KATOTOHANAN," which is strikingly similar to respondent's corporate name, thus making it
even more evident that the additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas,
Inc.", are merely descriptive of and pertaining to the members of respondent corporation.21
Significantly, the only difference between the corporate names of petitioner and respondent are
the wordsSALIGAN and SUHAY. These words are synonymous both mean ground,
foundation or support. Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,22 where the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under the test
of "reasonable care and observation" confusion may arise.

Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot


find justification under the generic word rule. We agree with the Court of Appeals' conclusion
that a contrary ruling would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names
Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of
God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not
authorize the use by petitioner of the essential and distinguishing feature of respondent's
registered and protected corporate name.23
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right to religious
freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC
guidelines in the approval of partnership and corporate names, namely its undertaking to
manifest its willingness to change its corporate name in the event another person, firm, or entity
has acquired a prior right to the use of the said firm name or one deceptively or confusingly
similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
G.R. No. L-22238

February 18, 1967

CLAVECILLIA RADIO SYSTEM, petitioner-appellant,


vs.
HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of Cagayan de Oro City
and NEW CAGAYAN GROCERY, respondents-appellees.
B. C. Padua for petitioner and appellant.
Pablo S. Reyes for respondents and appellees.
REGALA, J.:
This is an appeal from an order of the Court of First Instance of Misamis Oriental dismissing the
petition of the Clavecilla Radio System to prohibit the City Judge of Cagayan de Oro from taking
cognizance of Civil Case No. 1048 for damages.
It appears that on June 22, 1963, the New Cagayan Grocery filed a complaint against the
Clavecilla Radio System alleging, in effect, that on March 12, 1963, the following message,
addressed to the former, was filed at the latter's Bacolod Branch Office for transmittal thru its
branch office at Cagayan de Oro:

NECAGRO CAGAYAN DE ORO (CLAVECILLA)


REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE
SHALL SHIP LATER REPLY POHANG
The Cagayan de Oro branch office having received the said message omitted, in
delivering the same to the New Cagayan Grocery, the word "NOT" between the words
"WASHED" and "AVAILABLE," thus changing entirely the contents and purport of the
same and causing the said addressee to suffer damages. After service of summons, the
Clavecilla Radio System filed a motion to dismiss the complaint on the grounds that it
states no cause of action and that the venue is improperly laid. The New Cagayan
Grocery interposed an opposition to which the Clavecilla Radio System filed its rejoinder.
Thereafter, the City Judge, on September 18, 1963, denied the motion to dismiss for lack
of merit and set the case for hearing.
1wph1.t

Hence, the Clavecilla Radio System filed a petition for prohibition with preliminary injunction with
the Court of First Instance praying that the City Judge, Honorable Agustin Antillon, be enjoined
from further proceeding with the case on the ground of improper venue. The respondents filed a
motion to dismiss the petition but this was opposed by the petitioner. Later, the motion was
submitted for resolution on the pleadings.
In dismissing the case, the lower court held that the Clavecilla Radio System may be sued
either in Manila where it has its principal office or in Cagayan de Oro City where it may be
served, as in fact it was served, with summons through the Manager of its branch office in said
city. In other words, the court upheld the authority of the city court to take cognizance of the
case.
1wph1.t

In appealing, the Clavecilla Radio System contends that the suit against it should be filed in
Manila where it holds its principal office.
It is clear that the case for damages filed with the city court is based upon tort and not upon a
written contract. Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in
inferior courts, provides in its paragraph (b) (3) that when "the action is not upon a written
contract, then in the municipality where the defendant or any of the defendants resides or may
be served with summons." (Emphasis supplied)
Settled is the principle in corporation law that the residence of a corporation is the place where
its principal office is established. Since it is not disputed that the Clavecilla Radio System has its
principal office in Manila, it follows that the suit against it may properly be filed in the City of
Manila.
The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue
was properly laid on the principle that the appellant may also be served with summons in that
city where it maintains a branch office. This Court has already held in the case of Cohen vs.
Benguet Commercial Co., Ltd., 34 Phil. 526; that the term "may be served with summons" does

not apply when the defendant resides in the Philippines for, in such case, he may be sued only
in the municipality of his residence, regardless of the place where he may be found and served
with summons. As any other corporation, the Clavecilla Radio System maintains a residence
which is Manila in this case, and a person can have only one residence at a time (See Alcantara
vs. Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387). The fact that it
maintains branch offices in some parts of the country does not mean that it can be sued in any
of these places. To allow an action to be instituted in any place where a corporate entity has its
branch offices would create confusion and work untold inconvenience to the corporation.
It is important to remember, as was stated by this Court in Evangelista vs. Santos, et al., supra,
that the laying of the venue of an action is not left to plaintiff's caprice because the matter is
regulated by the Rules of Court. Applying the provision of the Rules of Court, the venue in this
case was improperly laid.
The order appealed from is therefore reversed, but without prejudice to the filing of the action in
Which the venue shall be laid properly. With costs against the respondents-appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ., concur.

HYATT ELEVATORS AND G.R. No. 161026


ESCALATORS CORPORATION,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
GOLDSTAR ELEVATORS, Promulgated:
PHILS., INC.,*
Respondent. October 24, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- x

DECISION
PANGANIBAN, J.:

ell established in our jurisprudence is the rule that


the residence of a corporation is the place where its
principal office is located, as stated in its Articles of
Incorporation.

The Case
Before us is a Petition for Review [1] on Certiorari,
under Rule 45 of the Rules of Court, assailing the June
26,

2003

Decision[2] and

the

November

27,

2003

Resolution[3] of the Court of Appeals (CA) in CA-GR SP


No. 74319. The decretal portion of the Decision reads as
follows:
WHEREFORE, in view of the foregoing, the assailed Orders
dated May 27, 2002 and October 1, 2002 of the RTC, Branch 213,
Mandaluyong City in Civil Case No. 99-600, are hereby SET ASIDE.
The said case is hereby ordered DISMISSED on the ground of
improper venue.[4]

The assailed Resolution denied petitioners Motion for


Reconsideration.
The Facts
The relevant facts of the case are summarized by the
CA in this wise:
Petitioner [herein Respondent] Goldstar Elevator Philippines,
Inc. (GOLDSTAR for brevity) is a domestic corporation primarily
engaged in the business of marketing, distributing, selling, importing,
installing, and maintaining elevators and escalators, with address at
6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

On the other hand, private respondent [herein petitioner] Hyatt


Elevators and Escalators Company (HYATT for brevity) is a
domestic corporation similarly engaged in the business of selling,
installing and maintaining/servicing elevators, escalators and parking
equipment, with address at the 6 th Floor, Dao I Condominium,
Salcedo St., Legaspi Village, Makati, as stated in its Articles of
Incorporation.
On February 23, 1999, HYATT filed a Complaint for unfair
trade practices and damages under Articles 19, 20 and 21 of the
Civil Code of the Philippines against LG Industrial Systems Co. Ltd.
(LGISC) and LG International Corporation (LGIC), alleging among
others, that: in 1988, it was appointed by LGIC and LGISC as the
exclusive distributor of LG elevators and escalators in the
Philippines under a Distributorship Agreement; x x x LGISC, in the
latter part of 1996, made a proposal to change the exclusive
distributorship agency to that of a joint venture partnership; while it
looked forward to a healthy and fruitful negotiation for a joint venture,
however, the various meetings it had with LGISC and LGIC, through
the latters representatives, were conducted in utmost bad faith and
with malevolent intentions; in the middle of the negotiations, in order
to put pressures upon it, LGISC and LGIC terminated the Exclusive
Distributorship Agreement; x x x [A]s a consequence, [HYATT]
sufferedP120,000,000.00 as actual damages, representing loss of
earnings and business opportunities, P20,000,000.00 as damages
for its reputation and goodwill,P1,000,000.00 as and by way of
exemplary damages, and P500,000.00 as and by way of attorneys
fees.
On March 17, 1999, LGISC and LGIC filed a Motion to
Dismiss raising the following grounds: (1) lack of jurisdiction over the
persons of defendants, summons not having been served on its
resident agent; (2) improper venue; and (3) failure to state a cause
of action. The [trial] court denied the said motion in an Order dated
January 7, 2000.
On March 6, 2000, LGISC and LGIC filed an Answer with
Compulsory Counterclaim ex abundante cautela. Thereafter, they
filed a Motion for Reconsideration and to Expunge Complaint which
was denied.
On December 4, 2000, HYATT filed a motion for leave of court
to amend the complaint, alleging that subsequent to the filing of the

complaint, it learned that LGISC transferred all its organization,


assets and goodwill, as a consequence of a joint venture agreement
with Otis Elevator Company of the USA, to LG Otis Elevator
Company (LG OTIS, for brevity). Thus, LGISC was to be substituted
or changed to LG OTIS, its successor-in-interest. Likewise, the
motion averred that x x x GOLDSTAR was being utilized by LG OTIS
and LGIC in perpetrating their unlawful and unjustified acts against
HYATT. Consequently, in order to afford complete relief, GOLDSTAR
was to be additionally impleaded as a party-defendant. Hence, in the
Amended Complaint, HYATT impleaded x x x GOLDSTAR as a
party-defendant, and all references to LGISC were correspondingly
replaced with LG OTIS.
On December 18, 2000, LG OTIS (LGISC) and LGIC filed
their opposition to HYATTs motion to amend the complaint. It argued
that: (1) the inclusion of GOLDSTAR as party-defendant would lead
to a change in the theory of the case since the latter took no part in
the negotiations which led to the alleged unfair trade practices
subject of the case; and (b) HYATTs move to amend the complaint at
that time was dilatory, considering that HYATT was aware of the
existence of GOLDSTAR for almost two years before it sought its
inclusion as party-defendant.
On January 8, 2001, the [trial] court admitted the Amended
Complaint. LG OTIS (LGISC) and LGIC filed a motion for
reconsideration thereto but was similarly rebuffed on October 4,
2001.
On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss
the amended complaint, raising the following grounds: (1) the venue
was improperly laid, as neither HYATT nor defendants reside in
Mandaluyong City, where the original case was filed; and (2) failure
to state a cause of action against [respondent], since the amended
complaint fails to allege with certainty what specific ultimate acts x x
x Goldstar performed in violation of x x x Hyatts rights. In the Order
dated May 27, 2002, which is the main subject of the present
petition, the [trial] court denied the motion to dismiss, ratiocinating as
follows:
Upon perusal of the factual and legal arguments raised by
the movants-defendants, the court finds that these are
substantially the same issues posed by the then defendant
LG Industrial System Co. particularly the matter dealing

[with] the issues of improper venue, failure to state cause of


action as well as this courts lack of jurisdiction. Under the
circumstances obtaining, the court resolves to rule that the
complaint sufficiently states a cause of action and that the
venue is properly laid. It is significant to note that in the
amended complaint, the same allegations are adopted as in
the original complaint with respect to the Goldstar
Philippines to enable this court to adjudicate a complete
determination or settlement of the claim subject of the action
it appearing preliminarily as sufficiently alleged in the
plaintiffs pleading that said Goldstar Elevator Philippines
Inc., is being managed and operated by the same Korean
officers of defendants LG-OTIS Elevator Company and LG
International Corporation.

On June 11, 2002, [Respondent] GOLDSTAR filed a motion


for reconsideration thereto. On June 18, 2002, without waiving the
grounds it raised in its motion to dismiss, [it] also filed an Answer Ad
Cautelam. On October 1, 2002, [its] motion for reconsideration was
denied.
From the aforesaid Order denying x x x Goldstars motion for
reconsideration, it filed the x x x petition for certiorari [before the CA]
alleging grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the [trial] court in issuing the assailed
Orders dated May 27, 2002 and October 1, 2002.[5]

Ruling of the Court of Appeals


The CA ruled that the trial court had committed
palpable error amounting to grave abuse of discretion
when the latter denied respondents Motion to Dismiss.
The appellate court held that the venue was clearly

improper, because none of the litigants resided in


Mandaluyong City, where the case was filed.

According to the appellate court, since Makati was


the principal place of business of both respondent and
petitioner,

as

stated

in

the

latters

Articles

of

Incorporation, that place was controlling for purposes of


determining the proper venue. The fact that petitioner
had abandoned its principal office in Makati years prior
to the filing of the original case did not affect the venue
where personal actions could be commenced and tried.

Hence, this Petition.[6]

The Issue

In its Memorandum, petitioner submits this sole


issue for our consideration:
Whether or not the Court of Appeals, in reversing the ruling of
the Regional Trial Court, erred as a matter of law and jurisprudence,
as well as committed grave abuse of discretion, in holding that in the
light of the peculiar facts of this case, venue was improper[.][7]

This Courts Ruling


The Petition has no merit.

Sole Issue:
Venue
The resolution of this case rests upon a proper
understanding of Section 2 of Rule 4 of the 1997 Revised
Rules of Court:
Sec. 2. Venue of personal actions. All other actions may be
commenced and tried where the plaintiff or any of the principal
plaintiff resides, or where the defendant or any of the principal
defendant resides, or in the case of a non-resident defendant where
he may be found, at the election of the plaintiff.

Since both parties to this case are corporations,


there is a need to clarify the meaning of residence. The
law recognizes two types of persons: (1) natural and (2)
juridical.

Corporations

come

under

the

latter

accordance with Article 44(3) of the Civil Code.[8]

in

Residence is the permanent home -- the place to


which, whenever absent for business or pleasure, one
intends to return.[9] Residence is vital when dealing with
venue.[10] A corporation, however, has no residence in the
same sense in which this term is applied to a natural
person. This is precisely the reason why the Court
in Young

Auto

Appeals[11] ruled

Supply
that

for

Company

v.

practical

Court

of

purposes,

corporation is in a metaphysical sense a resident of the


place where its principal office is located as stated in the
articles of incorporation.[12] Even before this ruling, it has
already

been

established

that

the

residence

of

corporation is the place where its principal office is


established.[13]
This Court has also definitively ruled that for
purposes of venue, the term residence is synonymous
with

domicile.[14] Correspondingly,

the

Civil

Code

provides:
Art. 51. When the law creating or recognizing them, or any
other provision does not fix the domicile of juridical persons, the
same shall be understood to be the place where their legal
representation is established or where they exercise their principal
functions.[15]

It now becomes apparent that the residence or


domicile of a juridical person is fixed by the law creating
or recognizing it. Under Section 14(3) of the Corporation
Code, the place where the principal office of the
corporation is to be located is one of the required
contents of the articles of incorporation, which shall be
filed with the Securities and Exchange Commission
(SEC).
In the present case, there is no question as to the
residence of respondent. What needs to be examined is
that of petitioner. Admittedly,[16] the latters principal
place of business is Makati, as indicated in its Articles of
Incorporation. Since the principal place of business of a
corporation determines its residence or domicile, then
the

place

indicated

in

petitioners

articles

of

incorporation becomes controlling in determining the


venue for this case.
Petitioner argues that the Rules of Court do not
provide that when the plaintiff is a corporation, the
complaint should be filed in the location of its principal
office as indicated in its articles of incorporation.
[17]

Jurisprudence has, however, settled that the place

where the principal office of a corporation is located, as

stated in the articles, indeed establishes its residence.


[18]

This ruling is important in determining the venue of

an action by or against a corporation,[19] as in the present


case.
Without merit is the argument of petitioner that the
locality stated in its Articles of Incorporation does not
conclusively indicate that its principal office is still in the
same place. We agree with the appellate court in its
observation that the requirement to state in the articles
the place where the principal office of the corporation is
to be located is not a meaningless requirement. That
proviso would be rendered nugatory if corporations were
to be allowed to simply disregard what is expressly
stated in their Articles of Incorporation.[20]
Inconclusive are the bare allegations of petitioner
that it had closed its Makati office and relocated to
Mandaluyong City, and that respondent was well aware
of those circumstances. Assuming arguendo that they
transacted business with each other in the Mandaluyong
office of petitioner, the fact remains that, in law, the
latters residence was still the place indicated in its
Articles of Incorporation. Further unacceptable is its
faulty reasoning that the ground for the CAs dismissal of

its Complaint was its failure to amend its Articles of


Incorporation so as to reflect its actual and present
principal office. The appellate court was clear enough in
its ruling that the Complaint was dismissed because the
venue had been improperly laid, not because of the
failure of petitioner to amend the latters Articles of
Incorporation.
Indeed, it is a legal truism that the rules on the
venue of personal actions are fixed for the convenience
of the plaintiffs and their witnesses. Equally settled,
however, is the principle that choosing the venue of an
action is not left to a plaintiffs caprice; the matter is
regulated by the Rules of Court.[21] Allowing petitioners
arguments may lead precisely to what this Court
was trying to avoid in Young Auto Supply Company v. CA:
[22]

the creation of confusion and untold inconveniences

to party litigants. Thus enunciated the CA:


x x x. To insist that the proper venue is the actual principal
office and not that stated in its Articles of Incorporation would indeed
create confusion and work untold inconvenience. Enterprising
litigants may, out of some ulterior motives, easily circumvent the
rules on venue by the simple expedient of closing old offices and
opening new ones in another place that they may find well to suit
their needs.[23]

We find it necessary to remind party litigants,


especially corporations, as follows:
The rules on venue, like the other procedural rules, are
designed to insure a just and orderly administration of justice or the
impartial and evenhanded determination of every action and
proceeding. Obviously, this objective will not be attained if the
plaintiff is given unrestricted freedom to choose the court where he
may file his complaint or petition.
The choice of venue should not be left to the plaintiffs whim or
caprice. He may be impelled by some ulterior motivation in choosing
to file a case in a particular court even if not allowed by the rules on
venue.[24]

WHEREFORE, the Petition is hereby DENIED, and


the assailed Decision and Resolution AFFIRMED. Costs
against petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. L-28398. August 6, 1975.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D. McDONALD, E.E.
SIMMONS and THE COURT OF TAX APPEALS, Respondents.
Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney Virgilio J.
Saldajena for Petitioner.
Manuel O. Chan for Private Respondents.
SYNOPSIS
Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of
MANTRASCO, and the three private respondents who owned the rest, at 100 shares each, deposited all their
shares with the Trustees. The trust agreement provided that upon Reeses death MANTRASCO shall purchase
Reeses shares. The trust agreement was executed in view of Reeses desire that upon his death the
Company would continue under the management of respondents. Upon Reeses death and partial payment
by the company of Reesess share, a new certificate was issued in the name of MANTRASCO, and the
certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the
Treasury to the capital account of the company as stock dividends to be distributed to the stockholders.

When the entire purchase price of Reeses interest in the company was paid in full by the latter, the trust
agreement was terminated, and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock
dividends was in effect a distribution of the "assets or property of the corporation." It therefore assessed
respondents for deficiency income taxes as well as for fraud penalty and interest charges. The Court of Tax
Appeals absolved respondent from any liability for receiving the questioned stock dividends on the ground
that their respective one-third interest in the Company remained the same before and after the declaration
of the stock dividends and only the number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares;
their declaration as treasury stock dividends was a complete nullity and that the assessment by the
Commissioner of fraud penalty and the imposition of interest charges pursuant to the provision of the Tax
Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.

SYLLABUS

1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. Treasury shares are stocks
issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other
means. They are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired by the corporation reacquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury
share, participates neither in dividends, because dividends cannot be declared by the corporation to itself,
nor in the meetings of the corporations as voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation though it still represent a paid for interest in the property of the corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK DIVIDENDS, A NULLITY.
Where the manifest intention of the parties to the trust agreement was, in sum and substance, to treat the
shares of a deceased stockholder as absolutely outstanding shares of said stockholders estate until they
were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and plainly
violative of public policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. A stock dividend, being one
payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained
earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. Where by
the use of a trust instrument as a convenient technical device, respondents bestowed unto themselves the
full worth and value of a deceased stockholders corporate holding acquired with the very earnings of the
companies, such package device which obviously is not designed to carry out the usual stock dividend
purpose of corporate expansion reinvestment, e.g., the acquisition of additional facilities and other capital
budget items, but exclusively for expanding the capital base of the surviving stockholders in the company,
cannot be allowed to deflect the latters responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings "to buy" the corporate holdings
of the deceased stockholders, it was in ultimate effect and result making a distribution of such earnings to
the surviving stockholders. All these amounts are consequently subject to income tax as being, in truth and
in fact, a flow of cash benefits to the surviving stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE ALLEGED
TREASURY STOCK DIVIDENDS, ERROR. Where the surviving stockholders, by resolution, partitioned
among themselves, as treasury stock dividends, the deceased stockholders interest, and earnings of the
corporation over a period of years were used to gradually wipe out the holdings therein of said deceased
stockholder, the earnings (which in effect have been distributed to the surviving stockholders when they
appropriated among themselves the deceased stockholders interest), should be taxed for each of the
corresponding years when payments were made to the deceaseds estate on account of his shares. In other
words, the Tax Commissioner may not asses the surviving stockholders, for income tax purposes, the total
acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to payment

made with the corporations earnings before the passage of the resolution declaring as stock dividends the
deceased stockholders interest (while indeed those earnings were utilized in those years to gradually pay off
the value of the deceased stockholders holdings), the surviving stockholders should be liable (in the
absence of evidence that prior to the passage of the stockholders resolution the contributed of each of the
surviving stockholder rose corresponding), for income tax purposes, to the extent of the aggregate amount
paid by the corporation (prior to such resolution) to buy off the deceased stockholders shares. The reason is
that it was only by virtue of the authority contained in said resolution that the surviving stockholders
actually, albeit illegally, appropriated and petitioned among themselves the stockholders equity representing
the deceased stockholders interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST CHARGES IN
ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING DISTRIBUTION OF EARNINGS.
The fact that the resolution authorizing the distribution of earnings is null and void is of no moment.
Under the National Internal Revenue Code, income tax is assessed on income received from any property,
activity or service that produces income. The Tax Code stands as an indifferent, neutral party on the matter
of where the income comes from. The action taken by the Commissioner of assessing fraud penalty and
imposing interest charges pursuant to the provisions of the Tax Code is in accordance with law.

DECISION

CASTRO, J.:

This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set aside
the income tax assessments issued by the Commissioner of Internal Revenue against John L. Manning, W.D.
McDonald and E.E. Simmons (hereinafter referred to as the respondents), for alleged undeclared stock
dividends received in 1958 from the Manila Trading and Supply Co. (hereinafter referred to as the
MANTRASCO) valued at P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common
shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three
respondents.
On February 29, 1952, in view of Reeses desire that upon his death MANTRASCO and its two subsidiaries,
MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the
respondents, a trust agreement on his and the respondents interests in MANTRASCO was executed by and
among Reese (therein referred to as OWNER), MANTRASCO (therein referred to as COMPANY), the law firm
of Ross, Selph, Carrascoso and Janda (therein referred to as TRUSTEES), and the respondents (therein
referred to as MANAGERS).
The trust agreement pertinently provides as follows:

jgc:chanrobles.com .ph

"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed and
ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the
COMPANY, these shares being all shares of the capital stock of the COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly endorsed
and ready for transfer, all shares of the capital stock of the COMPANIES belonging to any of them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time
during the life of this trust acquire any additional shares of stock of any of the COMPANIES, or of any
successor company, or any shares in substitution, exchange or replacement of the shares subject to this
agreement, they shall forthwith endorse and deposit such shares with the TRUSTEES hereunder and such
additional or other shares shall become subject to this agreement; shares deposited by the OWNER and
shares received by the TRUSTEES as stock dividends on, or in substitution, exchange or replacement of,
such shares so deposited under this agreement being MANAGERS SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER, remain
in the name of and shall be voted by the respective parties making the deposit ...

"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the
company purchasing the OWNERS SHARES, the TRUSTEES shall cause the OWNERS SHARES to be
transferred into the name of such company and such company shall thereupon transfer such shares into the
name of the TRUSTEES and the TRUSTEES shall hold such shares until payment for all such shares shall
have been made by the company as provided in this agreement.
x

"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all meetings
and shall be in all respects entitled to all the rights as owners of said shares, subject, however, to the
provisions of this agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the
provisions of this agreement.
x

"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of
earnings transferred to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES shall
participate to such extent in the affairs of the COMPANIES as they deem necessary to insure the carrying out
of this agreement and the discharge of the obligations of the COMPANIES and each of them and of the
MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall consider
advisable and corresponding shares shall be transferred to such directors to qualify them to act.
x

"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the
OWNERS SHARES; it being the intent that any of the COMPANIES shall purchase all or a proportionate part
of the OWNERS SHARES . . .
"(b) The purchase price of such shares shall be the book value of such share computed in United States
dollars . . .
x

"(d) All dividends paid on stock that had been OWNERS SHARES, from the time of the transfer of such
shares by one or more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in full for
such OWNERS SHARES shall have been made by each of the COMPANIES which shall have purchased the
same, shall be credited as payments on account of the purchase price of such shares and shall be a
prepayment on account of the next due installment or installments of such purchase price.
x

"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price of
the shares being purchased by any COMPANY or COMPANIES should they in their exclusive discretion
determine that such increase or decrease would be necessary to carry out the intention of the parties that
the Estate and heirs of the OWNER shall receive the fair value of the shares deposited in Trust as such value
existed at the date of the death of the OWNER. . .
"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations
hereunder when due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock
deposited hereunder, whether or not payment shall have been made for part of such stock, applying the
proceeds of such sale or disposition to the unpaid balance of the purchase price:
jgc:chanrobles.com .ph

"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of
the unpaid balance of the purchase price agreed to be paid by the COMPANIES for the OWNERS SHARES
such excess, after deducting all expenses, charges and taxes, shall be paid to the then MANAGERS.
x

"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign, mortgage,
pledge, transfer or in anywise encumber or hypothecate such shares or his interest in this agreement.
x

"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no dividends
except as may be authorized by the TRUSTEES. Dividends on MANAGERS SHARES shall, so long as they
shall not be in default under this agreement, be paid over by the TRUSTEES to the MANAGERS. Dividends on
OWNERS SHARES shall be applied in liquidation of the COMPANIES liabilities hereunder as provided in
Article 8(d).
x

"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all
shares held in trust, at any general and special meeting of stockholders for all purposes, including but not
limited to wholly or partially liquidating or reducing the capital of any COMPANY or COMPANIES, authorizing
the sale of any or all assets, and election of directors . . .
x

"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend their articles of incorporation, reorganize, liquidate,
dissolve and do all other things the TRUSTEES in their discretion determine to be necessary to enable them
to comply with their obligations hereunder and the TRUSTEES are hereby irrevocably authorized to vote all
shares of the COMPANIES and each of them at any general or special meeting for the accomplishment of
such purposes. . . ."
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On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not,
however, be immediately effected for lack of sufficient funds to cover initial payment on the shares.
On February 2, 1955, after MANTRASCO made a partial payment of Reeses shares, the certificate for the
24,700 shares in Reeses name was cancelled and a new certificate was issued in the name of MANTRASCO.
On the same date, and in the meantime that Reeses interest had not been fully paid, the new certificate
was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of
MANTRASCO.
On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:
jgc:chanroble s.com.ph

"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company
as a stock dividend to be distributed to shareholders of record at the close of business on December 22,
1958, in accordance with the action of the Board of Directors at its meeting on December 19, 1958 which
action is hereby approved and confirmed."
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On November 25, 1963 the entire purchase price of Reeses interest in MANTRASCO was finally paid in full
by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to
MANTRASCO all the shares which they were holding in trust.
Meanwhile, on September 14, 1962, an examination of MANTRASCOs books was ordered by the Bureau of
Internal Revenue. The examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared

as dividends had been proportionately distributed to the respondents, representing a total book value or
acquisition cost of P7,973,660; (b) the respondents failed to declare the said stock dividends as part of their
taxable income for the year 1958; and (c) from 1956 to 1961 the following amounts were paid by
MANTRASCO to Reeses estate by virtue of the trust agreement, to wit:
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Amounts
Year Liabilities Paid
1956 P5,830,587.86 P 2,143,073.00
1957 5,317,137.86 513,450.00
1958 4,824,059.28 493,078.58
1959 4,319,420.14 504,639.14
1960 3,849,720.14 469,700.00
1961 3,811,387.69 38,332.45
On the basis of their examination, the BIR examiners concluded that the distribution of Reeses shares as
stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned
from the payment of cash for the redemption of said stock and distributing the same as stock dividend." On
April 14, 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income
taxes to the respondents for the year 1958, as follows:
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J.L. Manning W.D. McDonald E.E. Simmons


Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
Add 50% surcharge* 723,234.50 721,359.507 25,217.00
1/2% monthly interest from
6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12

TOTAL AMOUNT DUE
& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12
The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a favorable
reconsideration, appealed to the Court of Tax Appeals.
On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for receiving
the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO
remained the same before and after the declaration of stock dividends and only the number of shares held
by each of them had changed.
Hence, the present recourse.
All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster
their respective positions. These are:
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A. National Internal Revenue Code


"SEC. 83. Distribution of dividends or assets by corporations (a) Definition of Dividends The term
dividends when used in this Title means any distribution made by a corporation to its shareholders out of
its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or
loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as
the case may be.
"(b) Stock dividend. A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings
or profits accumulated after March first, nineteen hundred and thirteen."
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B. B.I.R. Regulations
"SEC. 251. Dividends paid in property. Dividends paid in securities or other property (other than its own
stock), in which the earnings of the corporation have been invested, are income to the recipients to the
amount of the full market value of such property when receivable by individual stockholders . . .
"SEC. 252. Stock dividend. A stock dividend which represents the transfer of surplus to capital account is
not subject to income tax. However, a dividend in stock may constitute taxable income to the recipients
thereof notwithstanding the fact that the officers or directors of the corporation (as defined in section 84)
choose to call such distribution as a stock dividend. The distinction between a stock dividend which does not,
and one which does, constitute income taxable to the shareholders is the distinction between a stock
dividend which works no change in the corporate entity, the same interest in the same corporation being
represented after the distribution by more shares of precisely the same character, and a stock dividend
where there either has been change of corporate identity or a change in the nature of the shares issued as
dividends whereby the proportional interest of the shareholder after the distribution is essentially different
from the former interest. A stock dividend constitutes income if it gives the shareholder an interest different
from that which his former stockholdings represented. A stock dividend does not constitute income if the
new shares confer no different rights or interests than did the old the new certificate plus the old
representing the same proportionate interest in the net assets of the corporation as did the old."
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The parties differ, however, on the taxability of the "treasury" stock dividends received by the respondents.
The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the
Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese by
MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should be
taxed as income of the respondents for that year, the said distribution being in effect a distribution of cash.
The respondents interests in MANTRASCO, he further argues, were only .4% prior to the declaration of the
stock dividends in 1958, but rose to 33 1/3% each after the said declaration.
In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares
declared as stock dividends were treasury shares. We are however convinced, after a careful study of the
trust agreement, that the said shares were not, on December 22, 1958 or at anytime before or after that
date, treasury shares. The reasons are quite plain.
Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," 1
they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired
by the corporation either by purchase, donation, forfeiture or other means. 2 Treasury shares are therefore
issued shares, but being in the treasury they do not have the status of outstanding shares. 3 Consequently,
although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or
sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the corporation to itself, 4 nor in the meetings of the
corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their control of the corporation, 5 though it still
represents a paid-for interest in the property of the corporation. 6 The foregoing essential features of a
treasury stock are lacking in the questioned shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in
their names at all meetings and to exercise all rights "as owners of said shares" this authority is reiterated
in paragraphs 26 and 28 of the trust agreement;

(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be
subject to the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to
the approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who
were also given the authority to transfer qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the TRUSTEES;" in the same paragraph mention was also made
of "dividends on OWNERS SHARES" which shall be applied to the liquidation of the liabilities of the three
companies for the price of Reeses shares.
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reeses estate until they were fully paid. Such being the
true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared
out of outstanding corporate stock, but only from retained earnings: 7
Of pointed relevance is this useful discussion of the nature of a stock dividend: 8
"A stock dividend always involves a transfer of surplus (or profit) to capital stock. Graham and Katz,
Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States v. Siegel, 8 Cir., 1931, 52
F 2d 63, 65, 78 ALR 672: A stock dividend is a conversion of surplus or undivided profits into capital stock,
which is distributed to stockholders in lieu of a cash dividend. Congress itself has defined the term dividend
in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders, whether in
money or in other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct
189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions recognized that within the
meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus account of a
definite portion of the corporate earnings as part of the permanent capital resources of the corporation by
the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock
representing the profits so capitalized."
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The declaration by the respondents and Reeses trustees of MANTRASCOs alleged treasury stock dividends
in favor of the former, brings, however, into clear focus the ultimate purpose which the parties to the trust
instrument aimed to realize: to make the respondents the sole owners of Reeses interest in MANTRASCO by
utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the
said interests, and by making it appear outwardly, through the formal declaration of non-existent stock
dividends in the treasury, that they have not received any income from those firms when, in fact, by that
declaration they secured to themselves the means to turn around as full owners of Reeses shares. In other
words, the respondents, using the trust instrument as a convenient technical device, bestowed unto
themselves the full worth and value of Reeses corporate holdings with the use of the very earnings of the
companies. Such package device, obviously not designed to carry out the usual stock dividend purpose of
corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items,
but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to
deflect the respondents responsibilities toward our income tax laws. The conclusion is thus ineluctable that
whenever the companies involved herein parted with a portion of their earnings "to buy" the corporate
holdings of Reese, they were in ultimate effect and result making a distribution of such earnings to the
respondents. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow
of cash benefits to the respondents.
We are of the opinion, however, that the Commissioner erred in assessing the respondents the total
acquisition cost (P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows
that the earnings of MANTRASCO over a period of years were used to gradually wipe out the holdings therein
of Reese. Consequently, those earnings, which we hold, under the facts disclosed in the case at bar, as in
effect having been distributed to the respondents, should be taxed for each of the corresponding years when
payments were made to Reeses estate on account of his 24,700 shares. With regard to payments made
with MANTRASCO earnings in 1958 and the years before, while indeed those earnings were utilized in those
years to gradually pay off the value of Reeses holdings in MANTRASCO, there is no evidence from which it
can be inferred that prior to the passage of the stockholders resolution of December 22, 1958 the
contributed equity of each of the respondents rose correspondingly. It was only by virtue of the authority

contained in the said resolution that the respondents actually, albeit illegally, appropriated and partitioned
among themselves the stockholders equity representing Reeses interests in MANTRASCO. As those
payments accrued in favor of the respondents in 1958 they are and should be liable, for income tax
purposes, to the extent of the aggregate amount paid, from 1955 to 1958, by MANTRASCO to buy off
Reeses shares.
The fact that the resolution authorizing the distribution of the said earnings is null and void is of no moment.
Under the National Internal Revenue Code, income tax is assessed on income received from any property,
activity or service that produces income. 9 The Tax Code stands as an indifferent, neutral party on the
matter of where the income comes from. 10
Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects
that is, the assessment of a fraud penalty and imposition of interest charges pursuant to the provisions of
the Tax Code to be in accordance with law.
ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any deficiency
income tax liability is set aside, and this case is hereby remanded to the Court of Tax Appeals for further
proceedings. More specifically, the Court of Tax Appeals shall recompute the income tax liabilities of the
respondents in accordance with this decision and with the Tax Code, and thereafter pronounce and enter
judgment accordingly. No costs.
Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.

G.R. No. L-43350 December 23, 1937


CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao,
town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the
land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment
of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the
Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same
lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the
same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered and annotations thereof
appear at the back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de
Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was
sold to the plaintiff company, said to under process of incorporation, in consideration of one

peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon
and, to the condition that the certificate of title to said lands shall not be transferred to the name
of the plaintiff company until the latter has fully and completely paid Tabora's indebtedness to
the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry
on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said
company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four
parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were
thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by
the terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and
interest in and to the four parcels of land described in transfer certificate in turn obligated
himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note
for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the
date thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance
with which the four parcels of land were given a security for the payment of the promissory note,
Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January
25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be
rendered against the defendant for the sum of P25,300, with interest at legal rate from the date
of the filing of the complaint, and the costs of the suits. After trial, the court below, on December
18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff
presented a motion for new trial on January 14, 1935, which motion was denied by the trial court
on January 19 of the same year. After due exception and notice, plaintiff has appealed to this
court and makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached the conclusion that
Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree
with this conclusion, we have however voted to affirm the judgment appealed from the reasons
which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was
affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected
later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months
before the incorporation of the company. Unquestionably, a duly organized corporation has the
power to purchase and hold such real property as the purposes for which such corporation was
formed may permit and for this purpose may enter into such contracts as may be necessary
(sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the filing
of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that
all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure),
in the case before us it can not be denied that the plaintiff was not yet incorporated when it
entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una

sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being
in legal existence then, it did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would
seem to be self evident. . . . A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation nor does it
possess franchise or faculties for it or others to exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill.,
652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the
four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as
mere promoters of a corporations on the other hand. For reasons that are self-evident, these
promoters could not have acted as agent for a projected corporation since that which no legal
existence could have no agent. A corporation, until organized, has no life and therefore no
faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be ratified by the corporation if and
when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps.,
permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification which would
result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule,
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193;
citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128;
Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the four parcels of land, which he
succeeded in mortgaging to the Philippine National Bank so that he might have the necessary
funds with which to convert and develop them into fishery. He appeared to have met with
financial reverses. He formed a corporation composed of himself, his wife, and a few others.
From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife,
Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to
appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and
the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name.
The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly.

Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit
B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of
land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and
in both cases a writ of attachment against the four parcels of land was issued. The Philippine
National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in the making him sign Exhibits B, C, and D and in making him, among other
things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The
promisory note, Exhibit C, was made payable to the plaintiff company so that it may not
attached by Tabora's creditors, two of whom had obtained writs of attachment against the four
parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to the defendant,
Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from Manuel Tabora
to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A,
was subject to a condition precedent (condicion suspensiva), namely, the payment of the
mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having
been complied with by the Cagayan Fishing Development Company, Inc., the transfer was
ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8,
p. 141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the
Cagayan Fishing Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this point.
lawphil.net

The decision of the lower court is accordingly affirmed, with costs against the appellant. So
Ordered.
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
G.R. No. L-28113

March 28, 1969

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO


BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO. respondents.
L. Amores and R. Gonzales for petitioners.
Jose W. Diokno for respondents.
CASTRO, J.:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the
councilors, of the municipality of Balabagan of the same province. Balabagan was formerly a
part of the municipality of Malabang, having been created on March 15, 1960, by Executive
Order 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter
municipality.
The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain
the respondent municipal officials from performing the functions of their respective office relying
on the ruling of this Court inPelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that
section 23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the
power to create barrios in the provincial board, is a "statutory denial of the presidential authority
to create a new barrio [and] implies a negation of thebigger power to create municipalities," and
(2) that section 68 of the Administrative Code, insofar as it gives the President the power to
create municipalities, is unconstitutional (a) because it constitutes an undue delegation of
legislative power and (b) because it offends against section 10 (1) of article VII of the
Constitution, which limits the President's power over local governments to mere supervision. As
this Court summed up its discussion: "In short, even if it did not entail an undue delegation of
legislative powers, as it certainly does, said section 68, as part of the Revised Administrative
Code, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of
the Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory
enactment."
On the other hand, the respondents, while admitting the facts alleged in the petition,
nevertheless argue that the rule announced in Pelaez can have no application in this case
because unlike the municipalities involved inPelaez, the municipality of Balabagan is at least
a de facto corporation, having been organized under color of a statute before this was declared
unconstitutional, its officers having been either elected or appointed, and the municipality itself
having discharged its corporate functions for the past five years preceding the institution of this
action. It is contended that as a de facto corporation, its existence cannot be collaterally
attacked, although it may be inquired into directly in an action for quo warranto at the instance of
the State and not of an individual like the petitioner Balindong.
It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved
to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. 4 But the rule disallowing
collateral attacks applies only where the municipal corporation is at least a de
facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the
rule is that its existence may be, questioned collaterally or directly in any action or proceeding
by any one whose rights or interests ate affected thereby, including the citizens of the territory
incorporated unless they are estopped by their conduct from doing so. 6
And so the threshold question is whether the municipality of Balabagan is a de
facto corporation. As earlier stated, the claim that it is rests on the fact that it was organized
before the promulgation of this Court's decision inPelaez. 7

Accordingly, we address ourselves to the question whether a statute can lend color of validity
to an attempted organization of a municipality despite the fact that such statute is subsequently
declared unconstitutional.
lawphi1.et

This has been a litigiously prolific question, sharply dividing courts in the United States. Thus,
some hold that ade facto corporation cannot exist where the statute or charter creating it is
unconstitutional because there can be no de facto corporation where there can be no de
jure one, 8 while others hold otherwise on the theory that a statute is binding until it is
condemned as unconstitutional. 9
An early article in the Yale Law Journal offers the following analysis:
It appears that the true basis for denying to the corporation a de facto status lay in the
absence of any legislative act to give vitality to its creation. An examination of the cases
holding, some of them unreservedly, that a de facto office or municipal corporation can
exist under color of an unconstitutional statute will reveal that in no instance did the
invalid act give life to the corporation, but that either in other valid acts or in the
constitution itself the office or the corporation was potentially created....
The principle that color of title under an unconstitutional statute can exist only where
there is some other valid law under which the organization may be effected, or at least
an authority in potentia by the state constitution, has its counterpart in the negative
propositions that there can be no color of authority in an unconstitutional statute that
plainly so appears on its face or that attempts to authorize the ousting of a de jure or de
facto municipal corporation upon the same territory; in the one case the fact would imply
the imputation of bad faith, in the other the new organization must be regarded as a
mere usurper....
As a result of this analysis of the cases the following principles may be deduced which
seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal
corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a) been
upheld for a time by the courts or (b) not yet been declared
void; provided that a warrant for its creation can be found in some other
valid law or in the recognition of its potential existence by the general
laws or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or
potentially, such a de jurecorporation is authorized by some legislative fiat.
III. There can be no color of authority in an unconstitutional statute alone, the
invalidity of which is apparent on its face.
IV. There can be no de facto corporation created to take the place of an existing de
jure corporation, as such organization would clearly be a usurper.10

In the cases where a de facto municipal corporation was recognized as such despite the fact
that the statute creating it was later invalidated, the decisions could fairly be made to rest on the
consideration that there was some other valid law giving corporate vitality to the organization.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the
statute had not been invalidated cannot conceivably make it a de facto corporation, as,
independently of the Administrative Code provision in question, there is no other valid statute to
give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court
granted a similar petition for prohibition and nullified an executive order creating the municipality
of Lawigan in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was
created in 1961, before section 68 of the Administrative Code, under which the President had
acted, was invalidated. 'Of course the issue of de factomunicipal corporation did not arise in that
case.
In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an invalid statute were unenforceable.
Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the
executive order "is, in legal contemplation, as inoperative as though it had never been passed."
For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored."
As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13
The courts below have proceeded on the theory that the Act of Congress, having been
found to be unconstitutional, was not a law; that it was inoperative, conferring no rights
and imposing no duties, and hence affording no basis for the challenged decree. Norton
v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559,
566. It is quite clear, however, that such broad statements as to the effect of a
determination of unconstitutionality must be taken with qualifications. The actual
existence of a statute, prior to such a determination, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a
new judicial declaration. The effect of the subsequent ruling as to invalidity may have to
be considered in various aspects with respect to particular relations, individual and
corporate, and particular conduct, private and official. Questions of rights claimed to
have become vested, of status of prior determinations deemed to have finality and acted
upon accordingly, of public policy in the light of the nature both of the statute and of its
previous application, demand examination. These questions are among the most difficult
of those which have engaged the attention of courts, state and federal, and it is manifest
from numerous decisions that an all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.
There is then no basis for the respondents' apprehension that the invalidation of the executive
order creating Balabagan would have the effect of unsettling many an act done in reliance upon
the validity of the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the
respondents are hereby permanently restrained from performing the duties and functions of
their respective offices. No pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.

Separate Opinions
FERNANDO, J., concurring:
I concur fully with the well-written opinion of Justice Castro. It breaks new ground; it strikes out
new paths. It is precisely because of its impact on the power of judicial review of executive acts
that I deem a few additional words would not be amiss.
1. Insofar as the effect of a declaration of unconstitionality is concerned, the latter and
more realistic trend reflected in Chicot County Drainage District v. Baxter State
Bank 1 had previously elicited our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68) may
be construed to mean that at the time of the decision the Moratorium law could no longer
be validly applied because of the prevailing circumstances. At any rate, although the
general rule is that an unconstitutional statute 'confers no right, creates no office,
affords no protection and justifies no acts performed under it.' ... there are several
instances wherein courts, out of equity, have relaxed its operation ... or qualified its
effects 'since the actual existence of a statute prior to such declaration is an operative
fact, and may have consequences which cannot justly be ignored' ... and a realistic
approach is eroding the general doctrine ....'" 2 Also: "We have taken note, of the fact
that, on June 30, 1961, Section 25 of Reorganization Plan No. 20-A had been declared
unconstitutional by this Court in the case of Corominas, et al. v. The Labor Standards
Commission, et al., .... It appears, however, that the Plaintiff had filed his claim before
Regional Office No. 4 of the Department of Labor on July 26, 1960, or about one year
before said Section 25 had been declared unconstitutional. The circumstance that
Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional should
not be counted against the defendant in the present case. In the case of Manila Motor
Co., Inc. v. Flores, ..., this Court upheld the right of a party under the Moratorium Law
which had accrued in his favor before said law was declared unconstitutional by this
Court in the case of Rutter v. Esteban, 93 Phil. 68." 3
2. Nothing can be clearer therefore in the light of the two above cases than that a
previous declaration of invalidity of legislative acts would not be bereft of legal results.
Would that view hold true of nullification of executive acts? There might have been
doubts as to the correct answer before. There is none now.
A judicial decision annulling a presidential exercise of authority 4 is not without its effect
either. That much is evident from the holding now reached. The act stricken down,
whether proceeding from the legislature or the Executive, could in the language of the
Chicot County case, be considered, prior to the declaration of invalidity, as "an operative
fact and may have consequences which cannot justly be ignored."
Thus the frontiers of the law have been extended, a doctrine which to some may come
into play when a statute is voided is now considered equally applicable to a Presidential

act that has met a similar fate. Such a result should not occasion surprise. That is to be
expected.
There would be an unjustified deviation from the doctrine of separation of powers if a
consequence attached to the annulment of a statue is considered as not operative
where an executive order is involved. The doctrine of co-equal or coordinate
departments would be meaningless if a discrimination of the above sort were considered
permissible. The cognizance taken of the prior existence of an enactment subsequently
declared unconstitutional applies as well as to a Presidential act thereafter successfully
assailed. There was a time when it too did exist and, as such, a fact to be reckoned with,
though an infirm source of a legal right, if, as subsequently held, considered violative of
a constitutional command.
3. Precisionists may cavil at the above view; they may assert, and with some degree of
plausibility, that the holding in the Pelaez case goes no further than to locate a statutory
infirmity in the Presidential act there challenged, creating municipal corporations under
what the then Executive considered a grant of authority found in the Revised
Administrative Code. 5 Such a power having been found not to exist, the decision, so it
may be asserted, did not reach the constitutional issue of non-delegation of legislative
power. Tersely put, there was no finding of nullity based on a violation of the
Constitution.
To such a claim, it suffices to answer that while the challenged Administrative Code provision
was in fact held as not containing within itself the authority conferred on the President to create
municipal corporations, the opinion by the then Justice, now Chief Justice, Concepcion went
further. As was pointed out by him: "Although Congress may delegate to another branch of the
Government the power to fill in the details in the execution, enforcement or administration of a
law, it is essential, to forestall a violation of the principle of separation of powers, that said law:
(a) be complete in itself it must set forth therein the policy to be executed, carried out or
implemented by the delegate and (b) fix a standard the limits of which are sufficiently
determinate or determinable to which the delegate must conform in the performance of his
functions. Indeed, without a statutory declaration of policy, the delegate would, in effect, make or
formulate such policy, which is the essence of every law; and without the aforementioned
standard, there would be no means to determine, with reasonable certainty, whether the
delegate has acted within or beyond the scope of his authority. Hence, he could thereby
arrogate upon himself the power, not only to make the law, but also and this is worse to
unmake it, by adopting measures inconsistent with the end sought to be attained by the Act of
Congress, thus nullifying the principle of separation of powers and the system of checks and
balances, and, consequently, undermining the very foundation of our Republican system." 6
From which, it would follow, in the language of the opinion: "Section 68 of the Revised
Administrative Code does not meet these well-settled requirements for a valid delegation of the
power to fix the details in the enforcement of a law. It does not enunciate any policy to be
carried out or implemented by the President. Neither does it give a standard sufficiently precise
to avoid the evil effects above referred to." 7
It is thus clear that while it might not be strictly accurate to advance the view that there was a
finding of unconstitutionality of a challenged statutory norm, there could be no objection to the
view that the holding was one of unconstitutional application.

Nor is this all. If there be admission of the force of the assertion that the Pelaez opinion went
no further than to locate in the challenged Executive orders creating municipal corporations an
act in excess of statutory authority, then our decision in this case is all the more noteworthy for
the more hospitable scope accorded the Chicot doctrine. For as originally formulated, it would
merely recognize that during its existence, prior to its being declared violative of the constitute,
the statute must be deemed an operative fact. Today we decide that such a doctrine extends to
a Presidential act held void not only on the ground of unconstitutional infirmity but also because
in excess of the statutory power conferred. That to me is the more significant aspect of this
decision. To repeat, to that point of view I yield full concurrence.
I do so because it appears to me a logical corollary to the principle of separation of powers.
Once we accept the basic doctrine that each department as a coordinate agency of government
is entitled to the respect of the other two, it would seem to follow that at the very least, there is a
presumption of the validity of the act performed by it, unless subsequently declared void in
accordance with legally accepted principles. The rule of law cannot be satisfied with anything
less.
Since under our Constitution, judicial review exists precisely to test the validity of executive or
legislative acts in an appropriate legal proceeding, there is always the possibility of their being
declared inoperative and void. Realism compels the acceptance of the thought that there could
be a time-lag between the initiation of such Presidential or congressional exercise of power and
the final declaration of nullity. In the meanwhile, it would be productive of confusion, perhaps at
times even of chaos, if the parties affected were left free to speculate as to its fate being one of
doom, thus leaving them free to disobey it in the meanwhile. Since, however, the orderly
processes of government not to mention common sense, requires that the presumption of
validity be accorded an act of Congress or an order of the President, it would be less than fair,
and it may be productive of injustice, if no notice of its existence as a fact be paid to it, even if
thereafter, it is stricken down as contrary, in the case of Presidential act, either to the
Constitution or a controlling statute.
The far-reaching import in the above sense of the decision we now render calls, to my mind,
for an articulation of further reflection on its varied implications. We have here an illustration to
paraphrase Dean Pound, of the law being stable and yet far from standing still. That is as it
ought to be; that is how law grows. It is in that sense that the judicial process is impressed with
creativity, admittedly within limits rather narrowly confined. That in itself is to hold fast to the
appropriate role of the judiciary, far from insignificant as our decision discloses. Hence, this
separate concurring opinion, which, I trust, will make manifest why my agreement with what
Justice Castro had so ably expressed in the opinion of the Court is wholehearted and entire.
Concepcion, C.J., concurs.
G.R. No. L-2598

June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,


vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN,
EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc.,respondents.

Claro M. Recto for petitioners.


Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed
and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain
properties transferred to the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded
to do business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have
it dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;
and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two
main propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being ade facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that they were incorporated any
more than the latter had made similar representations to them. And as nobody was led to
believe anything to his prejudice and damage, the principle of estoppel does not apply.
Obviously this is not an instance requiring the enforcement of contracts with the
corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law
applies, and therefore the court had not jurisdiction to take cognizance of said civil case number
381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a corporation
under this Act and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may be a party, but such inquiry
may be had at the suit of the Insular Government on information of the Attorney-General.
There are least two reasons why this section does not govern the situation. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its
stockholders may not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim is
compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply
with the law the claim to be a corporation "under this act" could not be made "in good
faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for decision
by the judge, subject to review on appeal. Whkch brings us to one principal reason why this
petition may not prosper, namely: the petitioners have their remedy by appealing the order of
dissolution at the proper time.
There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or corporation,
and it was no error to reject the counter-bond, the court having declared the dissolution. As to
the amount of the bond to be demanded of the receiver, much depends upon the discretion of
the trial court, which in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
G.R. No. 125221 June 19, 1997
REYNALDO M. LOZANO, petitioner,
vs.
HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, RTC, Br. 58, Angeles City; and
ANTONIO ANDA,respondents.

PUNO, J.:
This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court,
Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and
Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil
Case No. 1214 for damages against respondent Antonio Anda before the Municipal Circuit Trial
Court (MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the
president of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA)
while respondent Anda was the president of the Samahang Angeles-Mabalacat Jeepney
Operators' and Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the request of the
Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to
consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney
Operators' and Drivers Association, Inc. (UMAJODA); petitioner and private respondent also
agreed to elect one set of officers who shall be given the sole authority to collect the daily dues
from the members of the consolidated association; elections were held on October 29, 1995 and
both petitioner and private respondent ran for president; petitioner won; private respondent
protested and, alleging fraud, refused to recognize the results of the election; private respondent

also refused to abide by their agreement and continued collecting the dues from the members of
his association despite several demands to desist. Petitioner was thus constrained to file the
complaint to restrain private respondent from collecting the dues and to order him to pay
damages in the amount of P25,000.00 and attorney's fees of P500.00.1
Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that
jurisdiction was lodged with the Securities and Exchange Commission (SEC). The MCTC
denied the motion on February 9, 1996. 2 It denied reconsideration on March 8, 1996. 3
Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58,
Angeles City. 4 The trial court found the dispute to be intracorporate, hence, subject to the jurisdiction of
the SEC, and ordered the MCTC to dismiss Civil Case No. 1214 accordingly. 5 It denied reconsideration
on May 31, 1996. 6

Hence this petition. Petitioner claims that:


THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION AND SERIOUS
ERROR OF LAW IN CONCLUDING THAT THE SECURITIES AND EXCHANGE
COMMISSION HAS JURISDICTION OVER A CASE OF DAMAGES BETWEEN
HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC]
APPROVED AND REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION. 7
The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as follows:
Sec. 5. . . . [T]he Securities and Exchange Commission [has] original and
exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of
the stockholders, partners, members of associations or organizations registered
with the Commission.
(b) Controversies arising out of intracorporate or partnership relations, between
and among stockholders, members or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders,
members, or associates, respectively; and between such corporation, partnership
or association and the state insofar as it concerns their individual franchise or
right to exist as such entity.

(c) Controversies in the election or appointment of directors, trustees, officers or


managers of such corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the
state of suspension of payments in cases where the corporation, partnership or
association possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where
the corporation, partnership or association has no sufficient assets to over its
liabilities, but is under the management of a Rehabilitation Receiver or
Management Committee created pursuant to this Decree.
The grant of jurisdiction to the SEC must be viewed in the light of its nature and function
under the law. 8This jurisdiction is determined by a concurrence of two elements: (1) the status
or relationship of the parties; and (2) the nature of the question that is the subject of their
controversy. 9

The first element requires that the controversy must arise out of intracorporate or partnership
relations between and among stockholders, members, or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and the
State in so far as it concerns their individual franchises. 10 The second element requires that the
dispute among the parties be intrinsically connected with the regulation of the corporation, partnership or
association or deal with the internal affairs of the corporation, partnership or association. 11 After all, the
principal function of the SEC is the supervision and control of corporations, partnership and associations
with the end in view that investments in these entities may be encouraged and protected, and their
entities may be encouraged and protected, and their activities pursued for the promotion of economic
development. 12

There is no intracorporate nor partnership relation between petitioner and private respondent.
The controversy between them arose out of their plan to consolidate their respective jeepney
drivers' and operators' associations into a single common association. This unified association
was, however, still a proposal. It had not been approved by the SEC, neither had its officers and
members submitted their articles of consolidation is accordance with Sections 78 and 79 of the
Corporation Code. Consolidation becomes effective not upon mere agreement of the members
but only upon issuance of the certificate of consolidation by the SEC. 13 When the SEC, upon
processing and examining the articles of consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a
certificate of consolidation which makes the reorganization official. 14 The new consolidated corporation
comes into existence and the constituent corporations dissolve and cease to exist. 15

The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly
registered with the SEC, but these associations are two separate entities. The dispute between
petitioner and private respondent is not within the KAMAJDA nor the SAMAJODA. It is between
members of separate and distinct associations. Petitioner and private respondent have no
intracorporate relation much less do they have an intracorporate dispute. The SEC therefore
has no jurisdiction over the complaint.

The doctrine of corporation by estoppel 16 advanced by private respondent cannot override


jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the
parties. 17 It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the
parties, neither can it be conferred by the acquiescence of the court. 18

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice


and unfairness. 19It applies when persons assume to form a corporation and exercise corporate
functions and enter into business relations with third person. Where there is no third person involved and
the conflict arises only among those assuming the form of a corporation, who therefore know that it has
not been registered, there is no corporation by estoppel. 20

IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order
dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside. The
Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to proceed with
dispatch in resolving Civil Case No. 1214. No costs.
SO ORDERED.
G.R. No. L-19118

January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,


vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled to
damages (for breach of contract) but reduced the amount from P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that the
judgment for P15,000.00 which had become final and executory, should be executed to its full
amount, since in fixing it, payment already made had been considered.
Now we are asked whether the judgment may be executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co.,
Inc. Plaintiff allegedinter alia that defendant was a corporation duly organized and existing under
the laws of the Philippines; that on July 19, 1948, defendant, through Jose M. Aruego, its
President, entered into a contract with plaintifif; that defendant had thereby agreed to pay

plaintiff P30,000.00 for the exclusive right to publish his revised Commentaries on the Revised
Penal Code and for his share in previous sales of the book's first edition; that defendant had
undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948; that per
contract failure to pay one installment would render the rest due; and that defendant had failed
to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the
execution and terms of the contract dated July 19, 1948; but alleged that it was plaintiff who
breached their contract by failing to deliver his manuscript. Furthermore, defendant
counterclaimed for damages.
1wph1.t

Plaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating in
the dispositive portion
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff
and against the defendant the University Publishing Co., Inc., ordering the defendant to
pay the administrator Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest
from the date of the filing of this complaint until the whole amount shall have been fully
paid. The defendant shall also pay the costs. The counterclaim of the defendant is
hereby dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full.
Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution writ against
University Publishing Co., Inc. Plaintiff, however, on August 10, 1961, petitioned for a writ of
execution against Jose M. Aruego, as the real defendant, stating, "plaintiff's counsel and the
Sheriff of Manila discovered that there is no such entity as University Publishing Co., Inc."
Plaintiff annexed to his petition a certification from the securities and Exchange Commission
dated July 31, 1961, attesting: "The records of this Commission do not show the registration of
UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." "University
Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law firm), a
"manifestation" stating that "Jose M. Aruego is not a party to this case," and that, therefore,
plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through counsel,
would not want Jose M. Aruego to be considered a party to the present case: should a separate
action be now instituted against Jose M. Aruego, the plaintiff will have to reckon with the statute
of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff has
appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange
Commission has not been disputed. Defendant would only raise the point that "University

Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that
"University Publishing Co., Inc." is an existing corporation with an independent juridical
personality. Precisely, however, on account of the non-registration it cannot be considered a
corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no
personality separate from Jose M. Aruego; it cannot be sued independently.
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but
even the court to believe in such representation. He signed the contract as "President" of
"University Publishing Co., Inc.," stating that this was "a corporation duly organized and existing
under the laws of the Philippines," and obviously misled plaintiff (Mariano A. Albert) into
believing the same. One who has induced another to act upon his wilful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter set up against his
victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the complaint and
litigating upon the merits. But as stated, "University Publishing Co., Inc." has no independent
personality; it is just a name. Jose M. Aruego was, in reality, the one who answered and
litigated, through his own law firm as counsel. He was in fact, if not, in name, the defendant.
Even with regard to corporations duly organized and existing under the law, we have in many a
case pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs.
Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as such agent." Had Jose
M. Aruego been named as party defendant instead of, or together with, "University Publishing
Co., Inc.," there would be no room for debate as to his personal liability. Since he was not so
named, the matters of "day in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who have a right to
control the proceedings, to make defense, to adduce and cross-examine witnesses, and to
appeal from a decision" (67 C.J.S. 887) and Aruego was, in reality, the person who had and
exercised these rights. Clearly, then, Aruego had his day in court as the real defendant; and due
process of law has been substantially observed.
By "due process of law" we mean " "a law which hears before it condemns; which proceeds
upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this
Court has said, " "Due process of law" contemplates notice and opportunity to be heard before
judgment is rendered, affecting one's person or property" (Lopez vs. Director of Lands, 47 Phil.
23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here
also that the "due process" clause of the Constitution is designed to secure justice as a living
reality; not to sacrifice it by paying undue homage to formality. For substance must prevail
over form. It may now be trite, but none the less apt, to quote what long ago we said in Alonso
vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply schooled and skilled
in the subtle art of movement and position, entraps and destroys the other. It is, rather, a
contest in which each contending party fully and fairly lays before the court the facts in
issue and then, brushing side as wholly trivial and indecisive all imperfections of form
and technicalities of procedure, asks that Justice be done upon the merits. Lawsuits,
unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts. There should be no vested rights in
technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent
principal, was the real party to the contract sued upon; that he was the one who reaped the
benefits resulting from it, so much so that partial payments of the consideration were made by
him; that he violated its terms, thereby precipitating the suit in question; and that in the litigation
he was the real defendant. Perforce, in line with the ends of justice, responsibility under the
judgment falls on him.
We need hardly state that should there be persons who under the law are liable to Aruego for
reimbursement or contribution with respect to the payment he makes under the judgment in
question, he may, of course, proceed against them through proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and the case
remanded ordering the lower court to hold supplementary proceedings for the purpose of
carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.
So ordered.
G.R. No. L-11442

May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,


vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order
of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the
Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case
are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at


Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a
contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein, represented in this instance by Mr. Segundino
Q. Refuerzo, the President". It was provided in said contract, among other things, that the
lifetime of the lease would be for a period of 10 years; that the land would be planted to kenaf,
ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the
net income accruing from the harvest of any, crop without being responsible for the cost of
production thereof; and that after every harvest, the lessee was bound to declare at the earliest
possible time the income derived therefrom and to deliver the corresponding share due the
lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not
complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of
First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and
Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She
averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the commencement of the action, already harvested,
processed and sold by defendants; that notwithstanding that fact, defendants refused to render
an accounting of the income derived therefrom and to deliver the lessor's share; that the
estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as
defendants' refusal to undertake such task was in violation of the terms of the covenant entered
into between the plaintiff and defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were
allegedly notified, the Court declared them in default and proceeded to receive plaintiff's
evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and
required defendants to render a complete accounting of the harvest of the land subject of the
proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net
income realized from the last harvest to plaintiff, with legal interest from the date defendants
received payment for said crop. It was further provide that upon defendants' failure to abide by
the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon
motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No
property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him, there being no
allegation in the complaint pointing to his personal liability and thus prayed that an order be
issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a

quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the evidence
on record made no mention or referred to any fact which might hold movant personally liable
therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de
Salvatierra instituted the instant action asserting that the trial Judge in issuing the order
complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued
by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of
the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such
a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A petition
provided for in either of the preceding sections of this rule must be verified, filed within
sixty days after the petitioner learns of the judgment, order, or other proceeding to be set
aside, and not more than six months after such judgment or order was entered, or such
proceeding was taken; and must be must be accompanied with affidavit showing the
fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting
the petitioner is good and substantial cause of action or defense, as the case may be,
which he may prove if his petition be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the
judgment, and not more than 6 months after the judgment or order was rendered, both of which
must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas
the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
months and 23 days, the filing of the aforementioned motion was clearly made beyond the
prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party
adversely affected by a decision or order is certainly an alert of grace or benevolence intended
to afford said litigant a penultimate opportunity to protect his interest. Considering the nature of
such relief and the purpose behind it, the periods fixed by said rule are non-extendible and
never interrupted; nor could it be subjected to any condition or contingency because it is of itself
devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January
31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be
granted. However, taking note of the question presented by the motion for relief involved herein,
We deem it wise to delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense
that the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so
in his capacity as president of the corporation. And this allegation was found by the Court a quo
to be supported by the records. Plaintiff on the other hand tried to refute this averment by
contending that her failure to specify defendant's personal liability was due to the fact that all the
time she was under the impression that the Philippine Fibers Producers Co., Inc., represented

by Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent
inquiry from the Securities and Exchange Commission yielded otherwise. While as a general
rule a person who has contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is estopped from denying the same in an action arising out of
such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114;
Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship
Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a
part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the
fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant
Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of
the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical personality separate
and distinct from its component members or stockholders and officers such that a corporation
cannot be held liable for the personal indebtedness of a stockholder even if he should be its
president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any financial obligation be, the corporation in
excess of his unpaid subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an unincorporated
association. The reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and appropriate for itself
the powers and attribute of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and comes personally liable for
contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing
[Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690).
Considering that defendant Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease
agreement by acting as its representative, his liability cannot be limited or restricted that
imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be
unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if
any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on
this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of
movant therein which might have been attached in the execution of such judgment, is hereby
set aside and nullified as if it had never been issued. With costs against respondent Segundino
Refuerzo. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
G.R. No. L-58028 April 18, 1989
CHIANG KAI SHEK SCHOOL, petitioner,
vs.
COURT OF APPEALS and FAUSTINA FRANCO OH, respondents.

CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai
Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment
for the next semester. Oh was shocked. She had been teaching in the school since 1932 for a
continuous period of almost 33 years. And now, out of the blue, and for no apparent or given
reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The original defendant was the Chiang Kai Shek School but when it filed
a motion to dismiss on the ground that it could not be sued, the complaint was amended. 2 Certain officials of the school were also
impleaded to make them solidarily liable with the school.

The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was set aside by
the respondent court, which held the school suable and liable while absolving the other defendants. 4 The motion for reconsideration having
been denied, 5 the school then came to this Court in this petition for review on certiorari.

The issues raised in the petition are:


1. Whether or not a school that has not been incorporated may be sued by reason alone of its
long continued existence and recognition by the government,
2. Whether or not a complaint filed against persons associated under a common name will
justify a judgment against the association itself and not its individual members.
3. Whether or not the collection of tuition fees and book rentals will make a school profit-making
and not charitable.
4. Whether or not the Termination Pay Law then in force was available to the private respondent
who was employed on a year-to-year basis.
5. Whether or not the awards made by the respondent court were warranted.
We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules
of Court clearly provides that "only natural or juridical persons may be parties in a civil action." It

is also not denied that the school has not been incorporated. However, this omission should not
prejudice the private respondent in the assertion of her claims against the school.
As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which
provided as follows:
Unless exempted for special reasons by the Secretary of Public Instruction, any
private school or college recognized by the government shall be incorporated
under the provisions of Act No. 1459 known as the Corporation Law, within 90
days after the date of recognition, and shall file with the Secretary of Public
Instruction a copy of its incorporation papers and by-laws.
Having been recognized by the government, it was under obligation to incorporate under the
Corporation Law within 90 days from such recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it had been in existence even earlier than
1932. The petitioner cannot now invoke its own non-compliance with the law to immunize it from
the private respondent's complaint.
There should also be no question that having contracted with the private respondent every year
for thirty two years and thus represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat her claim against it.
According to Article 1431 of the Civil Code, "through estoppel an admission or representation is
rendered conclusive upon the person making it and cannot be denied or disproved as against
the person relying on it."
As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15,
under which the persons joined in an association without any juridical personality may be sued
with such association. Besides, it has been shown that the individual members of the board of
trustees are not liable, having been appointed only after the private respondent's dismissal. 6
It is clear now that a charitable institution is covered by the labor laws

7 although the question was still


unsettled when this case arose in 1968. At any rate, there was no law even then exempting such institutions from the operation of the labor
laws (although they were exempted by the Constitution from ad valorem taxes). Hence, even assuming that the petitioner was a charitable
institution as it claims, the private respondent was nonetheless still entitled to the protection of the Termination Pay Law, which was then in
force.

While it may be that the petitioner was engaged in charitable works, it would not necessarily
follow that those in its employ were as generously motivated. Obviously, most of them would not
have the means for such charity. The private respondent herself was only a humble school
teacher receiving a meager salary of Pl80. 00 per month.
At that, it has not been established that the petitioner is a charitable institution, considering
especially that it charges tuition fees and collects book rentals from its students. 8 While this alone may
not indicate that it is profit-making, it does weaken its claim that it is a non-profit entity.

The petitioner says the private respondent had not been illegally dismissed because her
teaching contract was on a yearly basis and the school was not required to rehire her in 1968.
The argument is that her services were terminable at the end of each year at the discretion of
the school. Significantly, no explanation was given by the petitioner, and no advance notice
either, of her relief after teaching year in and year out for all of thirty-two years, the private
respondent was simply told she could not teach any more.
The Court holds, after considering the particular circumstance of Oh's employment, that she had
become a permanent employee of the school and entitled to security of tenure at the time of her
dismissal. Since no cause was shown and established at an appropriate hearing, and the notice
then required by law had not been given, such dismissal was invalid.
The private respondent's position is no different from that of the rank-and-file employees
involved in Gregorio Araneta University Foundation v. NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents' positions as deans and department heads
of the petitioner university are necessary in its usual business. Moreover, all the
private respondents have been serving the university from 18 to 28 years. All of
them rose from the ranks starting as instructors until they became deans and
department heads of the university. A person who has served the University for
28 years and who occupies a high administrative position in addition to teaching
duties could not possibly be a temporary employee or a casual.
The applicable law is the Termination Pay Law, which provided:
SECTION 1. In cases of employment, without a definite period, in a commercial,
industrial, or agricultural establishment or enterprise, the employer or the
employee may terminate at any time the employment with just cause; or without
just cause in the case of an employee by serving written notice on the employer
at least one month in advance, or in the case of an employer, by serving such
notice to the employee at least one month in advance or one-half month for every
year of service of the employee, whichever, is longer, a fraction of at least six
months being considered as one whole year.
The employer, upon whom no such notice was served in case of termination of
employment without just cause may hold the employee liable for damages.
The employee, upon whom no such notice was served in case of termination of
employment without just cause shall be entitled to compensation from the date of
termination of his employment in an I amount equivalent to his salaries or wages
correspond to the required period of notice. ... .
The respondent court erred, however, in awarding her one month pay instead of only one-half
month salary for every year of service. The law is quite clear on this matter. Accordingly, the
separation pay should be computed at P90.00 times 32 months, for a total of P2,880.00.

Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School
Teachers, confers security of tenure on the teacher upon appointment as long as he possesses
the required qualification. 10 And under the present policy of the Department of Education, Culture and Sports, a teacher
becomes permanent and automatically acquires security of tenure upon completion of three years in the service. 11

While admittedly not applicable to the case at bar, these I rules nevertheless reflect the attitude
of the government on the protection of the worker's security of tenure, which is now guaranteed
by no less than the Constitution itself.12
We find that the private respondent was arbitrarily treated by the petitioner, which has shown no
cause for her removal nor had it given her the notice required by the Termination Pay Law. As
the respondent court said, the contention that she could not report one week before the start of
classes is a flimsy justification for replacing her.13 She had been in its employ for all of thirty-two years. Her record
was apparently unblemished. There is no showing of any previous strained relations between her and the petitioner. Oh had every reason to
assume, as she had done in previous years, that she would continue teaching as usual.

It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning
told she was dismissed. There was not even the amenity of a formal notice of her replacement,
with perhaps a graceful expression of thanks for her past services. She was simply informed
she was no longer in the teaching staff. To put it bluntly, she was fired.
For the wrongful act of the petitioner, the private respondent is entitled to moral damages. 14 As a
proximate result of her illegal dismissal, she suffered mental anguish, serious anxiety, wounded feelings and even besmirched reputation as
an experienced teacher for more than three decades. We also find that the respondent court did not err in awarding her exemplary damages
because the petitioner acted in a wanton and oppressive manner when it dismissed her. 15

The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are
always at the forefront in the battle against illiteracy and ignorance. If only because it is they
who open the minds of their pupils to an unexplored world awash with the magic of letters and
numbers, which is an extraordinary feat indeed, these humble mentors deserve all our respect
and appreciation.
WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the
award of separation pay, which is reduced to P2,880.00. All the other awards are approved.
Costs against the petitioner.
This decision is immediately executory.
SO ORDERED.